...The reason the gas lobby wants nobody to notice the drop in demand is that – just as occurred with the gold-plating of the electricity market and the consequent doubling in electricity bills – there is a gold-plating racket afoot in the gas market too. The industry is paid according to its inflated forecasts. So there is no interest in letting on that demand is really in decline. The magic word in all this is DORC (Depreciated Optimised Replacement Cost). David Johnstone, professor of finance at the University of Sydney, says DORC is deployed by those who own the gas distribution assets to game the regulator and fetch an inflated return on their assets. Even where an asset, say a pipeline, is 40 years old, where the costs have already been sunk many years before by taxpayers, they are still claiming a return on it as if it were brand new. DORC assesses the replacement cost rather than the actual cost. This free lunch, as Johnstone puts it, is tolerated by governments and regulators because it has allowed them to maximise their returns from privatisation. The DORC formula for electricity pricing was invented by economists in the 1990s and played into the hands of the infrastructure owners (including governments). It granted a virtually riskless 8 per cent-plus-inflation rate of return on the notional current replacement cost of all existing assets. The owners stretched this to the limit, trying to include even the hypothetical replacement cost of easements on land, says Johnstone...
Posted on: Sun, 14 Sep 2014 21:38:52 +0000