Gas and electricity supplier AGL Energy (ASX: AGK) is a well-known and widely owned stock that controls a number of strategic energy production assets and has an entrenched position in the retail market. Despite this, AGL's business is facing certain headwinds that have just forced management to lower profit guidance for full-year 2013.

To understand exactly why AGL is underperforming requires gaining a deep understanding of the intricacies of energy pricing and the supply and demand dynamics of the domestic energy industry. So while there are a lot of factors at play, the direct explanation for the drop in underlying net profit after tax "to be in the lower half of the guidance range of $590 million to $640 million" was increased retail competition, coupled with soft wholesale prices and higher costs.

AGL stated that the increased retail competition has led to unprecedented customer churn rates. The soft wholesale prices are being caused by a combination of increased household solar penetration, weaker demand and significant over capacity.

While AGL's outlook is somewhat cloudy and not helped by the elephant in the room – the carbon tax – AGL does have a number of things going in its favour. They include the recent purchase of the Loy Yang generator, which has increased the company's scale and improved its coverage of retail load with owned and controlled generation, the recent SA government deregulation of electricity pricing and AGL's positioning as one of Australia's largest renewable energy generators.

The increased competition within the retail market and question marks over energy pricing, along with certain company specific issues, has flowed through to AGL and competitors Origin Energy (ASX: ORG) and Australian Power and Gas Company (ASX: APK), leading them all to significantly underperform the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) over the past 12 months.

Source: Google Finance

Foolish takeaway

The beauty of utility stocks is that consumers don't really have any choice but to purchase gas, electricity and water. However industry dynamics can change, including regulations, putting pressure on business models. Therefore investors need to be as vigilant as ever in assessing a utility company's sustainability.

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The post Why AGL is underperforming appeared first on The Motley Fool Australia.

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Consumers are worse off since Australian states decided to privatise their electricity assets, according to think tank, The Australia Institute.

A report released today shows that since Victoria privatised power in the 1990s, electricity prices have outpaced inflation, increasing by 170% compared with an increase of 60% in the consumer price index (CPI).

Falling productivity is being blamed for most of the rise, with power companies employing rising numbers of managers. Since 1997, the number of managers in the electricity sector has jumped a staggering 217%. Yet, at the same time, there has been a much smaller increase in front line staff, with the number of technicians and trades workers increasing by just 28%.

Over the same period, the number of sales workers has risen from 1,000 to 6,000. The report's author, David Richardson said, "It seems remarkable that a sales force of 6,000 people is necessary to sell a product which everyone needs."

During the privatisation of Victoria's network a lot of promises were made that it would deliver lower prices and a more efficient industry. NSW and Queensland are looking at privatising their state's power assets, but it appears unlikely that it will ease cost of living pressures, and much more likely to consign consumers in those states to even higher bills and worse service.

In December last year, AGL Energy (ASX: AGK) announced plans to increase prices by 10.4% from the middle of this year, following price rises by competitors Origin Energy (ASX: ORG), ERM Power (ASX: EPW) and Australian Power and Gas Company (ASX: APK) in response to the introduction of the carbon tax.

According to the Australian Financial Review (AFR), the average household energy bill has risen 80% over the past five years. No wonder complaints over energy bills have soared 43% in NSW in 2012.

Foolish takeaway

Power companies have also been accused by state governments of 'gold plating', or over-spending on their network upgrades. As we wrote in November and December last year, the real issue is that privatisation of energy assets hasn't worked so far, and consumers are bearing the brunt of that mistake.

With its legendary, fully franked 28 cent dividend, Telstra is the darling of Aussie investors. Chances are even if you don't own Telstra shares directly, your superannuation fund does. But with its share price skyrocketing over the past year, is Telstra past its prime? Click here for our brand-new report: Buy, Sell, or Hold Telstra?

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The post Consumers pay up for power privatisation appeared first on The Motley Fool Australia.

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The Ernst & Young survey of almost 5,000 people, commissioned by BT, found that 17% of people would struggle to find $500 to $1,000, while 30% had no money left over for savings.

More than 40% said they were able to meet their normal monthly expenses, but a third admitted they were worried about their ability to do so. Deanne Stewart, general manager of BT, says the results clearly show there are a large number of people who struggle to cope financially, and the problems are not always linked to the size of their pay cheque.

"In many instances people are living in the hope that they will achieve their goals rather than planning for a fulfilling and secure future," Ms Stewart said.

57% of those surveyed had no regular savings plan, and peaks among 45 to 54 year olds, who are often nearing the peak of their earnings capacity.

Close to 40% of people would be unable to maintain their current lifestyle if they lost their income for three to six months, thanks to not enough savings.

Spiralling costs of living, particularly in electricity and water, combined with unemployment or under-employment, mean low-income families are being the hardest hit. A family of four forks out an average of $1,788 a month on household expenses, while the monthly average utilities bill for a family with three kids pay $883.

Utilities companies such as Origin Energy (ASX: ORG), AGL Energy (ASX: AGK), ERM Power (ASX: EPW), and Australian Power and Gas Company (ASX: APK) have raised prices due to the introduction of the carbon tax, and the industry has come in for criticism for overcharging users.

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Households in NSW face another rise in energy bills after EnergyAustralia announced plans to increase prices by up to 10.5% over the next three years.

EnergyAustralia plans to increase prices by 4.5% from July 2013, 3% from July 2014 and a further 3% in July 2015.

The news comes just a day after the Prime Minister, Julia Gillard, announced plans that could see up to $250 shaved off the annual household electricity bill. AGL Energy (ASX: AGK) has also announced plans to increase prices by 10.4% from mid next year.

Related: Complaints spike as energy prices soar

The proposed changes follow a 20% increase implemented from July this year, sparked, according to power companies, by the need to upgrade the electricity network to cope with peak power periods. That has lead to energy suppliers being accused by governments of 'gold plating', or overspending on their network upgrades. The suppliers have countered by saying that state governments have neglected our energy networks for decades. $17 billion is projected to be spent upgrading networks from 2009 to 2014, despite households reducing their usage due to the rising prices.

Companies like AGL, Origin Energy (ASX: ORG), ERM Power (ASX: EPW) and Australian Power and Gas Company (ASX: APK) have also raised prices due to the introduction of the carbon tax. The introduction of solar rebates for solar generated electricity is also being blamed for price rises, with an explosion of households taking up the offers, pushing the costs onto those who have not installed solar panels.

The average household bill has risen 80% over the past five years, and is expected to reach $2,230 this year, according to the Australian Financial Review.

The Foolish bottom line

Some sectors of the media have suggested the easiest way to reduce power bills would be to drop the carbon tax. It seems to me that the real issue was the privatisation of energy assets. State and federal governments appear to have lost real control over the energy industry, and consumers are bearing the brunt of that mistake.

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Complaints over energy bills have soared, following the rapid rise of energy prices.

According to the NSW Energy and Water Ombudsman's (EWON) annual report, complaints rose 43% compared to last year. Electricity was the main subject of complaints, with the key issues being billing disputes, affordability of bills, debt collection and credit default listing, solar feed-in tariffs and customer service.

Related: Electricity users overcharged by $3 billion

EWON said it was disconcerting to find that while they could help a customer in many cases, there was clearly an underlying issue that many consumers would struggle to meet future bills. EWON also said that it were concerned about the rising number of credit default listings for amounts of less than $300.

Victoria's Energy and Water Ombudsman (EWOV) has yet to release its annual report for 2012, but in 2011, it saw a 33% rise in complaints over electricity, with high billing being the main issue for customers. EWOV stated in its report that it was clear to them that the energy companies could have been doing much more to resolve billing concerns of their customers. Here's some examples:

• 10,000 bills were sent out with the wrong BPAY reference
• 3,000 customers were affected when their provider couldn't enter their details into a new billing system
• Energy bills were often wrong, and errors in billing represented the second highest complaint
• One energy retailer said its billing system couldn't process manual changes (for adjustments or credits)

Other states have reported similar rises and issues.

Energy retailers such as Origin Energy (ASX: ORG), AGL Energy (ASX: AGK), ERM Power (ASX: EPW) and Australian Power and Gas Company (ASX: APK) are amongst the energy suppliers that have raised their prices. AGL Energy has stated that the main issue is capital expenditure on electricity infrastructure, which was neglected for many years by state governments. Changing consumer patterns, such as increased use of electricity at peak periods meant some infrastructure had to be built which would be used for just a few hours each year – during peak periods. Governments have responded by accusing the retailers of building too much infrastructure.

Of course the introduction of the carbon tax hasn't helped either.

A rush by consumers to install solar panels to take advantage of government rebates has also caused energy prices to be pushed up. The Federal government is now scrapping its solar credits scheme, which should reduce the pressure on electricity prices.

AGL Energy has suggested that a solution would be to fully deregulate electricity prices and allow energy retailers to offer 'time of use' energy pricing, with consumers encouraged to use less electricity during peak times.

The Foolish bottom line

It seems the privatisation of energy companies, once owned by the state, has led to more headaches than governments expected. One wonders whether the privatisation of the energy sector has actually delivered the benefits originally envisaged.

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Reported profit  fell 79% to $115m due to $155m of significant items associated with the company's purchase of the remainder of the Loy Yang A coal power station that it didn't already own, and a $212m fall in the fair value of derivatives.

Retail electricity revenue climbed 21% to $3 billion, due to a 4% increase in customer numbers to 3.4 million, and an increase in prices. Gas revenues were flat at $1.1 billion, while business customers increased by 11%, as wholesale electricity revenues increased by 3% to $1.9 billion.

The company has an ambitious plan to add up to 500,000 customers in NSW alone, enticing them away from its rivals Origin Energy (ASX: ORG) and TRUenergy. Origin and TRUenergy received customers when NSW privatised its energy retailing business in 2010. During the year, the company added a net 152,000 customers from that state.

To offset direct emissions costs of around $650m and a total cost uplift of near $1 billion as a result of the Carbon Tax, AGL has raised prices and invested heavily in renewable energy generation – solar, dams and wind farms. Additionally, the company will receive government transitional tax assistance and expects the carbon tax to be earnings positive in the 2013 financial year.

The company has provided a rosy outlook for the year ahead, made up by increased earnings from Loy Yang A as well as continued growth in retail customer numbers. Wet weather is also expected to benefit the company's hydro power generation. AGL has highlighted that competition from rivals – such as TRUenergy, Origin, Australian Power and Gas Company (ASX: APK) and ERM Power Ltd (ASX: EPW) is expected to rise over the next year.

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