Could new government regulations crimp company profits?

Could new government regulations crimp company profits?

The media is bringing us daily reports of government reviews, proposed policies and regulations for the financial services, energy and health sectors. Depending on what gets decided, the new regulatory landscape could have big repercussions for a number of major Australian businesses.

As we head into the thick of reporting season, one area that I anticipate will be of greater focus for shareholders will be the potential impact of and risks stemming from recent regulatory outcomes on business models.

Navigating the regulatory environment is nothing new for investors but the risks have become increasingly acute as the Commonwealth Government and various entities undertake more and more reviews to address areas such as energy policy, consumer affordability, perceived (or real) abuse of monopolistic power and questionable and unethical business practices.

Just to highlight a few of the issues that investors may want to explore further this August:

Royal Commission into Financial Services– an issue that has had extensive media coverage already; the potential fall-out may include significant brand damage, additional costs to improve compliance, tighter lending standards (crimping overall bank credit growth) and a migration of funds away from major institutions to independent players.

Energy Policy– given the complex and messy situation Australia’s East Coast finds itself mired in, I divided Energy Policy into 3 categories:

• ACCC review into retail electricity pricing– with the headline recommendation being the introduction of a ‘default offer’ priced by the AER to improve ease of comparison for consumers.
• Domestic gas reservation policy– Andreas has previously discussed gas reservation policies at length and notes building an LNG import terminal is unlikely to force gas prices lower; while the outlook seems relatively benign for domestic gas producers (after a period of significant uncertainty last year), higher prices are expected to have an impact on heavy domestic users of gas.
• National Energy Guarantee– an overarching policy integrating energy policy mechanisms with climate change to achieve both reliability and emissions targets. It is unclear how this will shape up but will likely impact the trajectory of electricity prices in the medium term.

Private Health Insurers – the possibility of a 2 per cent cap on private health insurance premiums will clearly impact the insurers but may also have flow-on effects to the private hospitals as the insurers seek to shift some of the responsibility in limiting price inflation to the hospitals. It is also uncertain whether the cap will stop the recent trend of policyholders downgrading or cancelling their private health insurance policies, which may also impact hospital utilisation.

Regulated assets –  Council of Australian Governments (COAG) recently eliminated the right of electricity and gas companies to appeal AER tariff rulings and is also seeking to implement a binding rate of return calculated every 4 years that will apply across all network businesses.

While not an electricity / gas asset, the Queensland Competition Authority’s decision on Aurizon’s rate of return for its below rail assets prompted a significant sell-off in the company’s shares in December last year.

ACCC– ACCC intervention is nothing new but its seemingly increased involvement is something to be mindful of, especially for companies with perceived market power in mature industries that require M&A to deliver significant earnings growth. The ACCC’s investigation into the Transurban consortium’s bid into Westconnex and its decision to block the sale of Aurizon’s intermodal business to Pacific National are two recent examples of this.