Power lines against the sunset

Why premiers need to sell power assets, and be smart about it

by Tony Wood

Published by The Australian Financial Review, Monday 23 June

The premiers of New South Wales and Queensland are looking to sell electricity assets as a way to cut state debt and improve their budget positions. If done well, privatisation could deliver big benefits. But if done badly, consumers and governments could be left wondering what went wrong.

Polls suggest that voters, particularly in rural areas, are against privatisation because they feel it will drive up prices, reduce reliability and lead to job losses. The evidence, on the contrary, is that private companies produce lower prices with no loss of reliability.

A detailed comparison between government and private ownership, published in a 2012 Grattan Institute report, found that government-owned companies spend more on capital investment and operations than do privately owned companies.

Reliability standards for these businesses are set externally – historically by state governments. About 10 years ago electricity reliability in Queensland and New South Wales was poor as governments constrained expenditure and milked their power businesses for profits. But a series of blackouts led governments to overreact and overbuild. Prices skyrocketed.

At one level, privatising network businesses won’t greatly affect the operation of the electricity market. Costs in New South Wales and Queensland will probably come down. But nationally, it is the Australian Energy Regulator that must take the lead in reducing the prices charged by distribution businesses.

These regulated monopoly businesses face low risk yet are allowed to earn financial returns higher than those earned by generators and retailers, whose business is mostly unregulated and which, selling their product on the free market, face much higher risk. The AER has indicated that it is finally moving to address this issue.

Above the AER, the overarching governance body for the sector is the COAG Energy Council of Commonwealth and state energy ministers. Its priorities and decisions will be more aligned with the national interests of energy consumers when some of its members are no longer conflicted by ownership. For NSW and Queensland governments, the goal will be a good sale. This will be tough compared with what Victoria and South Australia achieved some years ago. Electricity consumption and peak demand have fallen over recent years. Governments have also spent so much money on less productive infrastructure. Grattan analysis shows that assets may already be underutilised and regulatory changes are likely to reduce future returns on those assets. These issues will weigh on the minds of potential buyers.

Governments are nervous and it shows. Premier Mike Baird announced a commitment to sell only 49 per cent of the state’s network businesses, excluding the country-based distribution network. The problem is that a half-baked deal will probably deliver a half-baked price – control means a lot, particularly when cost reductions are urgently needed. Across the border, Premier Campbell Newman has decided to sell only the power generators and to leave the distribution businesses in public hands, and yet it is the latter that have been the main contributors to escalating prices for consumers.

Governments are trying to build support for sales by promising to spend the proceeds on other infrastructure. If they choose new projects carefully, this may boost productivity. But not all infrastructure is productive, and state governments have a record of building projects whose benefits don’t outweigh their costs.

The benefits from well-structured privatisation would accrue widely to electricity consumers and taxpayers alike. The premiers and their ministers need to bravely and strongly sell these benefits as they seek a mandate to proceed.