THE poles and wires of electricity networks are natural monopolies, accounting for 60 to 70 per cent of household consumers’ costs. Their ownership remains highly politicised 20 years after the Kennett government in Victoria opened the book on Australian privatisations. At the time, claims were made that private owners would milk the consumer and cut corners by avoiding necessary reinvestment and maintenance ....
A hefty efficiency dividend to come from selling poles and wires
Australian Financial Review, 13th June 2014
Thirty years ago, at the dawn of the Australian reform era, there was a lively debate about the merits of public versus private ownership. At that stage, conscious of its support from featherbedded unions, Labor argued it was competition, not ownership, that drove efficiency.
Privatisation has never been popular electorally. There is a range of reasons for this. Many people believe a business that is under political control can be forced to provide services below cost, some feel a sense of satisfaction in shared ownership, and others consider private ownership may unduly cut costs. In a recent survey published by Essential Media, 58 per cent of Australians disapproved of privatisation. While ALP and Greens voters were more opposed than average, this view was also shared by 54 per cent of Liberal or National voters. The survey indicated that Queenslanders were even more antagonistic to privatisation than others. Similar views are seen in opinion polls across the world. But, although such polls intimidate governments, there is no case of privatisation policy contributing significantly to an election loss and no case where privatisation has been reversed when a government lost office. Across all countries - even communist ones such as China - governments have divested businesses they once owned. In some cases, as with Labor's privatisation of the Commonwealth Bank in 1991, government ownership is recognised as serving no purpose and, instead, hamstringing management.
Energy issues are rivalling political scandals as a preoccupation of the news cycle in both America and Australia. In the US, reduced costs of extracting gas and oil from shale are delivering cheap domestic oil and gas - with implications for renewable energy policy, global gas prices and the US Navy in the Persian Gulf. Cheaper US fossil fuels have also increased the fretting about greenhouse gas emissions, including by the Paris-based International Energy Agency's climate change activists. Global energy developments have unpredictable implications for Australia, where electricity prices have risen 72 per cent over the past four years (50 per cent more than general inflation) and the industry's productivity has declined. These experiences have triggered a cascade of reviews including an Energy White Paper and a Productivity Commission inquiry. Australia's electricity price increases stem from a combination of regulations, carbon taxes, increased demand for peak power and overdue replacements of poles and wires.
Rise in electricity rates offers a chance to grasp nettle of privatisation
The Australian, 8th August 2012
In an attempt to deflect blame for electricity price increases from the carbon tax, Julia Gillard has drawn attention to the high cost of state-owned enterprises' poles and wires businesses and associated profiteering. NSW households have seen their electricity prices rise by 18 per cent both this year and last. Other states have seen comparable increases.
SENSIBLY, the Australian Industry Group has recommended the Queensland Government privatise its $2 billion electricity transmission business, Powerlink. The proposal should also extend to the state's electricity distribution businesses, Energex and Ergon. Like Powerlink, these are regulated monopolies and may be worth $20 billion to private bidders. Work by Carbon Market Economics director Bruce Mountain and Stephen Littlechild, England's former chief electricity price regulator, indicates electricity distribution costs in Queensland are excessive. Private ownership of the regulated "poles and wires" monopoly assets in Victoria and South Australia has brought greater cost disciplines and the southern states' prices have risen more slowly than in Queensland.
The parliamentary impasse between New South Wales Premier Kristina Keneally and the opposition over whether the electricity industry sale should be examined reignites an issue the Premier believed she had buried. Whatever else it may show, the NSW sale once again demonstrates the wisdom of the Kennett government in selling Victoria's electricity assets in the 1990s. In the NSW sales, Origin Energy has bought the 2800-gigawatt coal-powered Eraring Power Station, plus a hydro scheme at Shoalhaven with a capacity of 240GW. TRUenergy, a subsidiary of China Light and Power, has bought 2400GW from the Delta Energy coal-powered portfolio. Origin states the price it paid was equivalent to $313 a kilowatt; TRU may have paid a little less. The NSW ''gentrader'' sales leave the government running the power stations and guaranteeing their output to the buyers. The buyers are responsible for fuel contracts. In effect, it is equivalent to a sale of the power stations but without the privatesector owners having the ability to drive down labour costs.
State governments cannot seem to rein in spending so it matches their revenues. The upshot is skyrocketing debt levels. The NSW and Queensland governments see selling assets through privatisation as a solution. Privatisation of government-owned businesses improves efficiency. But it should not be seen as a means of achieving the necessary fundamental reform of state finances.
The NSW government's 10-year march to electricity privatisation is finally under way. The state's retailers and generators are earmarked for sale. But half of the costs of electricity comprise network costs - poles and wires. Regulatory decisions determine charges for these ''natural monopolies''. With network pricing, regulators walk a tightrope between providing the businesses with revenues that prevent system decay while avoiding excessive price allowances. To obtain greater consistency and concentrate expertise, the national Australian Energy Regulator (AER) has been given responsibility.
A dozen years ago, virtually all electricity in Australia was generated in government-owned plants, transmitted along government-owned facilities and marketed by government-owned retailers. The electricity industry comprised seven Statebased utilities, which had total control over generation and sales within their respective States. Competition from other suppliers and retailers was illegal. A rare level of political consensus—the 1993 National Competition Policy report (the Hilmer Report)— led State governments to separate their electricity businesses into the parts that were monopolies, that is, the poles and wires (which account for about half of the costs), from the generation and retailing parts where competition was possible. This was followed by opening up local markets to competition.
The Queensland Government has foreshadowed major changes in its electricity businesses. Its two retail distributors, Energex and Ergon, though active as retailers in the southern states, face little home state competition. The Government is now committed to opening the retail market fully to interstate firms. It has, however, stated a determination not to sell the lines businesses, a resolve strengthened by the blackouts stemming from inadequate investment. In leaving unsaid its intentions regarding the retail operations, the Government has created an expectation for possible sale. One issue, whether or not retailing is to be sold, is whether consumers should have a single retailer or the choice of Ergon and Energex. Dwarfing these issues is the matter of generation.
Aside from his role as NSW Finance Minister, one of Michael Costa's new jobs is, alongside new Premier Morris Iemma, as the shareholder minister to the state's eight corporatised electricity businesses. This role is one fraught with peril. As one former shareholder minister, South Australian Minister Rob Lucas related, being shareholder representative of several competing businesses presents severe conflicts of interest. Rob Lucas found that he would hear confidential plans from one government business in which he held a stewardship and other plans from another rival business only one of which could profitably proceed.
Following Victoria's electricity restructuring and privatisation there were massive generator performance improvements. Gradual increases in demand have whittled away the consequent excess supply, bringing increased wholesale prices over the past year. But last month NEMMCO, the Australian electricity market manager, issued a report that deflated fears of an electricity shortage in the coming summer. By February of next year, half a dozen new generators in Victoria and South Australia are now expected to increase capacity by 750 MW or 7 per cent. What this flurry of new capacity building demonstrates is that markets, if allowed to work, bring their own cure to shortages.
Public Private Partnerships (PPPs) worldwide are redefining the frontiers between public and private provision of infrastructure. Victoria has seen their profile raised with the planned partnership for the Scoresby Freeway. This project has assumed notoriety both from its escalating costs and the ambiguous government messages about whether it is to be paid for by real or phantom tolls.
Power to the People: Privatisation and Deregulation of the Electricity Industry in Australia
Johannesburg, 18 September 2002
“Until self-trained economist Edwin Chadwick came along, 19th-century Britain had a huge problem with its convicts bound for Australia: most were dying before they reached the "fatal shore" down under. Chadwick, however, proposed a solution as effective has it was simple. Instead of paying sea captains by the number of convicts that boarded their ships, he suggested paying them for the number of convicts who disembarked from their ships -- under their own power. It worked. Soon after Chadwick's policy was implemented, convict survival rates surged to over 90 percent.” "Entrepreneurial Economics for Fun, Profit, and a Better World," by Alex Tabarrok (May, 2002)
The New South Wales voters may have delivered an unambiguous thumbs down to electricity privatisation but the issues that persuaded the Premier and his Treasurer to favour it remain. The same imperatives that brought the ALP Government to privatise the Commonwealth Bank and Qantas are present in energy markets. Chief among them is not sales revenues---important though this is---but the incompatibility of government owned businesses operating in competitive markets. That incompatibility is intensified where businesses are subject to considerable regulatory oversight.
In the NSW election, electricity privatisation is one of the few areas which divide a somewhat damp and untried Coalition from a pragmatic and experienced Labor administration. Both contenders are busily vying to demonstrate how much more of the taxpayers' money they intend to spend but the Carr Government is a nose ahead in that part of the race. Not surprisingly, Carr and Treasurer Egan see electricity privatisation as a means to finance their campaign promises. Frustrated in this by the ideologues on the left and the vested interests among the unions, they are saying as little as possible about privatisation in the campaign, hoping to sneak in a partial privatisation down the line.
Telstra claims its cost of rural telecommunication subsidies is $1.8 billion per year. That figure creates a real second term headache for the Minister, Mr Alston, who wants to cap the costs at $253 million. This spat on the Telstra Universal Service Obligations highlights the regulatory requirements on the industry. Lurking beneath the shadows is the currently dormant issue of Telstra privatisation. The debate on costing rural and regional cross subsidy has been around for a decade. The estimates of the subsidy have always been controversial. In 1989 Telstra put it at some $800 million per year but $250 million was the estimate of the Bureau of Transport and Telecommunication Economics. Two years ago, the telecom firms and the Australian Communications Authority commissioned Bellcore to develop a model to offer an accurate fix on the subsidies.
In spite of election commitments, the South Australian Government has bitten the bullet and taken the road to electricity privatisation. Premier Olson is pointing to the cash benefits of privatisation and suggesting continued government ownership would put $1 billion of Commonwealth Government Competition Policy payment funding in jeopardy. While in strict terms this is untrue, it does pass one reality check. For States to receive those payments they must satisfy somewhat vague requirements to dismantle regulatory measures that impede the full blast of competition.