Lights off: Part I

“The most dangerous man to any government is the man who is able to think things out for himself, without regard to the prevailing superstitions and taboos. Almost inevitably he comes to the conclusion that the government he lives under is dishonest, insane, and intolerable…” - H.L. Mencken (Prejudices:Third Series)

If you want to get to the bottom of the NSW energy sell off you’ll need to grab your sunscreen and some comfortable shoes, and pack your lunch.

The electricity sell off in New South Wales has played out like the Millers Crossing epic. Remember Johnny Casper’s line: “…It's gettin' so a businessman can't expect no return from a fixed fight. Now, if you can't trust a fix, what can you trust? For a good return, you gotta go bettin' on chance - and then you're back with anarchy, right back in the jungle….”

Just how much wining and dining and how many back lane punch-ups have occurred in order to “get the deal done”? Having spent years pushing for “energy reform”, did the possibility of a hung parliament in March 2011 cause the “privateers” to hit the panic button? Did they make a couple of calls to get a little more certainty?

The pious ranting we have heard from the leader of the Opposition seems targeted at the way the deal was done and the price paid rather than at the sell off itself. The voluble Barry O’Farrell sounds somewhat disingenuous given that privatisation has always been high on the Liberal agenda.

Electricity: an essential service

Believe it or not some of us think the role of government is to ensure the provision of essential services to the people. If government itself provides the service it does so on the basis that it doesn’t make a profit but charges a price for the service at a level where the price we pay generally will cover the cost of providing the service and allow for the extra cost of making sure the service will continue to be provided to the population in the future. Proper modelling and costing can ensure that what we pay now creates appropriate reserves to maintain the infrastructure we inherited and build new infrastructure in the future.

Privatisation of an essential service, on the other hand, focuses on return on investment. Investment capital seeks interest or dividends, and merchant capital seeks profit. Their objectives are best served if the service is provided at the cheapest possible price and charged for at the highest possible price.

History

As with water, the international march towards electricity privatization appears to have taken root here in the mid 1990s. Sharon Beder in, For Sale: The Power of the People, and with Damien Cahill in Regulating the power shift: the state, capital and electricity privatisation in Australia provides an informative analysis of how the quest to privatise energy was pushed.

I sometimes wonder whether, in exchange for some kind of bail-out, Australia once signed some sort of structural adjustment program that no-one bothered to tell us about.

Some of the key occurrences include:

• The establishment of the National Grid Management Council (NGMC) in July 1991.
• COAG meetings in 1993 and 1994 which reaffirmed the commitment of most State governments and the Federal government to energy reform.
• Premier Bob Carr and State Treasurer Michael Egan pushing for electricity privatisation in NSW in 1997, a clean-cut sale of retail and generation for $30 to $35 billion. They failed.
• COAG commissioning a review of the energy market in 2001, which resulted in the Parer Report, Towards a Truly National and Efficient Energy Market.
• In June 2001, COAG establishing the Ministerial Council on Energy (MCE) to provide energy policy leadership.
• In December 2003, the MCE establishing its energy market reform program.
• In July 2005, two new bodies being established: the Australian Energy Market Commission (AEMC), with responsibility for rule-making and market development, and the Australian Energy Regulator (AER), with responsibility for market surveillance and energy market regulation.

On 10 February 2006, COAG endorsing the need to continue the structural reform process and establishing an expert group, ERIG, to prepare a report. ERIG found that government ownership (especially in electricity) acted as a barrier to entry and an impediment to competition. To improve efficiency in Australian energy markets, ERIG recommended disaggregation and full privatisation of government-owned energy assets throughout Australia, taking place as quickly as possible given the practicalities of the privatisation process. ERIG acknowledged that privatisation may be politically sensitive.

Quite a few people saw what was coming, and some even tried to do something about it. In 1994 independent anti-corruption fighter John Hatton introduced a Private Member’s Bill in the NSW Parliament – the Privatisation of Core Government Services Bill - "to give the people of New South Wales a say as to whether they want the core services as defined by the bill privatised, either in part – to the extent that it is privatisation by stealth – or wholly’. The bill passed its Second Reading on 22 September 1994 with the support of Bob Carr’s Labor Opposition but it was then killed by the Liberals under John Fahey. The Carr Labor Government that followed had an absolute majority and went completely the other way.

John Quiggin said in 2001 of the South Australian electricity privatisation experience "…the South Australian electricity industry has reduced the net worth of the public sector … the interest savings on the sale price will fall consistently short of the earnings foregone through privatisation. This is consistent with most Australian experience of privatisation”. Isn't that exactly what’s likely to happen in NSW? Last year the NSW Auditor General reported that the combined profit after tax of NSW electricity agencies was $1.2 billion compared to $847 million in 2008/09. Pre-tax profits of the distributors also increased substantially, from $661 million in 2008/09 to $965 million. Pre-tax profits from generators increased from $307 million to $465 million. Electricity entities’ distributions to the Government were $1.4 billion, up $200 million from last year.

No wonder Roozendaal’s sale price resulted in the mass resignation of directors!

With that sort of return providing a source of funding for maintaining and upgrading our energy supply systems, how can the NSW Labor government and Eric Roozendaal explain the midnight fire sale of our energy assets? We are all looking forward to their explanations, but in the meantime, back to our history lesson.

The official line: the Owen Report

On the back of the ERIG 2006 report, with its acknowledgment that privatisation might be “politically sensitive”, in April 2007 the Iemma Government commissioned Curtin University Professor Tony Owen to report on the need for new generation capacity in NSW. The Greens, along with various environmental groups, unions, and community groups, questioned the terms set for the inquiry and its independence.

The Iemma government set up the Owen Inquiry on the premise that the State would experience a shortfall of electricity supply capacity and blackouts some time in the next ten years if a new baseload plant were not built. The government based their prediction on a report prepared by the national electricity market operator, NEMMCO, called the 'Statement of Opportunities' (SOO), but the report in fact identified a relatively small shortfall in peak demand which it said could be met by better managing energy use and making businesses and homes more energy efficient.

The Owen report then came out suggesting that a new baseload plant – costed at $8 billion - needed to be up and running by 2014 if NSW was to avert an electricity generation crisis. We’d also need another $4 billion to retrofit existing power stations with carbon reduction technologies, and the retail businesses would need up to $3 billion more to remain viable and compete with their private sector rivals.

(As an aside, the current annual Statement of Opportunities by the Australian Energy Market Operator now forecasts that NSW will face shortages in 2016-17, well after the 2013-14 date put forward by Professor Owen in 2007.)

Sell-off spruikers in 2008 told us the State needed money to deliver new roads and new public transport to reduce congestion, more hospitals to improve the failing health network, and more schools. Importantly it also needed the $15 billion for energy reform to meet the demands in the next decades. Funnily enough those needs weren’t mentioned by Eric Roozendaal in December 2010: he said the midnight fire-sale removed the need for taxpayers to build new power stations, protected the State’s Triple A credit rating and, despite not resulting in a new energy retailer, ensured a more competitive retail market.

One might be forgiven for asking whether NSW retaining its Moody’s AAA credit rating was contingent upon the sale of the assets itself taking place, rather than on the money NSW derived from the sale!

So where does all of this leave us?