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.