Carr goes via the backdoor on electricity privatisation

Executives at various energy companies and investment banks must have had a cheerful Christmas. After years of manoeuvring and dead-end options, the NSW electricity industry was finally gift-wrapped and placed under the tree - although it will sit there for another few months yet.

The December Energy Directions Green Paper was typically short on detail. A few things, however, are clear. Prices for domestic users will rise, NSW is unlikely to avoid more coal-fired generation and households may soon be billed by a private sector retailer.

While “committed to retaining the electricity assets it currently owns”, the NSW Government wants out. Treasury has been biding its time since the Pacific Power and Integral financial catastrophes of the 1990s. The need for new capacity provides the impetus for change.

The Green Paper lays the ground work for back-door privatisation. What is delivered in the follow-up White Paper will depend on the deals done with NSW Labor and the Australian Competition and Consumer Commission (ACCC).

New power stations will be built with private equity. While this is positive, the key to the reform package will be the retail sector.

Electricity has four industry segments: generation, which converts heat into electrons, high-voltage transmission, distribution and retail.

While rarely publicised, government corporations like Energy Australia in NSW and Energex in Queensland combine the very different businesses of distribution and retail.

Distribution involves a network of poles, wires and sub-stations for transporting electricity from power stations to your home. It is engineering based, a crucial part of the supply system and regulated.

The other company buys energy wholesale and then retails it like Harvey Norman does TVs and whitegoods. This business has very few physical assets other than buildings and hi-tech billing and trading systems. As the wholesale “pool” price set by generators can soar from an average of $35 per unit to $10,000 in, literally, five minutes, the core skill of a retailer is risk management using sophisticated contracts and financial derivatives.

The unison of distribution and retail reflects a pragmatic policy decision at the start of the market. Newly-created retailers - they weren’t needed when customers had no choice but government tariffs - didn’t have sufficient collateral to cover their potential pool exposures. Asset backing from generators presented a far better operational and cultural fit - being the other side of the wholesale transaction - but would have stifled competition.

The market has since matured. Having seen the ACCC fail to stop AGL - one of the country’s largest retailers - acquiring a share in a major Victorian generator, the NSW Government is set to make market expectations a reality by formalising vertical integration.

According to the Green Paper, the Government hopes to couple a proportion of retail customers with its generation plant under the same corporate structure. The ACCC will be placated by having new generation and the remaining retail controlled by competing private sector parties.