Baird shows naysayers the passion on power

THE new NSW Premier has gone where his predecessors, on any side of politics, dared not.

The unpopularity of privatising electricity networks must be one of the great political m

BANKS, airlines, telcos, even fish shops and butcher shops — over the past century Australian governments have successfully offloaded them all in the name of efficiency and common sense, but not yet the poles and wires that channel electricity to businesses and households.

Overcoming the enduring, and seemingly irrational, popularity of publicly owned electricity distri­­b­ution has proved too great a challenge for governments in NSW and Queensland, which ­together own about $80 billion worth of network and transmission businesses.

That looks set to change: NSW Premier Mike Baird announced this week that his government would, after the state election due next March, lease 49 per cent of the state’s distribution networks for 99 years.

By promising to plough the ­expected $20bn windfall back into road and rail infrastructure, including a new Sydney Harbour crossing, he hopes to surmount perhaps the biggest political challenge in the state’s history.

“I can’t remember the last time I was so impressed with a premier, and I vote Labor,” said one energy expert, noting that the policy had eluded former premiers Bob Carr and Morris Iemma, and was considered too risky by former Liberal premier Barry O’Farrell.

What might appear to be a cop-out (maintaining 51 per cent government control) is a tactic. The government will sell majority control in Ausgrid, Transgrid and Endeavour Energy, three ­­dis­trib­utors-transmitters with combined annual earnings of $2.1bn in 2012, but keep Essential Energy, which connects region­al NSW to the electricity grid: the overall privatised share will (miraculously) net out at 49 per cent.

“It would be hard to argue that government ownership of wires and poles meets an Australian ­social norm,” the Productivity Commission said last year in a detailed study, which argued privatising remaining state-owned electricity assets would put downward pressure on retail electricity prices.

“People don’t realise that as corporatised entities they are already operating much like private firms and making profits, but without the same incentives for effic­iency,” says Paul Broad, head­ of the O’Farrell government’s 2011 infrastructure taskforce.

“Arguments against privatisa­tion were born of the intellectually lazy, but politically popular, stance adopted by Labor oppositions at the state level in the 1990s,” says senator Dean Smith, chairman of the Coalition energy committee.

The unpopularity of privatising electricity networks must be one of the great political mysteries, ­especially given the massive price increases in recent years, particularly in NSW and Queensland.

“The contribution of privately owned networks to electricity price growth in Victoria and South Australia has been significantly less than in NSW and Queensland,” says David Byrne, head of infrastructure at ANZ.

Between 1995 and 1998, the Kennett and Olsen governments in Victoria and South Australia, respectively, privatised the ­ent­ire­ty of their electricity distributors.

A report by Ernst and Young this week shows the cost of the network (the biggest component of household and business power bills, more than twice as expensive as generating the energy itself) has increased more than 122 per cent in NSW and Queensland since, while it has fallen in Victoria and South Australia.

Of the seven most expensive electricity networks in Australia (based on the charge for a typical customer), five are in public hands.

The Productivity Commission also pointed to evidence showing Australian distributors were less efficient than Britain’s privatised networks, distributor reven­ues per connection twice as high in Victoria, three times in South Australia and four times as high in Queensland and NSW.

Publicly owned networks can typically borrow more cheaply ­because investors believe (correctly) that they are ultimately guaranteed by taxpayers.

They are more susceptible to union demands, costly and conflicting political goals and are tempted to invest in (or “gold plate’’) networks beyond what is necessary to maintain relia­bility.

“State governments are hopelessly conflicted as owners of networks — they want to maintain perfect reliability, maximise returns to the state budget while minimising costs to consumers,’’ says Matthew Warren, chief executive of the Ener­gy Supply Association of Australia.

Vince Graham, chief executive officer of Networks NSW — the agency that controls the three ­distributors, Essential Energy, Endeav­our Energy and Ausgrid — says the investment per customer in NSW is $8200, almost double the level in Victoria.

“While there are differences in customer density between the two states, that cannot readily explain the whole difference,” he says.

Graham says the networks under his control recently decided not to go ahead with some of the $15.6bn in investment that was ­approved by the Australian Energy Regulator in 2009.

“Once rigour was applied, we were able to take $3bn of this out without harming reliability,” he says, noting the network price increase over the next few years would remain below CPI inflation. “Double-digits rises are over.”

The NSW Auditor-General found in 2012 that Ausgrid paid more than one million hours of overtime. One worker earned more than $180,000 in overtime, more than twice his annual salary. Almost 900 employees were paid overtime in at least half of their salary. In Queensland networks, also publicly owned, almost 650 employees earned a  least 150 per cent more than their ordinary pay.

The privatised Victorian distrib­ution businesses, which inherit­ed about 6000 staff in the 1990s, have reduced their headcount to less than half that without compromising reliability.

“It’s not the fault of employees that inefficiencies have been estab­lished to the detriment of the community, but of politically powerful unions and complicit management,” says Graham, under whose management overtime spending for the 12,000 employ­ees across the three NSW networks has fallen from $185 million in 2011-12 to $85m last financial year. “Every single day we are trying to rid the organisation of inefficiencies but we still have some way to go.”

There is no evidence for the claim of NSW Opposition Leader John Robertson, who as a union leader was instrumental in defeating the Carr and Iemma government’s privatisation push, that the sale would push up electricity pric­es and reduce reliability.

How much the sale generates remains uncertain, however. David Leitch, an energy analyst at UBS, says Hong Kong-based Cheung Kong Infrastructure would be a prime contender to buy the networks. “They are sitting at the moment on $8bn or $9bn in cash, suspected to be slated for infrastructure investment such as these in the Asian region,” he explains, noting that the group ­already owns the bulk of South Australia’s and Victoria’s electricity supply.

Australia’s superannuation funds will also be interested.

“Asian investors have expertise in energy infrastructure, drawn to the stable good returns these ­assets tend to generate,” says Byrne, noting the leases of the ­Botany and Newcastle ports by the O’Farrell government reaped significantly more than expected.

Whatever the sale price, selling public networks sooner rather than later might be wise, given ­uncertainty surrounding the ongoing “electricity death spiral’’ — whereby electricity consumption is falling because of massive price increases since 2010, lifting the aver­age fixed cost of networks, which in turn is prompting further falls in consumption.

At the same time, rising affordability of unsubsidised solar energy is reducing the need to join the electricity grid at all. “The energy industry in Australia and other developed economies has begun a radical transformation framed by falling demand (and) the rise of new technologies like solar panels,” says Warren.

“It is unclear how this will play out, but managing these sorts of risks and opportunities is better suited to private investors who are less constrained than government businesses,” he adds.