NSW has the opportunity now to set much lower electricity prices for homes and small businesses, writes Richard Wood.
In finally putting privatisation of electricity on its agenda, the Carr Government in NSW is arguing that $22 billion worth of assets sales will allow it to wipe out the State's debt and free up money for rebuilding hospitals, sewerage systems and dilapidated rural bridges.
But the inconsistencies of public ownership in the opening market for electricity have also brought a compelling need for NSW to follow Victoria's privatisation lead.
Since electricity trading began in late 1995 in Victoria and mid-1996 in NSW, the now linked State markets have delivered two sets of generator prices. Those for captive customers -- households and smaller businesses -- are set at $38 per megawatt-hour in Victoria and at $44 in NSW. But those customers who are free to choose have negotiated much lower contract prices -- in some NSW cases, less than half these levels.
The progressive extension of competition is just now hitting the NSW market for 750 MWh customers -- typically large supermarkets -- which was freed up in Victoria in mid-1996. In Victoria, suppliers that offered keen contract prices gained market share. In NSW, the retailers' battle for the 750 MWh customers is now cutting contract prices to the bone with offers, underwritten by generators, at prices as low as $14 per MWh.
No NSW generation plant can produce electricity at prices of $14 per MWh. Such prices are also below break-even profitability in lower-cost Victoria.
When private sector businesses engage in price wars to try to preserve market share and jobs, their management is answerable to genuine profit-maximising shareholders. But shareholder disciplines on government businesses -- such as the NSW electricity industry -- are less onerous and can distort the entire market.
The NSW generators can offer $14 per MWh electricity because of their dual market. Captive households and and smaller businesses receiving electricity at high prices are insulated from bigger business customers buying the same product at lower prices.
As shareholder of the electricity businesses, the NSW Government is recoiling at the impact of competition for the newly contestable customers. In the scramble for market share, its ostensibly commercial electricity businesses have been offering prices that truly private Victorian competitors find hard to match. And, because they are below cost, these prices have also jeopardised future dividends back to Macquarie Street.
The NSW Treasurer, Mr Michael Egan, announced his half-way solution to this dilemma in this month's Budget: he imposed a $100 million tax on sales to contestable customers. Acting as the tax collector, the NSW Government can recoup some of the profit it loses as a shareholder from the actions of its electricity businesses. The Government is therefore the real price fixer in this market.
Its electricity businesses can bid low prices to freeze out interstate competitors, but the Government/ shareholder incurs no loss.
The result is that households and other smaller customers cannot benefit from the lower prices won by large customers. They are tied in both States to the regulated price paths for captive customers until full competition arrives in 2001. In Victoria, a price schedule for captive customers was locked in as part of the Kennett Government's privatisation process. The high, though reducing, lock-in price formed a major component of the $18 billion the Victorian Government reaped on its asset sales.
There is no such constraint in NSW, which now has the opportunity to set much lower prices for households and small businesses as part of its privatisation sales. The Government could, therefore, both obtain handsome prices for its assets and improve the competitiveness of its smaller businesses as well as delivering a price bonus to households.
Electricity businesses are fast leveraging off their customer and fixed asset base to move into gas, telecommunications and insurance -- areas where governments have even less cause to be involved than electricity. Even if corporatised boards could be relied upon to act commercially, governments could not provide them with the capital to pursue such ventures.
The time has come for Treasurer Egan's "New Labor" policies, which will allow the Government to extract itself from business fields where it has no place, provide additional revenue streams and vastly reduce the scope and risk of regulatory oversight.
ADVERTISEMENT
No comments:
Post a Comment