In spite of election commitments, the South Australian Government has bitten the bullet and taken the road to electricity privatisation. Premier Olson is pointing to the cash benefits of privatisation and suggesting continued government ownership would put $1 billion of Commonwealth Government Competition Policy payment funding in jeopardy.
While in strict terms this is untrue, it does pass one reality check. For States to receive those payments they must satisfy somewhat vague requirements to dismantle regulatory measures that impede the full blast of competition.
Graeme Samuel at the National Competition Council is the gatekeeper of the Competition Policy payments. Last year, the NCC buckled when faced with opposition from tough talking State Treasurers who refused to countenance any threat to their payments.
But Mr Samuel is gaining greater credibility for the NCC as he stumps the country arguing the virtues of abandoning restraints on competition. His increased public profile gives the NCC a greater authority to advise Peter Costello against making the payments to State Governments that are dragging the chain on competition reform. In future the NCC will be no pushover for States which avoid opening markets up to competition but still want the special payments. Private ownership certainly offers better assurances that Governments will not be favouring a State owned firm.
As a part of the competition policy process, South Australia is committed to joining New South Wales and Victoria in the National Market, scheduled to commence in March. From that time the South Australian power business, Optima, and its retailer, ETSA, will gradually face increased competition in their presently sheltered State market.
This will mean lower prices for South Australian electricity customers. Those South Australian politicians who see the National Market as a vehicle to allow the lions in the bigger states to dine off the carcass of their consumers are missing the point without it businesses and consumers in the State will be disadvantaged.
There is also an overwhelming case for breaking up the existing assets. South Australia's generators within a single business have monopoly powers under any ownership and the business should be divided into at least two parts. ETSA, as a distributor/retailer, does not have monopoly powers under the national market but is very large. Dividing its retail/distributor arm into two would add greater competition. Moreover, as in the eastern states, its transmission business should be split off.
At present the tightly controlled dual generating and retailing monopoly provides the South Australian Government $240 million per annum revenue. The sale of the State's electricity assets would return over $4 billion. Fortunately for the State Government, it has recently revalued its assets. As a result it will not need to share a significant proportion of these funds with the Commonwealth, which now allows only the depreciation value specified at 30 June 1997 to be written-off for tax purposes.
With a sale price of $4 billion at a 6% rate of interest, the State would receive a similar return to that it presently obtains. However it would do so without the grave risks to those returns consequent on the loss of monopoly pricing powers and the intensification of competition from inter-state generators and retailers. The National Market and the pressure for genuine competition reforms means the current margins of the businesses will come under pressure.
In considering the sale of the assets, the South Australian Premier has indicated a disposition towards a Victorian style trade sale. The ETSA board favours a float. There could be an element of self-interest in this (a new owner would promptly install its own board) but a partial trade sale for some elements of the businesses may make sense.
Trade sales may well save prospectus costs and in some cases gain a premium from buyers who want total control. But this latter point can be overstated -- six of the nine Victorian power businesses were sold to consortia.
The ETSA board also acknowledges that trade sales to US concerns may provide a better price if the buyers can take advantage of some specific US taxation provisions. Naturally this issue will need to be explored. But floats open the sale process to the widest possible range of buyers; these include several fledgling specialist infrastructure fund management institutions. The widest range of buyers will generally allow sellers to extract the highest price.
The overriding goal is to place firms in private hands where they are fully free to take business risks and cut costs. South Australia's decision follows moves towards privatisation in Tasmania, hand wringing in New South Wales and private electricity developments in Western Australia. The National Market, great sale prices and the demonstration effect of the economies made in the privately owned Victorian industry provide a compelling impetus to privatisation of electricity supply.
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