States look beyond the power of one supplier

Fifteen years after Victoria privatised its electricity industry, New South Wales is dipping its toe into those same waters.

But its focus is on electricity retailing, which accounts for under 5 per cent of total supply cost.

Previously NSW has considered privatising its state-owned electricity generators.  The unions prevented this, fearing private owners would seek greater efficiency by replacing some of their members with non-union contractors.

There are no privatisation plans in NSW (or Queensland) for the supply system's poles and wires, which bring electricity to our homes, shops and factories.  Poles and wires account for about half the costs of electricity.

Victoria has five of these businesses.  SP Ausnet provides the transmission spine while Citipower, Powercor, Jemena and United Energy provide the local distribution.

Pole and wire businesses are natural monopolies and therefore operate under regulatory controls.  The controls are similar whether the companies are private, as in Victoria and South Australia, or government-owned as in NSW and Queensland.

The regulatory approach used is based on a system pioneered in England 20 years ago.  It sets price ceilings and reliability standards designed to protect consumers while giving ample profit incentives for the supply businesses to seek cost savings.

All this was supposed to be very simple.  The first English regulatory decision ran to just three pages.  Last week the Australian regulator put out draft proposals for Victoria's pole and wire businesses' prices comprising a horse-choking 2500 pages.

Regulatory intrusion has clearly become excessive.  The costs to the regulator itself are amplified by costs required of the regulated businesses to supply information.

Such excesses are especially irksome when, as was the case with the latest Victorian draft, the massive and detailed analysis simply resulted in price recommendations that merely maintained existing trends.

However, the outcomes of the various regulatory reviews also reveal a superior performance of privately owned businesses.  Depending on the measure used, the Victorian businesses spend 20 to 50 per cent less operating and maintaining their lines than their government-owned counterparts in NSW and Queensland.

Unlike the government-owned businesses, the Victorian companies have tended to spend less than their regulated prices permit.  As private businesses, they have incentives to make savings to allow increased dividends for their shareholders.

This gives the regulator a yardstick for reducing future allowable spending by the supply business, thereby passing on the efficiencies gained to customers.

By contrast, the government-owned companies have no real shareholders and are inclined to spend whatever they can, even when some spending yields no real value.  This denies regulators the evidence to justify holding down future spending levels and therefore customers face higher prices.

The private companies' cost savings have not lowered reliability levels.  Infrequent events such as bushfires make comparisons difficult but, over the long term, the Victorian, NSW and Queensland businesses have similar reliability.

All of this holds two messages.

Firstly, Victorians continue to benefit from the former Kennett Government's privatisations.

Secondly, the Queensland and NSW governments could reap similar benefits by privatising their state-owned pole and wire businesses.

For NSW, this may raise $15 billion, allowing the elimination of half the state's debt.

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