The New South Wales voters may have delivered an unambiguous thumbs down to electricity privatisation but the issues that persuaded the Premier and his Treasurer to favour it remain. The same imperatives that brought the ALP Government to privatise the Commonwealth Bank and Qantas are present in energy markets. Chief among them is not sales revenues -- important though this is -- but the incompatibility of government owned businesses operating in competitive markets. That incompatibility is intensified where businesses are subject to considerable regulatory oversight.
In the final analysis a business must seek to maximise the wealth it obtains for its shareholders. Breaking up the NSW electricity supply into ten separate firms with a common shareholder is no more likely to assure their total independence than would be the case with separately operated BHP coal mines.
Generators in NSW and Victoria have faced cripplingly low prices over the past two years. The privatised Victorian generators, which have lower costs, lay the blame for this squarely at the feet of excess NSW capacity. As a result, one Victorian generator, the $4.85 billion Loy Yang A, is facing some highly publicised financial difficulties.
The Victorian generators maintain that the NSW Government has subsidised the State's generators by guaranteeing them a high price for sales to customers (mainly households) who are not yet free to shop around for lower priced power. And, further to defray its loss of earnings from generators, the NSW Government placed an additional levy on sales to the customers who are free to choose their own electricity supply. Price wars are seen across many industries, but the Government's ability to insulate its returns from generation businesses has exacerbated these, creating vast market distortions.
Government ownership also exposes taxpayers to considerable business risk. The State owned electricity distributor, Integral Energy, is to take on AGL and become a distributor of gas. Such head to head competition is great for the consumer and may stimulate efficiency. But as a government business Integral puts at risk taxpayer funds in embarking on what might well become a considerable capital expenditure program. Worse still, if Integral were to stand toe-to-toe with AGL in a bruising battle for market share, it has similar advantages to the NSW generators. Unlike AGL, Integral does not face the discipline of shareholders and the effects of poor decisions on its market price and credit rating.
Hence a government owner is damned if it allows a firm it controls to embark on a risky strategy, and damned if it prevents it acting as a genuine entrepreneur.
But should a Government stand by and allow a free rein to the directors it appoints to run its entities? Some of the dangers of doing so have already been seen in the purchase by the State owned Great Southern Energy of Wagga gas. Great Southern paid a price of $56 million, twice that offered by private sector suitors, for an asset with a return regulated under the national gas code that could never have valued it above $32 million. The NSW regulator has since confirmed the regulatory rules and set prices that value the business at less than $30 million.
Much greater financial risks are seen with a commercial dispute between Victorian based retailer Powercor and the Government's Pacific Power generation business. In that dispute, the Government as shareholder is exposed to possible losses amounting to several hundred millions of dollars.
Already the electricity industry is unrecognisable from the integrated monopolies of five years ago. Not only is it now subject to naked market forces but it is rapidly fusing with other network industries like gas and telecommunications. Government ownership will leave the industry either hostage to a shareholder favouring excessive caution or embarking on risky innovation without the checks and balances capital markets impose on private firms. And government ownership faces considerable risks of over-manned firms or excess capacity due to its shareholder's fears of electoral punishment. State governments have to find ways of privatising their electricity assets or risk seeing their natural political reflexes upsetting the market framework they have created.
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