Electricity Privatisation: the Deal of the Century

Last week's sale of the giant Yallourn generator underlines how great a deal the Kennett/ Stockdale Government got for Victorian taxpayer.

In March 1996, the Government sold the Yallourn powerplant to a consortium led by Powergen of the UK for $2.45 billion.  Last week the Powergen consortium sold the plant to a Hong Kong based group for $1.84 billion or loss of around 25 per cent.

Both the other main generators, Hazelwood and Loy Yang have also seen post privatisation ownership activity.  CMS, the major owner of Loy Yang A, is seeking to bail out and Scottish Power sold out its 20% share of Hazelwood at a reported price that was a steep discount on the initial purchase price.

Earlier this year Scottish Power also sold Powercor for a price that was barely above its 1995 price, in spite of the firm having been highly successful, and GPU booked a $450 million loss when it sold its electricity transmission business, PowerNet, to Singapore Power.

The reasons for the reduced valuations are several.  Yallorn suffered particularly badly from union disputation.  While the generation sector as a whole suffered from viscous competition between the privatised Victorian generators and their government owned counterparts in NSW which put prices in a downward spiral.  Those consumers free to choose their power supply, including virtually all Victorian businesses, have seen the benefit in lower bills.  In the case of distribution and transmission sectors, the regulatory authorities have required price reductions for the charges levied on the use of power lines.

The price war for generation may be drawing to a close as demand catches up to the over-capacity.  Even so, as last week's Yallourn sale demonstrates, the assets are still fetching a steep discount from their original sale price.  As for the lines businesses, they are subject to tight regulatory oversight of Victoria's Regulator-General and the ACCC and can expect not substantial increase in levies.

In the interim, the Victorian taxpayer is revelling in the windfall the privatisations have brought.  Not only did the power privatisations allow over $28 billion to be wiped from the State's debt, but the price was ramped up by the government's exquisite timing (and, many would argue, astute salesmanship).  It is clear that the generators and transmission businesses are today worth at least $3 billion less than the $14 billion realised by the privatisation.  In the case of the electricity and gas distributors, while the current value is uncertain, the assets themselves sold for almost $5 billion more than their book value.

The process also gave Victoria a huge advantage over the other states.  Although South Australia's has privatised its electricity industry, the process was badly delayed and destorted by political opposition and as result it reaped no price premium.  The NSW Government's plan to privatise it electricity industry have been thwarted by the power union.

As with most things timing was vital During the mid-1990s there were a large number of cashed-up utilities of shore looking to expand in the electricity industry in the Asian regional and Victoria fit the bill perfectly.  Nonetheless, leadership was in the end vital -- as per usual leaders get the best price.

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