The courtship of Origin Energy by AGL will not be the final chapter of the turmoil in the energy market that began almost as soon as Victoria privatised its electricity industry.
Nobody anticipated the developments that have occurred in the 10 years since the first privatisations and the simultaneous creation of genuine markets for electricity. That process unleashed a whirlwind of activity as firms jostled with different product offerings, sought economies by downsizing and pursued alliances to reduce risks of trading a commodity that can have its price increase one hundredfold within minutes.
The pedestrian process of converting coal to electricity and transmitting power to users was transformed by competition and the prospects of higher profits. The outcome drove an unprecedented search for greater efficiencies, the result of which is arguably the world's most efficient, and lightly regulated, electricity supply industry.
Of the 14 Victorian electricity and gas firms privatised out of the state's gas and electricity monopolies, not one has been untouched by merger, spin-off and ownership changes.
This private-sector competition also infected the remaining government-owned firms to the extent that they are barely different in their management approaches.
There has also been an almost casual commingling of private and public equity. This is the case with the largest NSW retail business, EnergyAustralia, which has a strategic alliance with privately owned generator-cum-retailer International Power that gets close to being a merger.
The Queensland government's sale of its two retailers is another landmark. Ten years ago most analysts placed a negligible value on electricity retailing. It was stapled together with electricity distribution because that was seen as the only way it could be offloaded. Very soon Origin saw the value of retailing in its own right. At the same time the Chinese owners of Powercor and Alinta recognised that the distribution and retail functions attracted different sorts of equity and that there was greater value in them being in separate corporate entities. Previous fears that joint ownership would lead to monopolistic practices proved totally unfounded. The retail and distribution arms simply had to operate independently if the latter were to offer sufficient assurances to non-affiliated businesses that they were genuinely independent. In selling its two retail businesses, Powerdirect and Energex, Queensland raised $2.4 billion. Based on the Queensland values, NSW has more than $4 billion tied up in retail assets alone, assets that serve no public purpose in the highly competitive market we see today.
The NSW electricity supply is the elephant in the room that nobody wants to mention, fearing that its privatisation might be derailed by a "who's selling the family silver" campaign. Whoever wins the March 24 state election, some privatisation is certain. But our politicians have little faith in the voters' common sense. Hence, in a conspiracy of silence, all Australian governments have acquiesced in shelving the report of the Energy Reform Implementation Group (ERIG). That report's predictable exhortations include further privatisation of an industry most of which now has no justification for government ownership.
With the NSW election out of the way and publication of the ERIG report we will see a flurry of new activity in ownership and structure of the energy supply businesses.
This will also cover generation since, simultaneous with the retail/ distribution separation, a process of generator and retailer merging began. The imperative for this, one facet of which is the Energy Australia/ IP alliance, was risk mitigation. Both retailers and generators see at least a partial mutual ownership as the best form of insurance against very high prices. The Queensland and NSW governments will therefore see increasing value in privatising their generation assets and this will bring a further round of asset redistribution.
Hence, even if AGL is eventually successful in persuading Origin to mop up some synergies in an asset exchange, this will not be the last piece of the jigsaw being put in place. However, with 50 per cent of the retail electricity market, that merger would present the Australian Competition and Consumer Commission with its first genuine grounds to insist on some divestment. In the interest of continual searches for efficiency gains, hopefully such interventions will be rare and confined to real cases of monopoly and not ones the regulators contrive simply to deal themselves into the industry policymaking process.
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