NSW loses its asset spark

Morris Iemma is trying to work out out how to sell the state’s electricity assets while claiming he hasn’t actually sold any.

NSW has finally bitten the bullet and chosen to effectively privatise much of its electricity sector. It plans to do so, however, in a way that will enable it to claim that it hasn’t actually sold any electricity assets.

NSW Premier Morris Iemma has outlined a plan under which the state will lease its generators to the private sector and sell its retailers, while retaining its distribution assets, or "poles and wires”.

The announcement follows Professor Anthony Owen’s inquiry into the NSW electricity sector, which found the Government would have to spend $12 billion to $15 billion over the next 10 to 15 years on new generation capacity and on bolstering its retailers so they can compete with the privately owned integrated electricity generation and retailing groups. Professor Owen recommended the Government divest all its electricity businesses.

The problem for the Government is that Iemma promised not to sell its generators or transmission and distribution assets. The solution, which was used in South Australia, is to lease the three big generation companies’ assets to the private sector. Given that the leases would have to be long term if they were to attract any interest (South Australia used 99-year leases) that’s the sale you have when you don’t have a sale – in 99 years coal-fired generators will probably be extinct.

The Government is vague about the mechanisms it will use to execute the privatisations, saying the options include trade sales of the three retail businesses, leases of generation and/or initial public offerings.

The NSW process is unlikely to be as fevered as Victoria’s privatisations, which captured the interest of US utilities in expanding offshore, out of the heavily regulated US industry. They over-paid and subsequently withdrew. That privatisation program also occurred before climate change and the focus on restricting carbon emissions created uncertainty around the future of coal-fired generation.

Today there are only five electricity generators of significance – AGL, Origin, TRUenergy, International Power and Babcock & Brown Power. To varying degrees they are all pursuing "gentailer” or integrated strategies, or trying to match generation capacity with retail customer bases. They would be the most likely source of trade buyer interest.

While it might take some fast talking to explain to the NSW public why an IPO of a lease stapled to a retailer isn’t a privatisation of infrastructure, that would be a rational course for NSW to take – creating three new integrated electricity companies in NSW – and one that would create a deeper and more competitive sector and therefore one that could produce consumer benefit.

One assumes NSW will pursue a parallel sales process, offering the retailers and the generator leases to trade buyers while also exploring the value that could be created from floating the assets/leases.

Apart from meeting its commitment not to sell electricity infrastructure, it is unclear why the Government is so fixated on retailing the transmission and distribution businesses, where the experience of the other states is that they are highly valued by the private sector but can be tightly regulated under CPI-minus regimes to produce consumer gains.

Perhaps it is because they are the most unionised and employee-intensive element of the NSW system (11,500 versus the 3100 employed in distribution and retailing) or perhaps because, with the Government offering 30 weeks’ pay for six years or more of service as incentive or "transfer payments”, it would cost the Government too much to sell those businesses.

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