THE DISTILLERY: Power and money

Jotters hail a balance sheet boost from the clean-up of New South Wales’ power station plans, while one warns of long-term economic headwinds.

Three business journalists are almost thankful that the New South Wales government’s agreed to sell Eraring Energy to Origin Energy and cancel a coal supply agreement. The move cleans up a complicated arrangement put in place by the former Labor government. This sense of gratitude comes from the liabilities that the arrangements had placed on the state government’s balance sheet.

Also, it’s rate decision day!

But first, The Australian’s John Durie says the former New South Wales Labor powerbroker Joe Tripodi and his crew should have done the exact same thing as the O’Farrell government did yesterday. Instead, they decided to placate the Electrical Trades Union.

“Because the union blocked the sale of the power station, Tripodi created a complicated scheme in which the rights to the power from the station were sold to Origin for $609 million along with the promise of coal from a planned state-owned Cobbora coalmine. The coal was subsidised to get Origin to sign up for the rights but created a new taxpayer liability for no good reason. The ETU, of course, slammed the deal, which overturned its own folly that has cost NSW taxpayers plenty. Baird took two seconds to look at the deal and got his advisers Goldman Sachs to work out how it could be changed to get the liability off his books and the power station in private hands.”

The Australian Financial Review’s Chanticleer columnist, Tony Boyd, is similarly scathing of the former Labor government and welcomes the conclusion of a ludicrous arrangement.

“At a net cost to NSW taxpayers of $75 million, the government will free itself of about $1.75 billion in liabilities. The government, which was advised by Goldman Sachs, appears to have found a sensible middle ground to resolve a complex issue. Origin, which was advised by Lazard, comes out of the deal with some contingent liabilities for the supply of coal after 2022.”

And Business Spectator’s Stephen Bartholomeusz completes the trio of senior business journalists who believe the Labor arrangement stunk.

“The deals mean that Eraring has finally been cleanly privatised, the government has avoided having to develop Cobbora, Origin gets a net $250 million knocked off its original purchase price to reflect the reality that it will have a greater exposure to the coal price in future because the contract with Centennial is for only about half the term of the Cobbora contract. It will also have more flexibility in terms of the plant’s output, greater optionality within its own generation portfolio and energy trading business and should be able to manage it to drive greater efficiency. It was always inevitable that at some point the politically compromised and overly-complicated gentrader contracts would be replaced by a more conventional private ownership model for NSW’s power stations and logical that the most likely buyers would be those on the other side of those contracts, which is what has now occurred. It is a sensible outcome for both NSW taxpayers and Origin.”

Meanwhile, there’s an interest rate call today and everyone is expecting the Reserve Bank of Australia to stay put with the Australian dollar giving up some serious ground. Good news that might be, but The Australian’s Henry Thornton, a pen name for an “eminent, independent economist,” says Australia is in a world of trouble.

“Henry’s view is that Australia cannot now avoid a recession and that in what I call a ‘realistic worst case’ it will be a recession of at least the severity of those in the early 1980s and the early 90s, with double-digit unemployment even on the Australian Bureau of Statistics definition. With unchanged policies, the budget deficit will blow out severely and budget tightening will be forced on Australia by global market vigilantes, whether we like it or not. Claims that the coming recession will be caused by ‘mindless austerity’ of an Abbott government, should the election be won by the Coalition, are simply hogwash. In the unlikely case of an election win by Rudd Labor, or another hung parliament, most politicians will be gobsmacked by the state of the economy and the national budget. Cutting interest rates further may somewhat reduce distress, but will do nothing to relieve the cost disequilibrium, and may indeed worsen it. Only focused action by a fully informed and highly competent government can hope to steer Australia through the strong recessionary currents we are experiencing.”

The Herald Sun’s Terry McCrann notes that the Reserve Bank of Australia’s latest index of commodities prices indicates that Australia is still getting enormous bang for its resources buck.

The Australian’s Barry Fitzgerald anticipates some friction amongst gold equity investors in January next year because the December quarter is when producers will come under pressure to shift from the current cash method of reporting to the all-in cost method.

The shift is likely to reveal just how damaged the industry’s cost base is after 10 years of hikes.

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