Why O'Farrell should sell Snowy Hydro

I can tell Barry O'Farrell where to find about a quarter of the money for New South Wales infrastructure development on which he is being hassled by his predecessors Nick Greiner and John Fahey.

O'Farrell's decision, in the wake of the report on the electricity sector by ex-judge Brian Tamberlin, to sell just the government-owned trio of generation businesses and the controversial Cobbora coal mine was purely political.

He made a judgement, given that the Coalition does not control the NSW upper house of parliament, to retain the quartet of government-owned network businesses and avoid a towelling over his (unnecessary, really) pre-election promise not to sell them.

Fahey, who was the last previous Liberal premier of NSW after holding power almost two decades ago, is a bit more understanding of O'Farrell's decision than Greiner, who seems to lose no media opportunity to push the issue.

"I thought Barry had a bit of skating room with the (Tamberlin) report,” Fahey told Sydney media at the weekend, "but he stuck to his original decision not to sell. You can understand that, but I also know there's a crying need for infrastructure at this stage and there's an opportunity to replace one asset with another.”

By retaining the network businesses, O'Farrell is eschewing perhaps $25 billion in sales value. The number the media choose to use is $20 billion.

What the three generation businesses are worth is anyone's guess, not least because a substantial chunk of their operations were sold by the Keneally government in the gen-trader deal.

There's a view that their sales (and that of the mine) could pull in $6 billion. Alan Kohler thinks that Macquarie Generation, with its twin Bayswater and Liddell operations (4,700 megawatts of capacity, producing 15 per cent of east coast consumption) and its ready-to-go Bayswater B development site, could garner $5 billion on its own (Capitalising on NSW's comedy of errors, March 29).

But there is a way of nearly doubling this: sell Snowy Hydro.

It's probably worth about $6 billion and NSW owns 58 per cent of it. Another 29 per cent is owned by Victoria and the balance is in the hands of the federal government.

One of my senior sources in the power business says: "There's no non-political reason not to sell it. It has a large amount of equity locked up that NSW and Victoria would like and need. It already operates just like a private sector company and it is in the riskiest end of the market.”

This risk issue is not much appreciated outside the power industry. The public sees the Snowy as an icon of modern Australian engineering, but it's really an insurance company with a side business as a water manager.

Incorporated as Snowy Hydro in 2002, it provides risk support for east coast energy retailers in a volatile wholesale electricity market, where traders can lose $20 million in 20 minutes.

Snowy can generate flat out for only a short time before it exhausts its available water supply, but its back-up role, which includes two gas-fired peaking plants, is critical to the supply security of the east coast. The business also includes an energy retail arm, Red Energy.

Whenever power privatisation is raised, its opponents, including the NSW Labor leader John Robertson, leap in to the debate, carrying on about electricity bills going up and jobs being lost.

Robertson's recent claim that the generation sales O'Farrell plans will add $500 to NSW household power bills is a complete furphy and absolutely no one in the mainstream media has taken him up on demonstrating why this should be so.

(The Labor argument would be funny if it was not so puerile. In South Australia, electricity prices increased between 30 and 40 per cent after privatisation, Labor says. A 30 per cent rise in NSW electricity bills equates to more than $500 a year for the average household. My five-year-old grandson could understand why that's a nonsense argument, but the media pack in Macquarie Street has swallowed it whole.)

No case can be made for the Snowy sale leading to higher bills and an investor-owned business would probably add jobs because it would be free to pursue new investments.

But selling the Snowy is, of course, political dynamite.

John Howard cut and ran from his 2006 support for its sale in the face of the backlash, to the equal chagrin of his then finance minister, Nick Minchin, and ill-fated Labor leader Morris Iemma.

The ruckus this time would be even louder, not least because of the role the Greens have in federal parliament now. However, it is hard to see what O'Farrell stands to lose by backing the sale of the Snowy as well as the other generation assets.

In fact, politically he may stand to gain because the Sydney media are playing with the theme that he lacks the ticker for the top job – and Greiner is certainly not helping to counter this perspective.

Keith Orchison, director of consultancy Coolibah Pty Ltd and editor of Powering Australia yearbook, was chief executive of two national energy associations from 1980 to 2003. He was made a Member of the Order of Australia for services to the energy industry in 2004.