Will privatisation stop the price gouging?

The NSW Government has announced that it will be selling down 49 per cent of its ownership of network businesses via a 99-year lease to raise $20 billion. 

It has stated that the funds raised will all be invested in “new productive infrastructure” including a major urban rail upgrade and road construction. The government’s remaining 51 per cent share will then be placed into a statutory asset management fund, similar to the federal government’s Future Fund. This is with the intention of funding future liabilities of the state government. The government has also said that Essential Energy (the network business serving rural NSW) will remain entirely government owned.

The NSW Government is spruiking the sale to voters on the basis it will lower electricity prices. And in support of this claim is using a report from EY, formerly Ernst & Young, showing lower network price rises in Victoria and South Australia since these networks were privatised compared to NSW and Queensland.

Indeed, in an amazing turnaround the NSW Government is now emphasising that the doubling in electricity price rises since 2007 was largely due to mismanagement of network businesses, with the carbon price and Renewable Energy Target playing just a small part.

Meanwhile, on the other side you’ve got Labor leader John Robertson and union allies suggesting that households will suffer blackouts and price rises as a result of the part-privatisation.

As usual in such debates there’s a fair bit of cherry picking of the numbers to suit each side’s point of view, but Robertson is mounting a baseless scare campaign.

When you boil it all down, the odds are that privatisation should over the longer term lead to more efficient provision of network services without a material loss of reliability, because you no longer have government presiding as both the poacher (network business owner) and the game keeper (regulator).

Over the last few years Climate Spectator has provided extensive coverage of how the carbon price, and renewable energy and energy efficiency incentives have been used as scapegoats to cover up for failures to properly regulate network businesses since 2007. For the most part the Standing Council on Energy Resources (state and federal government officials responsible for energy policy) and the Australian Energy Market Commission, which writes the rules and is headed by a former NSW Treasury secretary, have been reluctant to admit a serious problem and been incredibly ponderous in acting.  

The worst offenders under the new post-2007 regulatory regime have clearly been the state government-owned network businesses. Although the private-sector operators have also made-out handsomely – something obscured by the Ernst & Young report’s choice of time periods for assessing network charges. This means the report misses the fact that Victorian Premier Jeff Kennett fattened-up the profitability of its networks before selling them; and it strangely stops in 2010-11 for South Australia prior to some noticeable network price rises.

In the case of NSW the chart below illustrates how the NSW network businesses substantially inflated their revenues under the new regulatory regime. Meanwhile, it’s important to note that peak electricity demand grew little in spite of record high temperatures.

NSW network businesses annual revenue: 2008/09 vs 2012/13

Source: Hugh Grant (2014) Presentation to the NSW Energy Forum—4 June 2014 based on network businesses Regulatory Information Notice Responses

The key critics of the regulatory regime, led by energy regulatory economist Bruce Mountain and echoed by Ross Garnaut and the Productivity Commission, place much of the blame at the foot of a conflicted regulatory arrangement. For the revenue-starved NSW and Queensland state treasuries, network businesses have effectively been used as a shadow form of taxation. This lax approach to regulation then also helped private sector operators, although to a lesser degree.

When you look at a breakdown of a householder’s electricity bill (below) Victorians pay substantially less for network infrastructure than their NSW and Queensland counterparts. According to Mr Mountain, this large difference can’t be explained by differences in geographical dispersion nor peak demand growth. Instead he believes it is due mainly to misplaced incentives where government-owned businesses can borrow money at low rates while charging customers for the cost of finance faced by a private sector business. (Now before you jump on South Australia’s privatised network costs being similar to those in NSW and Queensland, it has a more peaky demand pattern than NSW and Queensland.) 

Share of different components to household electricity charges

Source: Australian Energy Market Commission Residential Electricity Price Trends cited by Energy Networks Association (2014)

Of course, by keeping a 51 per cent ownership stake in the networks, the NSW Government doesn’t actually properly fix the problem of being poacher and game keeper.

It’s rather disconcerting that the NSW Government, in announcing that its remaining shareholding would be vested in a Future Fund-style body, said it would have "a particular responsibility to protect the value of assets held by the state".

If that’s the case, the government should ensure that its board members and management have no links to, or influence over government officials determining energy policy and regulatory matters.