Joe Poprzeczny: State Scene - Bipartisan failure on energy policy

An elated Energy Minister Eric Ripper has announced Western Power’s 25-year billion-dollar deal for transmission of North West Shelf gas to Perth for electricity generation.

The deal has been struck with a three-member consortium – Macquarie Bank’s Diversified Utility and Energy Trust, Alcoa, and Alinta (DUET-A-A) – which has acquired the Dampier-to-Bunbury Natural Gas Pipeline (DBNGP) for $1.86 billion from former owners, Epic Energy.

The banks that financed Epic’s 1998 purchase from the government had repossessed, but not liquidated, the DBNGP.

The Western Power deal with DUET-A-A clears the way for an election, since Premier Geoff Gallop now feels there’ll be no further power blackouts, as DUET-A-A has undertaken to expand the DBNGP’s capacity, something Epic couldn’t afford since it had overpaid.

Epic negotiated buying the DBNGP with former energy minister Colin Barnett for $2.4 billion.

Many, including former Labor minister Julian Grill, warned that selling the DBNGP at an inflated price would have major consequences on future energy costs and would endanger WA’s economic growth.

How right he has been.

With the DBNGP now valued at $1.5 billion by the Government’s previous Office of Gas Regulation (OGR) – now rolled into the Economic Regulation Authority (ERA) – since that’s the cost of laying a second DBNGP, why did DUET-A-A pay $1.86 million to the banks that had lent Epic so much?

Before considering this question and its impact on the price of gas we should take a look at some history.

Initially the DBNGP belonged to the State Energy Commission (SECWA), a socialist-style energy conglomerate that produced Australia’s highest cost power, therefore itself posing a threat to WA’s economic future.

Premier Carmen Lawrence wisely launched an inquiry in 1992, headed by industrialist Sir Roderick Carnegie, on how to restructure SECWA’s costly energy monopoly.

He recommended breaking-up SECWA into smaller, competing units.

Initially SECWA was split into Western Power – electricity generation, transmission-distribution and retailing to domestic and industrial clients – and Alinta Gas, which included the South West gas distribution network, the DBNGP, and a gas-retailing arm.

The next stage called for splitting Western Power into generation, retailing and transmission-distribution arms, with the first two to encounter competition from new privately owned generating and retailing companies entering the market, something that’s never happened.

The same was to be done to Alinta Gas.

But those generating and/or retailing either energy source weren’t to own either the electricity (transmission lines) or gas distribution (pipes) networks.

Both these networks, because they’re natural monopolies, were to remain publicly owned assets and be neutral in the proposed competitive gas and electricity markets.

Unfortunately Mr Barnett sold, with Alinta’s retail business, SECWA’s gas distribution network, getting $971 million for both.

He then compounded this grave blunder by selling the DBNGP to Epic Energy for $2.4 billion, when about $1.7 billion was seen as its true value.

Because Epic overpaid by so much it naturally wanted higher gas shipping tariffs, which the OGR ruled as unwarranted according to the National Gas Access Code’s terms that set out how monopoly pipeline charges were determined.

Last April the inevitable happened – Epic’s bankers repossessed the DBNGP and priced it at $1.86 billion to cover 100 per cent of bank debt.

Several prospective buyers were prepared to pay $1.86 billion because an increasingly desperate Gallop Government, fearing more blackouts such as those last February, was willing to ensure Western Power agreed to higher gas transmission charges and offered a $90 million stamp duty offset to pave the way for a sale if the buyer expanded the pipeline’s capacity.

Such costly financial sweeteners meant a buyer acquired the DBNGP at a more favourable real cost.

Few were surprised when DUET-A-A won out, since Alinta and Alcoa are WA’s biggest gas shippers, thereby giving them enormous power in the buying process.

Alinta is on a corporate expansion path and wanted a stake in the DBNGP.

 “Alinta has come a long way in a short time,” a company brochure says.

 “Starting life as WA’s State-owned gas utility, it is now a leading energy company, managing, operating and owning $5.7 billion of assets across Australia and New Zealand.”

Alcoa sought involvement because it is party to an ‘Exempt Contract’ (EAC) with SECWA since 1983, and required Alcoa to pay an excess capacity charge, which was inherited by Epic.

Under the EAC Alcoa is in line for a cheaper capacity charge from 2005.

If the once-generous banks had liquidated, rather than repossessed, the DBNGP, the EAC would have been set aside and Alcoa’s exemption for cheaper gas couldn’t have eventuated.

DUET is a resource-investment vehicle so Macquarie Bank was keen to buy in, despite paying several hundred million dollars over market price, especially since the Government signalled it would offset $90 million in stamp duty and Western Power would agree to high gas transmission charges.

Although DUET-A-A naturally would have preferred to buy the DBNGP at a cheaper price, the EAC and Western Australian taxpayers’ subsidies meant its partners came out ahead.

Now, back to the position of WA’s energy consumers.

This is best shown by considering the accompanying graph, which Alinta’s CEO Bob Browning, recently set out to State Scene.

It shows gas transmission costs in dollars per gigajoule between 2005 and 2025.

The racketed line (A), rising from 95c/Gj in 2005 to $1.05/Gj in 2025, is the projected gas transmission costs as adjudicated by the OGR.

The rising line (B) was Epic’s projected transmission cost; rising from $1.10/Gk in 2005 to about $1.50/Gj in 2025.

The line (C) above Epic’s proposed (B) is what DUET-A-A will charge, rising from $1.10 in 2005 to about $1.28/Gj in 2011, and remaining there until 2016.

DUET-A-A says its cost (C) must be higher than Epic’s and OGR’s to help bankroll prompt expansion of the DBNGP’s capacity.

But Epic had said it would expand the DBNGP for a lower cost, as its line (B) shows.

DUET-A-A says that, after 2016, it would slash transmission costs to OGR’s price line (A), subject to several assumptions such as the realisation of strong gas demand growth.

Only time will tell if that will eventuate.

The difference between (B) and (C) until 2016 is the extra cost to consumers other than Alcoa, over the next 11 years.

The difference between (C) and (A), that is, if the DBNGP had never been sold-off, is the extra cost to all of us.

Clearly, if Mr Barnett hadn’t sold the DBNGP to Epic to get $2.4 billion, we’d now have gas transmitted significantly cheaper; at cost line (A), not cost lines (B) or (C).

Clearly, the Liberals bungled badly by selling the DBNGP.

Labor compounded that bungle by failing to allow Western Power to call tenders worldwide for construction of a second Pilbara pipeline, which would have introduced competitive pressures on the DBNGP’s new owners, whoever they were.

Instead, WA’s economy remains where it was before the Carnegie inquiry – with far higher than necessary gas transmission costs.

In other words, a complete failure by WA’s energy policymakers – Liberal and Labor.