14/09/2004 - 22:00

Joe Poprzeczny: State Scene - Full energy catastrophe unfolds

14/09/2004 - 22:00

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State Scene has long argued that the Court-Barnett Liberal duo’s most disastrous move was privatising the Dampier-to-Bunbury Natural Gas Pipeline (DBNGP).

Joe Poprzeczny: State Scene - Full energy catastrophe unfolds

State Scene has long argued that the Court-Barnett Liberal duo’s most disastrous move was privatising the Dampier-to-Bunbury Natural Gas Pipeline (DBNGP).

To compound that grave blunder they sold it for a massive $2.4 billion when about $1.7 billion was quite enough.

Because Epic foolishly overpaid by about $700 million it wanted – some say expected, due to signals from government – to charge more than $1 a gigajoule to transmit Pilbara gas to South West consumers when well below that was more realistic.

At rock bottom, Epic’s ongoing row with Western Australia’s gas regulator was over whether it could charge to cover the $700 million overpayment, or whether it should charge prices that reflected the real or market value of the DBNGP, currently about $1.55 billion.

Presently, WA’s energy sector is on the brink of a consequent outcome of that miscucalculation and the drawn-out regulator-versus-Epic row, with Epic’s bankers finally deciding its loss-making DBNGP must be sold.

Today’s crucial question is whether the disastrous Court-Barnett sale can be remedied, or could WA’s domestic and industrial gas users find themselves in an even less favourable position.

State Scene is, unfortunately, compelled to report that all the signs are that another, far bigger, bungle is set to occur.

However, before outlining it, here’s how we got there.

In the early 1990s the DBNGP belonged to the State Energy Commission (SECWA), a huge, socialist-style energy conglomerate WA’s politicians controlled to do with what they wished, irrespective of what their decisions may do to the budget and State debt.

Premier Carmen Lawrence launched an inquiry in 1992, headed by industrialist Sir Roderick Carnegie, to help map a way out of costly and inhibiting monopoly controls.

Carnegie recommended breaking up SECWA into smaller units so politically initiated inefficiencies could no longer be disguised in the books.

And SECWA’s proposed smaller units would be forced to face competition from new electricity generating and retailing, and new gas-retailing companies.

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

Stage two called for further splitting of Western Power into its electricity generating, retailing and transmitting-distribution entities, with the first two to encounter competition from new privately-owned generating and retailing companies entering the market.

And the same would apply to Alinta Gas.

But, crucially, in each case their distribution networks – electricity transmission-distribution lines and all gas reticulation – were to remain independent of the electricity generating and retailing and the gas retailing sectors.

This was because the level playing field we so often hear about requires that these critical network assets be accessible to users under fair and transparent access regimes managed by independent parties, meaning parties with no interest in upstream or downstream generating or retail businesses.

The days of monopoly, Carnegie argued, were over since it was too costly to consumers and retarded WA’s economic growth.

Let’s firstly see what happened to Western Power.

Here the Court-Barnett duo opted to do nothing, so a huge electricity conglomerate, with its generating and retail arms, remained isolated from competition.

That’s why after the 2001 election Premier Geoff Gallop and Energy Minister Eric Ripper were able to move to break up Western Power.

But the Greens and Liberal-dominated upper house blocked that move so we only have limited competition in the electricity market.

But what of SECWA’s huge, hived-off gas conglomerate, Alinta Gas, which controlled gas retailing, the South West’s gas distribution network, and the 1500km-long DBNGP?

Here the Court-Barnett duo acted, but quite inappropriately.

Before considering what they did, let’s outline what they should have done.

They should have hived-off and sold-off Altina’s gas retailing arm and told the buyers that new gas retailers would be allowed to enter the domestic gas market as competitors, removing the gas market monopoly.

Crucial here was retention of Alinta’s south-west distribution network and the DBNGP by the public.

But the Liberal duo heard the cash register bells ringing.

So they sold the DBNGP for $2.4 billion and, along with, it Alinta’s integrated retail-distribution arms for $971 million.

What’s wrong with that, one may ask? Plenty.

Selling Alinta’s distribution network – a monopoly – stapled to its retail arm has meant no new gas retailers (read competitors) will ever enter the market against Alinta’s retailing activities.

Alinta’s control over access to the gas reticulation network, means that it would know much about the cost structure of third parties applying for access to gas.

It would be quite another matter if the network was independently administered or publicly owned.

Never sell the transmission and distribution lines to parties with direct interests in generation and retail activities, otherwise competitors won’t emerge.

But the opposite happened with gas and that’s why Alinta fetched $971 million for the Court-Barnett duo and that’s also why we’re still without competitors.

There is nothing clever about getting a high price for State monopoly assets since taxpayers and consumers eventually end up paying for that price.

Can things possibly get worse?

Unfortunately they can, much worse. And they’re about to.

And the reason is simple.

It is because Alinta, which monopolises the gas retail market and distribution network, has now teamed up with Alcoa and a Macquarie Bank Trust, DUET, to buy Epic’s DBNGP for about $1.8 billion.

That means Alinta is now set to move WA back to where things were in and before the 1990s when SECWA monopolised the gas market.

And the only reason Alinta-Alcoa-DUET (20-20-60 per cent) is paying so much – the pipeline is now only worth about $1.55 billion – is that the State Government, wait for it, has offered up to $300 million dollars worth of sweeteners.

Among these are stamp duty rebates, and a Western Power gas transport contract at a potentially higher tariff than would have been under a contract with Epic.

In other words, Western Australian taxpayers will actually subsidise the Alinta-Alcoa-DUET conglomerate into a monopolising position in the gas market.

But there’s more, and it’s far worse.

Alinta and Alcoa plan to build 1000 megawatts power generation capacity, meaning they’re moving into electricity against Western Power while controlling the gas transmission line Western Power relies on for its generation survival.

A monumental transfer of monopoly value from the public sector to private hands will be unfolding over the next decade, with taxpayers and consumers in WA picking up the tab.

A privately owned energy conglomerate is about to emerge to displace the once powerful, publicly owned SECWA.

We’ve therefore come the full circle, or, as Zorba the Greek once said, “the full catastrophe.”

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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