11/05/2016 - 20:45

Network sale analysis ‘rubbish’: Nahan

11/05/2016 - 20:45

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Treasurer Mike Nahan has poured cold water on a report that argued Western Power was a major cash spinner for the government, saying the corporation paid a net dividend of less than $30 million to the state last year.

Sparks have flown in the debate about a sale of Western Power.

Treasurer Mike Nahan has poured cold water on a report that argued Western Power was a major cash spinner for the government, saying the corporation paid a net dividend of less than $30 million to the state last year.

It follows the release of an analysis undertaken by Orion Consulting Network on behalf of the Electrical Trades Union, which argued that the government would be in a worse cash flow position if the asset was in private hands.

Assuming that Western Power, which owns the state's south western electricity network, is sold at a similar asset ratio as the recent Transgrid lease sale in NSW, it would be valued at about $15.1 billion.

Orion argued that in this best case scenario, and assuming all monies were used to pay down debt, the state government would still be $171 million worse off each year.

That was partly because of the loss of income tax equivalent payments and the corporation’s contributions to a fund that reduces costs for regional customers.

But Dr Nahan claimed those assertions were ‘rubbish’.

Western Power has been and continues to be a cash flow negative drain on the state,” Dr Nahan said Wednesday.

“It does not pay any tax equivalent payment to us, it never has in the 10 years it's existed.

“Last year its net dividend … was less than $30 million, on an asset base of more than $9 billion.”

Although state-owned enterprises don’t pay company tax to the federal government, under competition policy rules they have to deduct that amount from their income before arriving at a net profit figure.

In the case of Western Power, however, those years of tax liabilities appear to have been included for income reporting purposes, but payment to the government indefinitely deferred.

Over time, that has built up on the company’s balance sheet as a $481.3 million liability.

In terms of dividends, the government received about $132 million in 2014-15, which is netted out against a $93 million equity contribution, in the ballpark of Dr Nahan’s figure.

Regional costs

Western Power also makes payments into a fund to reduce costs for regional power customers, where metropolitan consumers cross subsidise people in the bush to the tune of about $136 million annually.

Orion speculates that money would need to come from general government revenue in the event of a sale, although the government has not yet suggested that will be the case.

As it stands, the value of that contribution is already included by the Economic Regulation Authority in Western Power’s revenue cap when the authority sets network access prices.

If that continues as is after the sale, the new owner would be paying for the fund, not the government, suggesting a sale at a decent price would in fact be cash flow positive for the state government.

An added benefit to a lower debt level would be a potentially lower interest rate across the government’s borrowings as a whole as ratings agencies and investors see it is getting serious about reining its finances.

Uncertainty

Dr Nahan continued his focus on the financial risk to the public of holding the asset amid major technological change in the energy sector.

That change could lead to off grid solutions, he said.

A good historical example is Australia Post, which rapidly declined in value after the invention of the email.

For a private provider, Dr Nahan said, the challenge of technological disruption could be an income earner.

That was why power networks were fetching record prices, he said.

“(The sales value is) much more than the state could ever contemplate earning if it owned it itself.” 

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