Power split plan threat

THE Electricity Reform Task Force’s plan to create separate State Generation and State Retail electricity entities could be doomed to failure, according to the public version of a report commissioned by WA Treasury and Western Power.

The Deloitte Touche Tohmatsu/ Trudo report says there will be significant concerns about State Retail’s viability if tariffs are constrained to remain constant until 2006 and then increase at 50 per cent of WA’s inflation rate annually.

It also says Western Power’s profitability will be reduced by between $318 million and $401 million over the next 10 years compared to the utility’s earning capacity in its current state. Payments to the WA Government also will decrease, by between $337 million and $410 million over the next 10 years.

This year Western Power paid the Government $193 million, including an extra $20 million demanded by treasury to top up the budget.

The utility, in its current form, is forecast to pay government a further $800 million by the end of 2005-06.

The report says there are no stand-alone retail businesses operating anywhere in the world. Such entities usually form into large conglomerates with some generation businesses.

It also expresses concerns about the long-term viability of State Generation, because while it is able to meet its debt obligations out to 2022, it makes economic losses for an extended period.

The report’s authors found that the cost of implementing a four-way split in Western Power would cost between $52 million and $60 million, with additional on-costs of between $22 million to $29 million a year.

Western Power chairman Malcolm Macpherson said the utility’s board was opposed to the break-up.

“Based on the experiences of interstate and overseas utilities we believe the move would increase costs and reduce payments to government,” he said.

However, Mr Macpherson backed the recommendation to create a separate business to manage the regional and Pilbara businesses separately to operations within the State’s main grid.

In an information paper the ERTF says the consultants’ estimates are overstated as some of the costs will need to be met regardless of whether WA’s electricity system was changed or not.

“Further, Western Power’s estimates do not take into account improvements to the new entities’ efficiencies and costs that would flow from reform,” it says.

“Western Power’s consultants estimate the reduction in Western Power’s value as a result of reform at $500 million. More than a quarter of this estimated loss – $130 million – will come from loss of market share to competitors offering lower prices.

“This change in value can be viewed as a transfer of value to consumers and will result in lower electricity prices.”

Another question being asked is whether the break-up of Western Power will result in four new CEOs, each on an annual salary of around $400,000.

A spokesman for Energy Minister Eric Ripper said such an outcome was unlikely and should be viewed “with an eye on the huge economic benefits” that would come from change.

“Transmission, retail and generation are already run as separate business units,” he said.

“This breakup doesn’t mean we will have four times the cost. The four separate entities could become more efficient too.”

Some of the real benefits to WA from the break-up of Western Power are expected to come from increased industrial activity.

The ERTF report says reduced electricity prices will bring an economic boost of $590 million a year and result in the creation of 3,900 new jobs.

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