11/02/2016 - 15:06

Powerful case for network sale

11/02/2016 - 15:06

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While proponents laud the benefits in capital recycling from an electricity network sale, there’s evidence it would lead to lower prices for users.

Powerful case for network sale
Poles and wires near East Perth power station.

While proponents laud the benefits in capital recycling from an electricity network sale, there’s evidence it would lead to lower prices for users. 

The sale of Western Australia’s electricity distribution network would put downward pressure on power prices if undertaken the right way, according to two experts in the field.

It could additionally provide a substantial windfall for a state government in desperate need of cash to reduce debt levels, which are now expected to peak at $39 billion later this decade.

That’s up 10-fold from the level under the previous labour government in 2008.

Jonathan Kennedy, executive director of policy and strategy at peak body Infrastructure Partnerships Australia, said a sale of Western Power would be an opportunity to drive permanent downward pressure on electricity prices.

That position is backed up by an EY report on network costs released last year.

Victoria and South Australia, which have both had privately-operated electricity networks for more than a decade, have had much lower cost increases than government-operated networks in NSW and Queensland.

The Victorian case is most illustrative, with costs in that state having fallen 18 per cent in real terms, while real costs in NSW more than doubled, according to Mr Kennedy.

Both are governed under the same regulatory structure in the national electricity market, with the NSW network now being gradually privatised.

Mr Kennedy said the data suggested a sale would benefit users, with the difference in price movements driven by the ownership type.

Ultimately, he added, state-owned networks did not have the incentives to drive results for consumers as private networks did.

“There’s no threat of takeover, there’s no threat of extinction, and they just don’t have anywhere near the incentive to be efficient that the privately-operated networks have,” Mr Kennedy told Business News.

UWA Business School professor Peter Hartley said the most important consideration in a sale of energy assets would be to set up a structure that would be efficient and competitive, not simply extract the highest possible sale price.

That would ultimately be beneficial for consumers and for state development, because a competitive structure would improve electricity prices.

A renowned economist, Professor Hartley was appointed the BHP Billiton chair in the business of resources at UWA’s Business School in 2012.

A key adviser to the Victorian government during the Jeff Kennett-led network sale of the 1990s, he said that sale and regulatory structure was a textbook example of how to do it right.

Professor Hartley said it was important to have a very competitive market for generation, where companies would not have incentives to game the system by reducing supply to drive up prices, as had been the case in California.

The poles and wires that made up the network were a more complex problem, he said, as they formed a natural monopoly.

As such, it would be important to ensure a properly regulated market with set rates of return, a system that currently exists in domestic gas distribution.

The retail market, which deals directly with consumers, could be competitive – with providers able to win customers based on service and efficiency.

The Productivity Commission also backs reform, recommending in 2013 that state governments sell government-owned network businesses, as they were part of the efficiency problem in electricity markets.

Asset recycling

A further benefit from a sale is the unrivalled opportunity to unlock capital for reinvestment, Mr Kennedy said.

That was a strategy pursued by NSW Premier Mike Baird, with estimated proceeds of around $20 billion from network sales allocated to a series of infrastructure projects in that state.

This week, Treasurer Mike Nahan suggested Western Power was worth around $15 billion, although other estimates have reportedly been closer to $10 billion.

With about $7.1 billion of borrowings on the business’s books (and therefore those of Treasury), that means the government could have up to $8 billion to reinvest into new capital projects, such as the MAX light rail line or Ellenbrook railway.

Alternately, if it took a hawkish approach and has success on other sales, such as TAB and Fremantle Ports, it could more than halve its projected debt levels.

Dr Nahan said a key metric for assessing the sale would be whether the asset would be better in private or public hands.

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