23/08/2005 - 22:00

Tim Treadgold: Briefcase - Painful road ahead on power

23/08/2005 - 22:00

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Given a choice when buying a commodity, such as bread or milk, the overwhelming consideration for most shoppers is price. Why then would anything be different when buying a commodity such as electricity and telephone services?

The answer, obviously, is that there is no difference. It’s just that we’ve got used to shopping around for the basics, but have this residual mindset which says power and phones are provided by government.

Understand the fundamentals of this simple introduction to the way business works and you start to see why the Federal Government is super-keen to get out of a commodity-priced business called Telstra – and can only gawk at the desire of the State Government to retain effective control of its electricity business, Western Power.

In time, the folly of government remaining in a business that competes with lean and fast-moving private enterprise operators will become obvious, because none of us really cares who provides the power to our homes, so long as it is (a) reliable and (b) cheap.

Some true believers will continue to insist on only buying pure government-supplied electricity, but they will be very much in a minority.

This difference in approach to managing the future is creating a truly delicious situation for observers like Briefcase of how markets and governments behave.

In Canberra, the Federal Government has worn months of criticism from the Opposition, and from within its own ranks, over the plan to sell its 51 per cent stake in Telstra. The windfall gain of an estimated $30 billion is one factor in the push to quit the one-time national telephony service. But, a bigger factor is that people like the Prime Minister John Howard understand that Telstra, under government control, cannot survive.

Global telephony providers, with low-cost operating centres in India and China, will undercut Telstra every time on conventional telephones, and the provision of all-important broadband width – the commodity that’s changing the way the world works.

In WA, the power debate is slightly different – but only because the commodity (electricity) must be produced and serviced locally since there is no national grid reaching across the Nullarbor.

The issue with power, however, even if it has to be generated locally, is all about cost, speed of service, and an ability to meet the demands of customers.

That is why Western Power, whether as a single entity or carved into four bits, is doomed for a very simple reason – civil servants, with their 9am-to-5pm approach to life, complete with grey cardigans and plastic lunchboxes, have never been able to (and never will) compete with a private operator driven by the incentive of a fat bonus if he signs up new customers, or works on weekends when the government chappies are mowing their lawns.

No-one in the WA Government will admit this, but the decision to go with a gas-fired power station rather than coal for the next base-load provider had much more to do with price than concerns about the environment.

It is true that gas emits less sulphur and other nasties into the atmosphere, but the real reason gas was chosen is because WA has much more gas than it does coal; that gas is cheaper and will remain cheap for decades to come; and that slick operators like Alinta have already found a way to undercut Western Power on the cost of producing electricity.

Alinta’s deal with Alcoa to operate co-generation power units is the first sign of the future. By selling steam to Alcoa and electricity to industrial customers, Alinta gets two revenue streams out of the same gas supply. On a dollar-for-dollar basis, co-gen will always beat a power station only producing electricity.

So, what of the future? It will takes years, but the diversion of state and federal onto different courses (dictated by political philosophy as much as business realism) has set the Federal Government on a course to be effectively debt free and able to ‘pork barrel’ merrily at future elections, while WA’s government will be left trying to compete in a head-to-head confrontation with private power operators – good luck, chaps.

•••

The jury on what really happened at Sons of Gwalia is still out, well, actually it hasn’t even been called yet. But, if early media reports are accurate there is an awfully familiar smell coming off the carcass of what was once one of WA’s leading companies.

Source of the odour is a botched hedging/forward-selling program of currency and gold. When Briefcase saw these reports there was a sense of deja vu because it sounded like a re-run of failures past – with Western Metals and Pasminco jumping to mind.

If troubles with the hedge book really were the problem at Sons of Gwalia it begs two questions. The first is who was in charge of the book – and that’s for the legal eagles to sort out. The second is what on earth goes wrong at mining companies when it comes to managing risk.

Briefcase has a healthy regard for most mining company managers, especially when it comes to knowing their rocks. But for decades now, whenever a rock-kicking friend starts to talk about currency hedging and forward selling all he hears is someone saying ‘speculation’.

•••

On the question of risk, the market is showing all those tell-tale signs of having hit a peak, for now. One of the best indicators can be seen in the rising number of something that used to be highly unusual, sell notices from stockbrokers.

Last week, the venerable house of Goldman Sachs JB Were took a decidedly grim view of some of the stocks it follows. Private clients who studied the advisory notes from Goldman found that four of the 13 stocks mentioned in a daily note had long-term sell tips, eight had the equivalent of hold (using words like ‘marketperform’) and only one had a buy tip, and that was the competition in the form of Macquarie Bank.

Long-term sells were put against Qantas and Virgin Blue (fuel costs), Jubilee Mines (over-priced), and Multiplex. No argument with any of those tips – but seeing four in a row is a pretty useful sign that the overall market really only has one way to go for the rest of 2005.

•••

“Many a man owes his success to his first wife, and his second wife to his success.” Jim Backus.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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