NSW electricity prices: up, up and away

New South Wales Premier Mike Baird is one lucky guy.

Who'd have thought that the decision to sell off a publicly owned natural monopoly - the state's electricity network businesses - would arouse scant suspicion in newspapers and expose many in the electronic media for their misunderstanding of what privatization means or worse, see them cozying up to it as they are spoon fed the irrelevancy that "the private sector is more efficient".

Heads up: a competitive market leads to efficiencies, not a monopolistic market. Even if such a market has one player: a private company.

Apart from the union movement's mostly fear laced - alas not educative – advertising campaign, the last time something remotely interesting on the issue was uttered was way back last June by a gentleman called Bob Walker and his wife, Betty Con Walker.

The Walkers are names that probably don't ring as loud a bell as they should with energy consumers in the First State. Or should I say, the owners of the multi-billion dollar electricity network assets commonly known as the "poles and wires".

The former, Bob Walker, is an emeritus professor of accounting at the University of Sydney whereas the latter, Betty Con Walker, PhD is an economist.

Writing for Fairfax Medialast June, they quite rightly queried the logic of selling off electricity assets just after they were expensively renewed and have a good 40-year life ahead of them.

They ask:

Why would any rational financial manager seek to sell a profitable natural monopoly?

Wouldn't it be better to enjoy the earnings from this new investment?

Very sensible questions indeed.

They quote from annual reports and budget papers which show the networks are generating an after-tax return on assets of averaging 10.7 per cent a year and a return on equity averaging 20.7 per cent a year.

And they remark "These returns … would be far higher if they were pre-tax, since [company] tax equivalent [payments] got to State Treasury, if these enterprises used the same accounting methods as listed public companies".

"Why", not "how" the assets are to be sold is le mot du jour.

So far, no convincing answer has been forthcoming from the state government. That said, it's only been 8 months.

Government statements on the matter have done little more than blown a heck of a lot of smoke in voters' eyes.

Let's look at a few issues. All are listed in an18 December 2014 media release from the NSW Government.

First, the government "will proceed with the long-term lease of 49% of the NSW electricity network, introducing private investment into TransGrid, Ausgrid and Endeavour Energy (the "Network Businesses"). The regional distribution network, Essential Energy, will remain 100% Government owned".

Sounds ho-hum, but what does this mean?

What is clear is that 51% of the network pie will stay in the government's hands, at least for now.

But what is in that pie?

Is it "51% of the aggregated assets of all the network companies by value"? And how rubbery are those figures?

Or does the Premier plan to keep 51% ownership of each of the businesses?

Or is it "on average, 51% of each distributer's network assets"?

Or does it mean the "outright sale of Ausgrid, the most valuable jewel in the network crown?" With the government's share of the balance of the networks in turn exceeding 51%, so as to give the misleading impression of 51% government ownership?

The countless ways available to pull the wool over the public's eyes by dividing ownership between taxpayers (the current owners) and the private sector (the new owners) are mind-boggling. But what is clear is that only when lock, stock and barrel, that is a 100% of any network business is sold (to one party or consortium ideally by trade sale) will the government achieve the highest possible price for that business.

Perhaps the government will merge Ausgrid with another network business and flog 100% of the merged entity to a single buyer? We really don't know. We're just the mugs who own the assets.

Second, the government claims not only that the proceeds of sale will make available $20 billion in new infrastructure, but that

"a community consultation process … found overwhelming support for its $20 billion infrastructure plan".

Needless to say the community was not asked if instead they prefer future dividends from the network assets to pay for the said infrastructure, with say, the private sector bankrolling any shortfall instead, as opposed to the government's proposed garage sale.

Third, Prof Walker over half a year ago asked, "where's the cash?" when he alluded to the calculations of the claimed $20 billion made available by the sale, to invest in new infrastructure, were not adding up.

The government claimed the $20 billion comprised $13 billion in proceeds, plus $2 billion from the federal funding under the asset sales incentive program and $5 billion in interest earned from investing the sale proceeds over 10 years. Walker challenged those numbers.

He pointed out that the investment of those funds doesn't have a 10-year horizon, as they must be committed to infrastructure by 2019. What do you know? He discovered a $4 billion hole. It's still there. Gaping.

And Walker was generous. He took the government's word for $13 billion. UBS, the investment bank that is advising the government lowered their gaze to $11 billion.

If UBS is correct, then the gaping hole is even wider. Oh, and the $2 billion in promised federal funding is no slam-dunk either. Just ask the folks who believed in the Federal government's promised $5.5 billion paid parental leavescheme that was killed and cremated on 3 February. They too took the Feds at their word.

Fourth, the government promises to use the funds to invest in public transport, hospitals and roads. Here's an idea: why can't all of those infrastructure projects be built by the private sector and operated by the private sector on behalf of the government? Why must the state for instance be involved in building, operating and maintaining hospitals, trains or harbour tunnels? Oh, and in the event say a private operator cannot build and profitably operate a second harbour crossing charging less than say $7 per car, the government, if it feels that $7 is too pricey, can surely reimburse car owners a fixed amount per crossing, say $2 for a number of years. Is that not a cheaper and more effective solution?

Many have been soothed by the premier's assurances that the assets will revert to the state at the end of the lease period. Fat chance, if NSW history is any guide.

In 1992 the Wran Labor government, in the face of public restlessness, leased the old Treasury Building on the corner of Macquarie and Bridge Streets in downtown Sydney, for 99 years. It now houses the five-star InterContinental Hotel. Seven years later in 1999, another Labor premier, Bob Carr, noting that the caravans of public disquiet had moved on, soldthe freehold on the hush hush. And the shenanigans that accompanied that sale raised more than an eyebrow.

For the five years from 2014-15, the state's electricity assets are projected to generate north of $5 billion in dividends and income tax equivalents for NSW. This is close to 38% of the projected $13 billion in expected proceeds from the sale. Or 45%, if you take UBS' figures.

Pro-sale propaganda from the government and its cheerleaders in Big Infrastructure intones that in private hands "prices do not rise further" or that "power prices are forecastto come down". Both are meaningless and unenforceable utterances that wouldn't stand up in a lamington drive.

Amongst the arguments for a sale, mention is often made that "strong regulation in electricity networks… will be embedded in the partial leasing".

What's wrong with strong regulations existing hand in hand with the current public ownership? This question has not been canvassed.

And assuming a sell off, where are the calculations showing that the nature of the inverse relationship between strong regulations and expected sale price? Naturally, the more

regulations a new owner is saddled with, the lower the price she will offer.

Think of buying a small house. Say you're willing to pay $X for it, after all, you plan to renovate it one day.

Now think of the same house that is sold with a caveat limiting its height or some other attribute. You will no longer be prepared to pay $X, will you?

On the topic of prices, the government's own song sheet of 18 December states:

Electricity network prices and household bills are on their way down in NSW and will continue to fall as a result of the AER (Australian Energy Regulator) determination.

The relates to the November 2014 draft determination of prices in NSW indicating they will fall over the next five years.

Fall regardless of whether the utility is privately or publicly owned. And why not?

After all, returns to utility owners are a function of their investment. The bigger the asset base, the better the return they are entitled to. This system encourages overinvestment in assets so as to maximise the returns through higher prices.

In NSW, billions of taxpayer dollars in the last few years were invested in the industry, reaching a peak in 2012 that gave rise to bill shock statewide amongst electricity consumers. It's now time for prices to fall as the investment cycle has slowed down considerably.

If the assets are sold (sorry, I'll use the palatable verb, "leased") what happens at the next round of price determinations?

Given by then the NSW government will be far less involved in the energy industry and perhaps busy focussing on selling off Sydney Water or profitable parts of the rail network, we can assume that the loudest voices in the regulator's corridors will be those of the new owners of the networks.

It's hard to conclude prices will do anything but soar in the medium to long term.

Currently NSW consumers receive electricity bills comprising two components: a fixed charge for the network's poles and wires carrying electricity to the home in addition to a usage charge for the energy actually consumed. I say get ready for an additional new "rental" charge for the electricity meter every customer has on his or her property. After all, a savvy new owner will surely attempt to bypass any thought of fleecing customers, when he can skin them.

When another Sydney based monopoly, Kingsford Smith Airport was sold in 2002 by Prime Minister John Howard to Macquarie Bank, guess what happened? Prices rose.

A tax of $3.50 per taxi ride was levied; the dedicated public bus from Darlinghurst to the terminals was axed and car parking rates skyrocketed. Today, 30-minutes of car parking near a terminal at KSA costs four times what it does at Newark Liberty Airport that serves New York City.

Surprise, surprise, the City of Newark, New Jersey and not a profit-motivated monopolist owns that airport.

And another example this time from across the political divide. 10 years earlier, in 1992 Prime Minister Paul Keating sold Australian Airlines (formerly known as TAA) - and itself half a monopoly - to Qantas and created an even more concentrated aviation market. Good job Paul!

In time Qantas took advantage, exploiting its market power vigorously in the period after the financial crash of Ansett,and before Virgin Blue(as it was then known) established itself as a competitor.

From a consumer's point of view, both sales (the airport and the airline) resulted in a loss of public assets and both resulted in consumers paying more as prices, like airplanes and hot air balloons only went up, up and away.

And they say history doesn't repeat itself.