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A sensible privatisation

April 26th, 2006

I was somewhat alarmed to read in today’s Australian that “THE Beattie Government will today put up for sale the state’s two monopoly power retailers – Ergon and Energex – in an attempt to get the best price for the assets before they have to compete with private-sector companies.” While Ergon and Energex are indeed power retailers, their much more important role is running the electricity distribution network, an area where there is no capacity for competition.

The Courier-Mail does a better job, saying that the retail arms will be sold off, though it also fails to say what will be done with distribution. The estimated price of $1 billion is reasonable (maybe a bit optimistic, but I haven’t looked in detail) for the retail businesses, but far below the value of the distribution network.

To the extent that the current electricity model, including retail competition makes sense at all, selling off the retail arms of public distribution monopolies is a good idea. Retail and distribution don’t fit together at all well in this model. In fact, it would make some sense for electricity generators (most of which are publicly owned in Queensland) to buy or establish their own retail outlets. This would enable an efficient matching of risk.

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  1. April 26th, 2006 at 06:36 | #1

    Omg, this is tragic news, Ergon are huge customers of mine, money seems to be no object for them. They book teams of technician in for months at a time, AND foot the restaurant bill without question.. *yes, that is extremely lucrative for me*

    A groovy new profit driven privatised manager may not be so quick with the chequebook.

    My day is ruined!

  2. April 26th, 2006 at 09:27 | #2

    I agree that electricitiy retailers and electricity producers should be first cab off the rank for privatisation. Electricity Distributors (as well as high voltage transmission) involves a more difficult set of considerations. And unlike telecommunications there it is unlikely that we will see alternate delivery models that lend themselves to a competitive threat.

  3. April 26th, 2006 at 09:37 | #3

    Absolutely. That is what the recent cut up of Western Power in WA was about, I suspect. The retail, generation and distribution arms were cut apart, with the distribution arm retaining the Western Power name. Now all we have to wait for is the sale of Synergy and Verve.

  4. April 26th, 2006 at 17:17 | #4

    The following webpage appears to give a reasonable overview of how the Electricity Market has been formulated in Australia.

    http://www.efa.com.au/structure.html

    On the topic of privatising electricity assets I notice that the debate about privatisation of the Snowy Mountains hydroelectric system seems to have been somewhat captured by locals in the area. It should be remembered that the asset belongs to a much wider constituency. It should also be remembered that the system as originally envisaged was not just about electricity.

    I would be interested in John Quiggins opinion (or other peoples views also) on the privatisation of this significant assett.

  5. April 26th, 2006 at 17:35 | #5

    Beattie has emptied the piggy bank, and now is selling off the state’s silverware to foot the bill for his financial incompetence.

  6. April 26th, 2006 at 17:40 | #6

    From the article referenced by JQ:-

    On Monday, the Government received a report from Boston Consulting Group on the future of the state’s power industry, and one of the report’s two major recommendations was to sell the power retailers. The other recommendation, which the Government has rejected, was to sell the state’s power stations and major transmission lines.

    Mr Beattie made it clear on Monday the state would keep control of its generation and transmission assets.

    As a result, power generation companies such as Stanwell and Tarong will remain in government hands, as will Powerlink, the company that runs the state’s major transmission networks.

    This does seem like a very odd decision.

    The four key parts to the electricity system are:-

    1. Generation.
    2. Transmission (ie high volutage).
    3. Distribution (ie low voltage).
    4. Retail.

    Of these the first two would seem like the most fruitful areas to expose to competition and privatisation. Yet Mr Beattie seems to be deliberately doing things in the opposite order.

    Generators are in competition with other generators across the grid. Victorian generators are in competition with Queensland generators in so far as there is inconnect capacity to handle the trade.

    Transmission is something of a monopoly however in areas where redundancy is needed and extra capacity required it is quite open to multiple owners operating in parallel. It is only distribution that gains very few benefits from duplication and as such it is closest to a natural monopoly. Of course this does not mean that distribution must be government owned, however it is the area where an argument for government ownership would be strongest, and as such the area where an argument for privatisation would be weakest.

    What seems really odd about this is that the ALP at the Federal level has argued for the retension of government ownership in telecommunications where the argument for government ownership would seem weaker than in electricity distribution.

    NOTE: Power is transmitted at high voltage because for the same amount of power it equates to less electrical current and hence less resistive energy losses in a given size of wire. Energy is distributed and consumed at low voltage because it is less dangereous and easier to isolate with insulation.

  7. April 26th, 2006 at 19:48 | #7

    The Courier-Mail does a better job, saying that the retail arms will be sold off, though it also fails to say what will be done with distribution. The estimated price of $1 billion is reasonable (maybe a bit optimistic, but I haven’t looked in detail) for the retail businesses, but far below the value of the distribution network.

    On the train ride home I found an article about this issue in todays Australian Financial Review (page 9). It also seemed to imply (although not 100% clearly) that only the retail arms of Ergon and Energex were to be privatised and that the distribution arms were valued at around $5 billion and would be kept in government hands (apparently this has been pledged previously).

    This seems somewhat more consistent. Especially given the strong disinclination expressed by Mr Beattie in the Australian article with regards to privatisation of generators.

    So from what I can read into it all the distribution side of things will remain government owned.

    I still don’t understand the source of the opposition (with the NSW and QLD ALP governments) to the privatisation of Generation fascilities.

  8. SJ
    April 26th, 2006 at 22:53 | #8

    Terje says:

    The four key parts to the electricity system are:-

    1. Generation.
    2. Transmission (ie high volutage)
    3. Distribution (ie low voltage).
    4. Retail.

    Of these the first two would seem like the most fruitful areas to expose to competition and privatisation. …

    Transmission is something of a monopoly however in areas where redundancy is needed and extra capacity required it is quite open to multiple owners operating in parallel.

    Transmission is already exposed to competition (and privatisation in Vic and SA). The competition provisions are set out in chapter 2 of the National Electricity Rules – a parallel transmission element can be set up as a “Market Network Service”, which doesn’t earn a guaranteed income as a regulated monopoly.

    Two such network services were established. Directlink from NSW to Qld, and Murraylink from Vic to SA.

    Neither were able to survive as Market Network Services. Both applied to be converted to regulated services, and the ACCC/AER granted them both the right to convert to monopoly services, although they were both required to significantly write-down their investments.

    What does this tell you about the value of competition in transmission?

  9. April 27th, 2006 at 00:21 | #9

    What does this tell you about the value of competition in transmission?

    That it is high risk.

  10. April 27th, 2006 at 09:15 | #10

    Terje wrote :

    What seems really odd about this is that the ALP at the Federal level has argued for the retension of government ownership in telecommunications where the argument for government ownership would seem weaker than in electricity distribution.

    Beattie also promised to retain government ownership of the half privatised SunCorp (formerly the State Government Insurance Office – SGIO), then immediately broke that promise upon defeating the Borbidge National Party Government.

    The federal Parliamentary Labor Party disgracefully agreed to support the privatisation of the Snowy Hydro Scheme, apparently as a favour to its financially inept NSW and Victorian state counterparts, currently in government in those repective states, who apparently need the money to balance their mismanaged budgets. For further information see Alan Ramsey’s excellent articles in the Sydney Morning Herald : “Here we go again – sold down the river”(1), “They went to water over the Snowy sale” and “Desperate deal to sweeten the books”.

    All of these privatisations are overwhelmingly opposed by public opinion, that is by the people who actually own these assets to begin with, according to every poll I am aware of.

    It is a sickening indictment of what is supposed to be a democratic system that strong and consistent public opposition to privatisation is, with rare exceptions such as Telstra and Medibank Private, ignored by both those who are supposedly governing in our name and their supposed ‘oppositions’.

    Footnote(s)

    1. Link doesn’t work for reason unknown. Instead, go to http://smh.com.au/news/opinion/alanramsey/ and click on link to story “Here we go again – sold down the river”.

  11. Iain
    April 27th, 2006 at 18:47 | #11

    Terje – there are, indeed, alternative delivery models.

    Lovins et al have demonstrated that decentralised electricity systems are probably the most likely and profitable way forward.

    http://www.smallisprofitable.org/

    This has been listed by The Economist in their book of the year awards. To fret about a lack of funding going to distribution infrastructure (over the long term) may be a misguided outlook.

  12. April 28th, 2006 at 14:09 | #12

    Lovins et al have demonstrated that decentralised electricity systems are probably the most likely and profitable way forward.

    Does a decentralised electricity system need a distribution network?

    If so then the issue remains. If not then the issues are separate.

    Or am I missing something?

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