Give people of NSW a chance to own electricity assets with a public float

Bruce Mountain, 23 Mar 2015

Published on Sydney Morning Herald

The debate about privatisation of poles and wires in NSW has focused on two questions: will electricity prices go down and will privatisation improve the government’s finances? A third question – will privately owned networks undermine households and businesses trying to reduce their dependence on the grid – is also relevant.

In South Australia and Victoria, privately owned networks now charge much less than those in NSW, whereas they charged much the same when they were government owned 20 years ago. So, is it reasonable to associate lower prices with private ownership?

Maybe, but why does ownership matter? The evidence in other developed countries is that ownership differences do not explain price differences. Why does it matter here and not there? And why have we only discovered that ownership matters to prices now – why was this not apparent for the past 100 years’ of the industry’s history?

And if the government’s proposed partial privatisation will bring lower prices, surely full privatisation offers even lower prices? If the government really believes ownership matters to electricity prices, why is it only proposing to sell half the equity of three businesses and to hold on to all of the fourth business?

The explanation for the peculiarly Australian evidence of the relationship between electricity prices and government ownership is straightforward but inconvenient: successive governments have had their hands in electricity users’ pockets. Higher electricity prices have translated into eye-watering profits for the government, as electricity consumer advocates have long pointed out.

But making those profits has required the construction of redundant infrastructure. The waste falls most heavily as higher input costs to trade-exposed industries and cost-of-living pressures to those households least able to bear them. As regulatory failures go, this takes a lot of beating.

The Electrical Trade Union’s response to privatisation has been to point to those profits and ask why the government would be so crazy as to sell such a wonderful cash cow? Free lunches anyone: who does the union think is paying for those fabulous profits?

Those clinging to the family silver suggest the solution is to fix regulation, not sell the business.  But the government does not need to wait on the regulator to give back its ill-gotten gains. No surprise that this is unpalatable. Getting the government’s hands out of consumers’ pockets is surely essential in resolving the conflict of interest that underlies the regulatory failures.

The opposition, to its credit, has provided a more nuanced and sophisticated rejection of privatisation: it will use its ownership rights to champion the interests of those consumers looking to reduce their dependence on the grid through their own rooftop generation. The opposition says privatised networks will make life as difficult as they can for consumers looking to leave. The opposition makes a good point about incentives, but remind me again why the government will be any less likely than private owners to undermine a business it owns?

Finally, to the question of privatisation proceeds, it is not unreasonable for the government to want to get as much as it can, but it has to balance competing interests and, again, there are no free lunches: higher proceeds come at the expense of higher electricity prices.

Equity analysts and investment bankers suggest investors are queuing up to pay substantial premiums to the regulator’s valuation of the poles and wires businesses. This is the NSW government and people’s good fortune. In return, the government should give something back to electricity consumers by writing down its regulated assets, thereby relieving consumers of the burden of the white elephants born of the past decade of regulatory failure.

The government is not mistaken in thinking that getting out of the business is essential in ensuring consumers get better value. But it should have the courage of its convictions and get out of the business altogether, not partially, as it is proposing. Privatisation offers a wonderful opportunity to democratise ownership. Offering its remaining 49 per cent share in a public floatation so that the people of NSW – not just pension funds and electricity utilities – can become owners, would be economically sensible and politically popular, surely.