NSW Electricity Privatisation Can’t Increase Electricity Prices 1

Wednesday, April 1st, 2015
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As this article is being written, the voters of NSW have gone to the polls to choose a new state government.

As Election Day approached, the election had been billed more and more as a referendum on electricity privatisation. There had have been some bold claims by the current state opposition that privatisation will increase electricity prices. The state government has also made bold claims about both the $20 billion sale price for 49 per cent of the assets (demanding the question: why would someone buy only part of the asset, and not a controlling part, at that?), and guaranteeing that prices will not go up.

The overall justification for the sale is also a little odd. The objective is to monetise the expected future profits (or 49 per cent of them) in order to raise capital for investment in new state infrastructure assets. One wonders why the ongoing profit stream could not be used to say, fund the debt payments on money borrowed to build the new infrastructure assets.

The problem with the debate about privatisation is that it isn’t really about the price of electricity seen by consumers, it is about only part of the price of electricity, namely of the distribution network charge component of the total price.

Data provided by the Australian Energy Market Commission in 2011 clearly shows the impact of various components of the electricity supply chain on the end price. These are broken down by state. The figure below shows that electricity distribution (this is the only place where the current privatisation might have an impact) is around half of the final price. Immediately, any increase is cut by half when considering the impact on the final cost to the user, all other things being equal.

electricity privatisation

The reality is also that much of the NSW state electricity assets have already been privatised. First, the retail arms of Energy Australia, Integral Energy, and Country Energy were sold off for a princely sum of around $900/customer, and then after the pseudo-sale of the NSW power stations (through the so-called “gen-trader” sale of trading rights), a full sale of the actual generation assets was completed just last year with AGL’s acquisition of Macquarie generation, the last piece of previously “gen-traded” assets.

Thus, around 50 per cent of the state’s electricity assets have already been privatised. This of course is not an argument for further privatisation but just points to the fact that half the horse has already bolted.

The above is all by way of background to set the scene for a discussion of how the privatisation of the distribution and transmission networks might affect the final price. To complete the background, three things are worth noting:

  1.  The generation part of the price stack is unregulated and a product of competitive bidding in the spot electricity market.
  2. Transmission and distribution networks are local monopolies and therefore regulated by the ACCC/Australian Energy Regulator (AER). The prices are pre-determined by the AER every five years for a period of five years. The rules are the same for both private and public networks.
  3. The final price seen by the consumer was regulated by state regulators such as the NSW Independent Pricing and Regulatory Tribunal (IPART) and the Queensland Competition Authority (QCA). The Victorian prices are now no longer regulated and have not been so for over five years, while NSW and South Australia have just removed this retail regulation.

The question is then twofold: based on what happened in Victoria and South Australia, where networks are fully private, does their experience suggest that partial privatisation increase network prices, particularly distribution network prices, and will retail prices rise due to other factors?

The evidence suggests some interesting conclusions. The network price component at the deregulation of the sector going back to around 1997 were much closer together than they are now. The current situation can also be seen in the above chart. It shows that Victorian network prices are significantly lower than NSW, Queensland, South Australia, and Western Australia. The other states and territories are much smaller and therefore their situation is unique and had to draw a general conclusion from.

However, the Victorian lesson is particularly stark: private networks are more efficient than publically owned networks. Whether this is true efficiency or something more sinister, such as a way of raising indirect taxes by the state governments, is a discussion for another time.

The other interesting observation to be gained from the graph is the differences in sizes of the retail margins (purple) in the different states. These lead to relatively similar price outcomes even when underlying wholesale costs are the same. It suggest that operating a retailer in Victoria is much more expensive but it is also worth noting the impact of the smart meter roll-out is not insignificant.

So will prices increase following privatisation? No, there is no reason to expect that a change in ownership will cause the AER to allow higher prices. In fact, quite the opposite conclusion can be drawn given the evidence from Victoria and the other states. It is important, however, to watch the market carefully as something else has recently changed that could lead to increase in prices, and that is the removal of retail price caps. If competition does not work well, then the retail margin in NSW and Queensland could increase.

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  1. Jurgen S.

    It's amazing that ardent privatisation opponents remain almost willfully blind to cases in favour of the decision that are so close at hand.