Is Victoria heading for a California-style electricity crisis. Wendy Wedge explores the possibilities as supply gets increasingly tight and investors increasingly pissed off.
But it is increasingly looking as if they may share one great similarity a power industry in crisis.
The Californian story is now well-known a botched de-regulation which resulted in blackouts and the ridiculous sight of major users closing down operations because they could make more selling the power for which they already had contracts.
Is Victoria going the same way?
It all started when the Kennett Government with significant help from project leader Dr Peter Troughton and his auctioneer, John Wylie at CSFB dismantled the Victorian industry and sold it off. Crikey’s Mayne man also helped by working to put a positive spin on it all. (too right, best thing the Kennett government did – ed.)
They were helped in netting billions from the sale by two things.
First, Treasurer Alan Stockdale was a market ideologist who believed in competition. So after a prolonged stay while in Opposition in London he recognised that the privatisers’, heroine, Maggie Thatcher, usually maximised the price by privatising monopolies. Like Henvry VIII’s dissolution of the monasteries her privatisations were more about transferring assets supporters than improving efficiency. Stockdale’s approach was different he wanted to introduce competition so he carved the industry up into different segments before flogging it off.
Second, when they sold the fashion in the utilities industries was for overseas expansion. Every company from France and the UK to the US just had to have an overseas strategy. The strategy didn’t have to make money or anything like that it just had to be because the markets deemed it necessary.
The end result was, with some judicious spinning and manipulation by Wylie, a lot of people paid a lot of money for some power companies. In the case of the generating businesses an awful lot of money for some very old and very tired generating capacity.
There are many other elements to the story including lots of confusing stuff about regulatory regimes but the beginning of it all is a lot of “big dumb Americans” in Wylie’s phrase paying out heaps and then having to get a return on capital.
Now we can start thinking about Victoria and California.
The first problem in California was the near impossibility of building new generating capacity. A combination of greens, unions and nimbies make building almost anything hard. The problems of a small generator in Geelong where greens, residents, and local councils are mounting a picket line indicate that Victoria is in the same league. Throw in the construction unions and you could argue that Victoria is even more difficult than California.
The second problem in California was that huge hunks of power were allocated on contract to a few big users making supply and demand management harder. In Victoria the aluminium industry (Alcoa) has huge long-term contracts, negotiated under the Cain Government, which the taxpayer has to subsidise.
The third problem in California was price caps. In a partly de-regulated market with supply and demand skews, pricing mechanisms were less than transparent and effective. In Victoria the Government has just resisted power companies attempts to increase prices and instead introduced price capped increases of between 2.5% and 4.7% plus subsidies for non-metropolitan users. This has caused Citipower owner AEP to announce its intention to sell as it raises the spectre of sovereign risk.
So returns on inflated capital expenditure are being squeezed; generating capacity is under pressure; and, pricing regulation is all over the place.
All in all it looks like a re-run of California.
Indeed, already all the players are showing that they have learnt one important lesson from California get in as early as possible in trying to shift the blame on to someone else.