The threat by the NSW Liberals and Greens to undo the Labor government’s privatisation of some of its energy assets is almost certainly empty and, more to the point, probably misconceived.
Controversy and confusion has raged in NSW ever since the messy mid-December conclusion to the privatisation process, with its mass walk-out of directors of the generators. The latest development is the airing of the concept of repaying the $5.3 billion received from Origin Energy and TruEnergy, perhaps with compensation, in order to undo the deals and allow the assets to be put up for sale again in the hope of a better price.
Given that Origin and TruEnergy have signed binding contracts to acquire the three retailers and two GenTrader contracts and would be unlikely to relinquish the prized assets, even for a premium to what they paid, the only obvious way to reverse the deals would, if the Liberals and Nationals win government in March, be to legislate.
That would do extraordinary and quite unnecessary damage to NSW’s reputation, given that it is based on a misunderstanding of the outcome of the sale process.
Much of the recent controversy relates to the value received for the assets sold and the risks and expenditures avoided as a result.
The fact that the government will use $1.2 billion of the proceeds to pay off the debts of the generators has caused confusion, with the Opposition and some of the more hysterical media simply deducting it from the sale proceeds when in reality NSW will owe $1.2 billion less — and still own the generators.
Another contentious issue has been a provision in the GenTrader contracts that creates a capped $360 million taxpayer exposure to the cost of future outages. That potential liability is also being deducted from the proceeds but compares with the cost of hedging an otherwise open-ended exposure to outages and price spikes before the GenTrader deals were done.
The bulk of the $5.3 billion raised from the deals with Origin and TruEnergy relates to the three retailers that were sold. Of the $3.25 billion Origin paid, for instance, $2.3 billion was for the Country Energy and Integral Energy retail businesses.
There is no doubt in the market’s mind that those deals — priced at about 20 times earnings before interest, tax, depreciation and amortisation and between $1000 and $1300 per customer — represented fair value.
While there are major synergies and strategic benefits to Origin and TruEnergy from acquiring the retailers — and, with AGL, they were the most obvious bidders for them — the fact that Origin’s and TruEnergy’s parent, CLP Group, has modestly under-performed its overall markets since the acquisitions would suggest the market doesn’t believe there was any transfer of value from taxpayers to shareholders.
Given that, if the sales were somehow undone, the same bidders would again be bidding for the same assets, it is improbable that buying the businesses back and paying Origin and TruEnergy compensation would lead to a better outcome, indeed it is probable, given that AGL was a significant under-bidder, that the proceeds would be less.
Thus it wouldn’t be rational to undo the sales of the retailers.
The other component of the deals was the GenTrader contracts. They are hard to value because they are novel.
The politics of electricity privatisation in NSW meant that a conventional sale of the state-owned generators wasn’t feasible, so the government sold what are effectively long-term leases over the output of the power stations, which will continue to be state-owned and operated.
Origin and TruEnergy will pay fixed and variable charges that are intended to cover the generators’ costs of operating and maintaining their stations, including their capital expenditures. Origin and TruEnergy have already accepted responsibility for hundreds of millions of dollars of residual capital spending for investment programs not yet completed.
Significantly, they are also responsible for supplying coal to the generators. Unlike the Victorian generators, the NSW generators don’t own their own coal resources. Most of the contracts for their current supply were written a decade ago, when coal prices were a fraction of what they are today. Most will expire within the next few years and the generators faced steep cost increases as they were forced towards export parity pricing.
There is, of course, the smaller matter — and large risk — of the impact of a carbon price on coal-fired power that will be shifted to the private sector.
Built into Origin and TruEnergy’s valuation of the GenTrader contracts would be the anticipated rise in the cost of coal — and the relative inefficiency of the NSW generators.
Complicating matters is the government’s building of the Cobbora coal mine to secure lower-cost supply for the generators as NSW coal production is being increasingly diverted to export markets (after refusing to pay the price demanded by Whitehaven Coal).
To the extent that the price of the low-quality coal the mine will produce is subsidised that, too, ought to have been reflected in the prices paid by Origin and TruEnergy. NSW will, of course, own the coal mine and generate a return from it, albeit one perhaps lower than if the pricing of its coal were at arm’s-length from the GenTrader arrangements.
The real issue with the privatisation and the paucity of proceeds relative to the sales of energy assets in other states, particularly Victoria, is the NSW wasn’t prepared, because of the union backlash, to sell either its distribution businesses or the generators. All the “hard” assets in its electricity sector remain state-owned.
If the state Opposition wanted to increase the proceeds it could, of course, put the distribution businesses up for auction and also sell the generators themselves.
With the GenTrader contracts in place to provide reasonable certainty on the revenue side, there would be a considerable incentive and opportunity for a private operator to manage the plants more efficiently to create value. Origin and TruEnergy would be logical bidders for their generators.
This article originally appeared on Business Spectator.