Archive for January, 2011

Beyond bad

If it were not actually happening, one would be hard put to invent a worse example of government management than the NSW handling of the “gen-trader” sales.

While Kristina Keneally’s apparent decision to back down from the sale of further assets before the election is to be welcomed, information leaking out to the media about the process gives a new meaning to poor governance. (I say “apparent” because, as with so much else associated with this government, Keneally has obfuscated about the issue: bids are still being accepted until Monday, but, she says, “there is no guarantee” the transactions can be completed before the government goes in to caretaker mode on 5 March. Meanwhile, leaks from within the Labor party to the media say that shaken and stirred MPs have been assured that the deals will not be finalised.)

The Australian Financial Review, in a report published today, asserts that a driver in Keneally’s latest backdown was the prospect of some MacGen directors following the example of those on the Delta Electricity and Eraring Energy boards and resigning rather than approving a deal. The paper quotes the director as telling it: “The process (has) involved an appalling lack of attention to detail, almost no communication with the power companies and a frightening disregard for the protection of taxpayers against ongoing financial risk.” The director is reported to claim that the board is concerned that the deal could leave it in a position of trading while insolvent, with the cost of extra-ordinary payments and repairs beyond regular maintenance not covered by the sale arrangement. It is also claimed that the MacGen board put in “dozens” of submissions to Treasurer Eric Roozendaal’s transaction team outlining concerns about the structure of the sale without receiving any feedback.

While Keneally’s move to prorogue State parliament has stymied the attempts of the Nile committee to call the directors who resigned to give evidence, there is still time before the election for Roozendaal to be summoned back to answer the serious allegations published in the Financial Review.

Meainstream media reporting of the power situation in NSW, however, remains confused. Despite reports, it is hard to assert that there is lack of investment in the industry when some $19 billion is being outlayed over five years on networks — and it is this expenditure that is driving up end-user costs.

The critical issue affecting investment in new generation capacity is the lack of federal government action on a carbon price. Once that is in place, provided it is adequate, private investors will have a signal to pursue investment in new gas-fired baseload generation. The federal RET will also drive some investment in wind farms in the State — the problem here at present is the slump in REC prices caused by the mishandling of renewables process by the Rudd government (of which Gillard and Swan, of course, were senior members.)

The problem with the “gen-trader” fiasco is that it exposes the government-owned generators to untoward risk and, if there is a failure of private sector power station development, could lead to these plants, some of them approaching 40 years of age, having significant operational difficulties later in the decade. The implications, if this happened, for supply security are serious.

Opposition leader Barry O’Farrell has told the Nile committee that he is assailled with community complaints about power prices wherever he goes in the State. It serves his political purposes to conflate this concern with the “gen-trader” fiasco — and, while the community doesn’t understand this issue, it does appreciate that it is another example of Labor’s “beyond bad” governance –but the Coalition should take care not to create an impression that a change of government, a judicial inquiry in to the deals and a new policy on generation ownership will ameliorate the rising trajectory of retail power prices.

The price drivers are network costs, the growing impact of the RET (although a small burden by comparison), the flow-on costs of Keneally’s misbegotten rooftop solar subsidy and, when and if it arrives, a carbon price. Collectively, these factors are on track to increase end-user power bills in 2015 to double what they were in 2008. Not only does O’Farrell have no announced plan to change this — it is hard to see what plan he could offer. Network charges are judged by an independent national regulator, the embedded costs of the solar FiT are now unchangeable and the RET and carbon tax are federal policy.

Any hope that major users had that an incoming Coalition government could effect a radical change in the network sector can now be abandoned. Under pressure to protect the Coalition from Labor scare tactics in the election campaign, he has pledged that a sale of “poles and wires” — a term that in itself betrays a lack of understanding of the network business — will not be pursued.

Reading the evidence that OFarrell and his Treasury spokesman Michael Baird gave to the Nile committee, it seems likely that a Coalition government will set up a new version of the 2007 Owen Inquiry in to NSW generation needs and the best means of meeting them. In some respects, this is to be welcomed — it will create some clarity in a confused environment — but investors will be rightly concerned at any further long delays in establishing firm NSW policy on power production.

Go no further

The widely-held view in New South Wales that it has been governed for most of the past four years by a conga-line of political clowns should lead to a substantial defeat of the ALP at the end of March – but the issue of how this will affect the electricity privatisation process will roll on beyond the poll.

The situation is not helped by the fact that the mainstream media seem unable to differentiate between the straightfoward sale of the retail arms of the three government-owned electricity distribution businesses and the messy “gen-trader” deals, which involve not only the output of power stations but also the sale of future generation sites and the development of a coal mine with taxpayer funds.

One sidebar issue is why the Keneally government barred Snowy Hydro, owned by it and the Victorian and federal governments, from participation in the bidding process.

Another is what lies behind the decision of the government during the “gen-trader” process to bar Delta Electricity from signing a new electricity sales contract with Hydro Aluminium for its Kurri Kurri smelter, although it apparently allowed Macquarie Generation to complete a similar deal with Rio Tinto for a new contract to supply to the Tomago smelter. As the Labor member for the seat in which Kurri Kurri is located pointed out to the NSW Legislative Council committee investigating the privatisation process, there are 500 jobs affected by the ban.

The retail sale presents no governance issues: Origin Energy and TRUenergy have paid what is perceived in the energy industry as over the odds to acquire some three million account-holders customers, and will now have to work like billy-ho to retain them as other private sector retailers offer them deals. Good for supply competition and good for State revenue.

The controversial “gen-trader” process is further complicated by the fact that Treasurer Eric Roozendaal was not able to complete the sales in December and before his panicked Premier prorogued the State Parliament. Should he now go ahead and take final bids for Macquarie Generation output and remaining parts of Delta Electricity production by the end of January and pursue the sale before the government goes in to caretaker mode on 5 March ahead of the 26 March poll?

Well-regarded business journalist Stephen Batholomeusz, writing in Business Spectator, argues that the threat by the Coalition and the Greens that they will undo the privatisation deals after the election, and following a judicial inquiry, is “misconceived.” This would require legislation to be passed by the new government.

Batholomeusz says this would do “unnecessary damage” to the State’s reputation with investors.

He is right, I believe, to argue that undoing the retailer sales would be irrational, but the “gen-trader” situation and the related Cobbora mine development may be another matter.

The first imperative here is to get all the information relating to these done deals publicly available. The second, it seems to me, is to send a very clear “buyer beware” message to those in the market for MacGen and the rest of Delta. If these deals are pushed through under the present circumstances, a future Coalition government and the Parliament post-poll would be entitled, I believe, to say the buyers knew that the sales would be challenged and can have no complaint if they are over-turned.

Public disquiet about the privatisation process, something Premier Keneally has now confessed to the LegCo inquiry that she “under-estimated” in trying to shut it down, will not be lessened by The Australian revealing, and former Premier Morris Iemma reportedly confirming, that State Cabinet was told in 2007 that the “gen-trader” idea was a distant third preference behind full privatisation of the State-owned generators or their being leased out.

Apparently the concept of auctioning the generation trading rights was also rejected by former Premier Bob Carr and his Treasurer, Michael Egan, in 2004.

Given that a substantial portion of generation output has not yet been sold under the flawed “gen-trader” model – Macquarie Generation production and the remaining Delta output account for well over half the government-owned assets – it would be best if any further activity in this area was put off until after the State election.

Any “crash through” approach by Roozendaal, supported by the Keneally Cabinet, would rightly be considered by the electorate as outrageous and by the next government as beyond acceptance.

The most recent media coverage suggests Roozendaal himself believes the bidders for MacGen output and remaining Delta assets may have been spooked by the “gen-trader” furore and may not ready to put in final offers by 31 January, as required. The firms concerned may be wise to hasten slowly rather than exposing themselves to becoming part of further political fall-out from this badly-managed process.

Picture of power

As is so often the case, a newspaper photograph encapsulates a story better than many thousands of words. So it is with the photograph of Kristina Keneally published by the Sydney Morning Herald (18 January). There she is at the New South Wales Legislative Council inquiry in to the power privatisation deals with her nose in the air — capturing perfectly the attitude of her government to the public’s right to know a great deal more about the process, an arrangement that caused eight directors of Delta Electricity and Eraring Energy to resign rather than confirm the sales.

By proroguing parliament some two months early, Keneally believes she has stymied the committee chaired by Fred Nile from hearing evidence from the directors. It may yet be down to a court to decide whether the directors can appear without threat of legal action against them by the government.

Appearing with Treasurer Eric Roozendaal before the committee, Keneally has (a) admitted she knew that proroguing parliament would stymie the hearings and (b) acknowledged that she had under-estimated the public reaction to the move.

The inquiry has already elicited from Kim Yeadon, a former ALP minister and an adviser to the government on the sales, the fact that the directors “were worried about the issue of solvency” for Delta and Eraring if the “gen-trader” sales went ahead. The generators are also liable to pay damages to the buyers, Origin Energy and TRUenergy, if they are unable to deliver agreed output.

Most importantly, perhaps, is the issue of what exactly the “gen-trader” deals are reaping for the taxpayers in NSW, bearing in mind that the government (which stresses its green credentials at every opportunity) has committed $1.3 billion to establishing the new Cobbora coal mine to ensure supply from the generators and has undertaken a $1 billion subsidy of coal prices.

Roozendaal says the government intends to sell Macquarie Generation’s production and that of Delta’s coastal operations by the end of January.

Now may be the time for Opposition Leader Barry O’Farrell to guarantee a royal commission in to sales when, as expected, he wins office on 26 March. The certainty of having no place to hide against full exposure of the process may concentrate the minds of public servants and advisers — it may even give Keneally and Roozendaal pause for reflection before they finally burn every bridge.

Taking on the flood

While they don’t seem to be getting much in the way of media attention, the emergency service heroes dealing with the Queensland floods include the hundreds of ENERGEX and Ergon Energy crews working in abysmal conditions and through the nights to restore power to stricken householders and businesses.

In Toowoomba, location of the “inland tsunami” that captured national and global attention, for example, Ergon was able to report by Wednesday (12th) that it had restored power to all homes and all but 20 businesses in the CBD where access was impossible.

In Brisbane and Ipswich, where urban density meant the the greatest impact was felt in terms of customers without power, ENERGEX mobilised 400 crews, despatching them by road and air to the worst-affected areas, and restored power to 140,000 customers in the first three days of the south-east region emergency. It used eight helicopters to put crews in to the Lockyer Valley, scene of the worst impact in terms of lives lost, and the Brisbane Valley. (At the height of the emergency 8,000 homes and businesses in the valleys were powerless, with restoration work hampered by flooded roads and fields and impassable access tracks.) By Friday the network business was able to report that it had restored power to 170,000 south-east Queensland homes and businesses since the flood peaked and was working on another 66,000, two-thirds of them in the Brisbane flood plain. “Access issues,” the corporation said, were still hampering its work along the Bremer and Brisbane rivers.

One of the substantial ongoing issues for power users after the waters recede will be getting premises inspected by licensed electricians. ENERGEX is warning that this could be an important issue for office blocks, factories and other businesses, as well as homes, where the floodwaters may have imposed significant damage on circuitry and appliances.

Left in the dark

An old year that ended with a major newspaper incorrectly editorialising “The price of power is escalating thanks in large part to a severe lack of capital investment in generators over several years” along with another tabloid rant about network outages in New South Wales — “a blackout crisis has emerged” — despite an improvement in customers minutes without supply pretty well summed up a real major energy problem that emerged in 2010 and will run on in to the new year and new decade: the inability of the popular media to adequately understand supply issues and thus to genuinely inform their readers, listeners and viewers.

This is a large problem for both power suppliers and policymakers at a time when difficult decisions need to be taken and the public reaction to electricity price rises as a component of eroding household budgets is taking on a political life of its own.

New year newspaper reports in Melbourne and Sydney highlighted the fact that Australian Bureau of Statistics data show Melbourne average household electricity bills rose 54 per cent in the three years to September while those in Sydney increased 45 per cent in this period. These cost-of-living pressures have been exacerbated by Melbourne water bills increasing 62 per cent over three years and gas prices rising 28 per cent while Sydney bills went up 43 per cent (water) and 21 per cent (gas). A consumer survey is reported to have found that cost-of-living concerns outweigh the prospect of rising interest rates among householders (two-thirds of whom do not have their home mortgaged).

In this environment, it will be difficult enough for power suppliers and politicians to manage the continuing price rises in 2011 and beyond, even before a carbon cost is imposed, without an almost continuous stream of media misinformation about the causes.

The public mood on the east coast is not going to be improved when the impact of heavy rain and floods in Queensland and New South Wales starts to be felt: fruit and vegetable prices are forecast to rise 50 per cent this year.

Part of the communications problem lies in the complexity of power supply issues, making it all the more important for the industry to ensure the media, politicians, their advisers and the community at large are better informed.

To take just one example, NSW government-owned network business EnergyAustralia, lambasted in “silly season” reporting on outages,in fact, delivered its best performance in terms of average customer minutes without supply in 2009-10 compared with the past five financial years, backed by capital outlays of almost $5 billion, a record, in that period — to be exceeded in the next five-year regulatory tranche.

With network charges (not wholesale energy costs) the major contributor to escalating power bills, one wonders what level of capex expenditure to achieve a world-leading outage performance the tabloid’s editors would be prepared to envisage? And at what cost to their readers?

An inability to understand the nexus between the cost of investment and the cost of power is a root cause of much of the mis-understanding: witness a daily newspaper happily reporting during the Christmas/New Year break that NSW’s need for future baseload power and desire for lower carbon emissions could be met by planting, harvesting and burning mallee forests — without a single word on the impact of the process on power prices versus, say, burning gas. (And none about what might happen if a NSW equivalent of the vicious bushfires that ravaged Victoria two years ago were replayed in the new State forests.)

In similar vein, the media (and political) love affair with rooftop solar power continued unabated in 2010 despite efforts by the Secretary of the federal Department of Climate Change (and now the Secretary-elect of the Treasury) to point out that the technology would require an outlay of about $200 billion to cover every household and deliver only 16 million tonnes of greenhouse gas abatement annually. Even if the capex could be halved by technology development, at $100 billion, rooftop PV would be among the most expensive measures available. Despite this, the (hopefully-outgoing) Keneally government in NSW embarked in the past year on a fiasco of a feed-in tariff scheme for PVs that will require State householders to subsidise those who took it up to the tune of $1.5 billion over six years — it would have been $4 billion except that the government panicked when the full effect of its mad-cap vote-chasing became apparent and pulled the plug on the original scheme.

Expecting journalists or politicians to lead the way in improving community understanding of power supply issues is indeed to “imagine a vain thing” — with a bow to Mr Handel. The industry itself will need to lift its communications game massively or find its position the more imperilled as the new decade wears on.