Wednesday, 22 August 2012

Electricity.... a perspective

Restructuring electricity companies

The discussion about power prices and the restructure of the State’s electricity sector often neglects the crucial role of the sector as a fiscal contributor to the overall State sector.

The affairs of the parent company, aka the General Government (GG), are usually discussed separately to the affairs of its subsidiaries, the wholly owned GBEs and State Owned Companies (SOCs) which together comprise the Total State sector.

The survival of any entity is inextricably linked to its net operating cash flow, in other words the cash revenue less the cash operating cash outlays.

The GG’s net operating cash flow for this year 2012/13 is expected to be $154 million. If one disregards capital grants the net operating cash flow for GG is only $45 million.

Included in GG’s operating cash is $233 million of dividends and income tax equivalents from the GBE/SOCs and also $34 million in guarantee fees, also paid as a consequence of the competitive neutrality requirements of national competition policy. Almost all these payments are from the three electricity companies for they are the only profitable ones (apart from MAIB) and their borrowings comprise 89% of all GBE/SOC borrowings upon which guarantee fees are based.

Without these payments from GBE/SOCs the GG’s net operating cash flow would be a negative $222 million. This is after payments for unfunded super liabilities but before capital and infrastructure payments, the latter this year budgeted to be $524 million, of which some, but certainly not all, will come from capital grants of $109 million, asset sales of $40 million and unspent capital grants from prior years.

GBE/SOC contributions are pretty important for GG.

Looking at the total State sector the net operating cash flow excluding capital grants expected for 2012/13 is $788 million.

If the net operating cash balance for GG before payments of dividends, tax and guarantee fees is expected to be a negative $222 million, this means that the non GG Sector will have a net operating cash flow of $1,010 million before the aforementioned payments to GG.

The electricity sector is the goose that is currently laying golden eggs but whose livelihood is under threat by almost everyone.

Since the GFC the Government has hitched its empty hay cart to its GBE/SOCs and more than ever is relying upon them for much needed funds.

In 2 years time, in 2013/14, dividends, tax and guarantee fees from GBE/SOCs are expected to be $454 million.

Electricity prices

One of the alleged necessary reasons for the restructure of the electricity industry is the crippling effects of price increases on living costs, unconditionally accepted by all political parties as an article of faith.

Finance journo Peter Martin who runs a very good economics blog recently reproduced the results of Australian Bureau of Statistics (ABS) survey of household expenditure pointing out the relatively small share of power costs in households including the % share of the top quintile (20%) of households in terms of income compared to the bottom quintile.

All evidence suggests that household incomes have increased faster than CPI and so it’s difficult to see how cost-of-living pressures taken as a whole over time are anything other than the consequence of consumption choices, not inflation. NATSEM at the University of Canberra released a study in May 2012 showing household incomes outpacing inflation over a significant period.

The issue then becomes why should the Government intervene now?

Privatisation of electricity assets

At the same time as the restructure debate there is occasional talk about the privatisation of electricity assets.

Not that there is a firm proposal to sell the electricity companies by any State political party. The State Opposition spokesmen was careful to make his position clear not to harm election prospects and to maintain the higher ground with his silly adversarial claim that others such as the Greens could not be trusted to follow his noble example.

But others have been more forthcoming. News Limited journalist Matthew Denholm opined a few weeks ago that we should “open the monopoly energy sector to full competition and privatisation with proceeds placed into a future fund to invest in ageing infrastructure”.

Proponents of privatisation including people from across the spectrum suggest we will be better off, but it requires a leap of faith to agree.

Funds management entities including the union dominated Industry Funds Management, a manager of infrastructure assets for superannuation funds are in favour. So too is Martin Ferguson once doyen of the Left whose guiding philosophy seems to have shifted to the Graham Richardson School of Pragmatism. Also onside is the infrastructure industry (see for example

The Government via its compulsory super for all plus attractive concessional treatment for higher income taxpayers has successfully corralled about $1.4 trillion for the funds management industry to administer.

This has meant while fund managers have managed to clip the ticket for $15 billion each year, fund members have had to endure zero real returns over the last decade.

Looking around for suitable investments to boost flagging returns necessary to justify a continuation of daylight robbery, the funds management industry now want State governments to monetise the remainder of their infrastructure assets with returns set by Regulators to achieve a guaranteed rate of return.

The ex post-rationalisation is that this will free up funds for governments to update and replace aging infrastructure.

Self interest is the ex ante explanation.

In other words sell the good stuff and invest instead in low yielding assets.

One problem for Governments in deciding infrastructure assets in which to invest is the low and often non-existent returns. Infrastructure can range from bike tracks, roads, schools and hospitals, dams and irrigation assets to assistance with industrial developments at Longreach.

In some cases possible returns to governments can be modelled via increased revenues, but at best there is often a time lag.

But with a lot of infrastructure spending the benefits accrue privately, say, via increased house prices in affected locations, but few want to share these gains with Governments.

Recently an article suggested infrastructure returns to Government be via land tax to capture some of the private gains that accrue as a result of Government outlays.

We all agree that we need to maintain and update our infrastructure, but it has to be done in a way that is sustainable for Governments and equitable for all Tasmanians.

Following the GFC and the refusal to countenance additional State taxation, the Government outsourced additional revenue collection to the electricity GBEs. But now that revenue source is under threat with the restructure proposals.

However to sell them would deprive the Government of the last vestige of flexibility from a budgetary viewpoint, as well as disposing of assets at below their long term value requiring regulated and guaranteed prices to attract buyers, and which almost certainly would markedly reduce the life expectancy of the State of Tasmania.

The overall State sector would, as a result, consist principally of the General Government sector. Departments and agencies in other words.

Tasmania would become little more than a municipal council. Without electricity companies in the State sector, Tasmania as a State as we now know it, would be lucky to last 10 years.

If we retain electricity companies we need to carefully understand their overall function. Any changes as currently being discussed need to fully account for the important fiscal role they now occupy in the State sector.

It’s not simply a matter of competition and low prices.

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