Basslink highlights State's budget woes

(Published in The Mercury 27th April 2016)

The big danger in the aftermath of the Basslink debacle is the search for someone to blame will divert attention from finding the best solution.

At last week’s Senate hearings in Hobart, Michael Negnevitsky, UTas engineering professor nailed it when he said “...the failure of the Basslink has to be viewed not just as a disaster......but.... as a wake-up call..... in 10 years time we may not recognise our power systems.... (which) in the last five years have changed much more than in the previous 50 years.”

It’s not just a wake-up call from an energy security viewpoint but also from the perspective of the government’s fragile budgetary position as it begins to grapple with the costs of the outage and the after-effects.

The roles of participants will give a glimpse of how the State sector works.

The cash costs of at least $200 million will be borne by Hydro Tasmania. It will have to find the money from somewhere. It won’t come from the Consolidated Fund which would directly impact the general government’s budget. But it will come via the back door, either from TasNetworks or from Tascorp.  The impact on the State’s overall position will be the same. This position will also be affected by the expected massive write-down in the value of Hydro’s generating assets, reflecting reduced future income as dam levels are restored. In 2005 Hydro wrote down the value of its generating assets by $1 billion. A similar write-down would not surprise

The general government which comprises all the departments and agencies has relied on returns from government businesses to top up revenue from the Feds and from own source taxation. The three electricity companies (Hydro, Tas Networks and Aurora Energy) have been the big contributors.

The other notable government business is Tascorp, the government’s finance arm, which borrows long term and on-lends to government businesses, mainly Hydro and Tas Networks. Most other borrowings are small as businesses are unable to service debt. Tas Racing for instance has its interest paid for by government.

Hydro has been desperately trying to reduce debt but the demands of recent governments have made this impossible. Last year’s injection of $205 million from Tas Networks was a Clayton’s capital reconstruction. Half went as returns to the government and the other half used to fund annual capital expenditure. None was used to reduce debt.

In Treasurer Gutwein’s first budget handed down in August 2014, a special dividend from Hydro of $75 million was included in the forward estimates for 2017/18 enabling the Government to proclaim a return to surplus as promised. If ever there was a demonstration that forward estimates are meaningless this was it. Hydro was advised of the intended dividend on the day before the Budget was handed down.  Two months later the idea was scrubbed when the realities of Hydro’s position were made plain. Subsequent correspondence from the Treasurer obtained under RTI confirms varying degrees of interest by the Treasurer in Plan B to sell off Entura, the Tamar Valley Power Station and the retail arm Momentum Energy. The only asset not included on the For Sale list was Hydro’s 25% share in the Musselroe/Woolnorth wind farms. Hydro’s position has worsened considerably since with the Basslink outage. It will struggle to pay its way whilst restoring dam levels, forgoing income from renewable energy certificates and paying Basslink commitments and interest to Tascorp. It won’t have to pay anything to government as it won’t be profitable.

Tas Networks, responsible for all electricity transmission and distribution, is told by the Australian Energy Regulator (AER) every five years what its assets are worth and what prices to charge so as it can cover costs which include interest on borrowings equal to 60% of its assets, plus allow a return on the remaining 40%. Over 90% of profits end up with the government. Regulated competition is a cosy arrangement.

The upshot is that Tas Networks receives enough from its handful of customers which include Hydro, the major industrials and monopoly retailer Aurora Energy, to service $1.8 billion in borrowings and pay a return to government. Currently Tas Network’s borrowing are $1.6 million, all from Tascorp. The AER determination means another $200 million can be borrowed and comfortably serviced with existing pricing arrangements, assuming of course it doesn’t lose any major clients or Aurora’s customers move off grid.

Tas Networks has become a crucial source of working capital for government and government businesses. It is now the largest contributor of government businesses to government coffers. It has recently provided equity funds for Hydro, Forestry Tasmania and Tas Rail. Even Aurora Energy, now a debt free paper shuffler which buys and sells electricity, has a bottom line totally dependent on government grants which cover the costs of electricity concessions --- 90% per cent of profits then return to government coffers.

The use of Tas Networks as a source of funds, however smart from a budgetary viewpoint, limits its ability to adapt to changing circumstances in the power industry. It has a vested interest in the status quo because its preoccupation with servicing debt and providing returns to government restricts what it can do.

In the normal course of events one would expect a business like Hydro that has hardly added to its generation assets in the last 25 years except for a 25% interest in a highly geared wind farm venture to be relatively debt free and ready for the next challenge. But unfortunately governments have had other ideas. The pattern has been replicated with Tas Networks. Between them they have enough debt to choke a hippopotamus and are not ideally placed for the future. We will no doubt be reminded at Budget time how the general government is free of debt. That unfortunately masks the reality of the broader government sector.

The model of regulated competition is designed for private rent seekers to own and operate infrastructure. When government mimic their private colleagues the result is the mess that confronts us.

It’s not just a matter of finding energy solutions. It’s crucial to determine how it’s funded. Any proposal that solves half the problem is no solution at all.