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Australia

Australia

MONOPOLIES TORN APART

The A$12 billion Australian electricity industry is being jackhammered apart in a restructuring and privatisation push unparalleled in the nation's history. Over the past two years "micro-economic reform," as the government likes to call it, has shattered the once powerful and vertically integrated state owned electric utilities into generation, transmission and distribution businesses, much to the dismay of some community, business and environmental groups as well as the executives of the former monopolies.

At national level, the government plans to create a fully competitive electricity market by 1999 with limited competition starting this year. A key feature of this market will be a common electricity pool, controlled by a National Grid Management Council, to serve the eastern "interconnected" states (currently only South Australia, Victoria and New South Wales) where wholesale customers will purchase their electricity on a spot basis or under contracts with any generator.

Pricing of distribution "franchises" (which will have to pay a franchise fee) and environmental matters will remain state responsibility along with health and safety issues, while network pricing, network connection and access, market rules and operation and system security will be regulated through an industry code of practice under the direction of the National Electricity Market Management Company and the National Electricity Code Administrator.

The nation's generation capacity is currently about 35,000 MW, mostly from large (greater than 500 MW) coal fired power stations. At a recent conference on the national market and greenhouse issues, however, the competitive market was described by one major industry representative as "not consistent with the government's goal of reducing greenhouse emissions."

Environmentalists complain that the national market and proposed interconnection of more states to the national grid is simply a means to facilitate the transfer of excess coal fired capacity in Victoria and NSW to lower polluting states which are experiencing a higher population growth. Demand management protocols have not been properly met, they argue, in a similar failure to the initial UK restructuring. As a result there will be higher greenhouse gas emissions at the expense of energy efficiency and clean energy technologies. Furthest down the path of restructuring is the southern state of Victoria, which amalgamated over 20 distributors into just five businesses while splitting one generator into five separate businesses. As part of the restructuring package, the government has legislated that maximum tariffs for residential and small business customers groups, which may be disadvantaged in the restructuring, will reduce by 9.1% and 22%, respectively, and remain at that level until the year 2000 when full competition will determine prices.

Widespread sale of utilities

The dramatic shake-up also includes the sale of all distribution businesses and a number of generators in a bid to privatise the industry. The first of Victoria's electricity companies to be privatised, United Energy, was recently sold to a consortium led by United States utility Utilicorp for A$1.8 billion -- a price significantly higher than government estimates. The state government plans to sell the four remaining electricity distribution companies and one generator by early next year.

Bob Beatty, an industry analyst, has said the high price indicates investor confidence in the restructuring of the Victorian industry. He cautions, however, that the "fiercest" test of the Victorian model will begin after 2000 when all customers will be able to choose their distribution company and all price controls expire. The chief engineer for the former State Electricity Commission of Victoria (SECV), Richard Urie, has called the pricing protection "a hollow sham." The SECV restructured itself prior to the government's initiative, reducing staff from 22,700 to just 7,500, and in the process was poised to reduce tariffs by 20% which the government cancelled.

One of the methods the government is using to make the businesses more saleable is to "write down" -- or devalue -- the assets of the distributors to make them more attractive to potential buyers who will need to show commercial rates of return on the assets. Urie said the sale of distribution and generation businesses will almost certainly be majority financed by debt which will add to costs of production along with new dividends to shareholders.

A majority of Victorians -- almost 70% -- tend to agree with Urie and oppose the privatisation, according to a recent AGB McNair poll, which the opposing political party has vowed to stop if it is elected. The restructuring in Victoria has also been responsible for the cancelling of Australia's first commercial 10 MW wind farm at Toora.

The Victorian government has also created its own pool for the dispatch of electricity under the control of a state regulator. In the current arrangement, sellers would bid into the pool their price each day for electricity to be dispatched each half hour the following day. The next day, generators are dispatched to meet demand from buyers in the order of their bids (from lowest to highest) with the price of the highest bidder dispatched paid to all generators during the period.

Urie believes the bidding process will have no effect except to allocate generation to respective power stations. Since payment per unit output would be the same for all, there would be no effective competition, he said, adding that total pool payments could be as much as three times those of current practice.

In the state of New South Wales (NSW) the impeding restructuring has taken a different tack. Shying away from the Victorian model, the state government has amalgamated 24 distributors into just five businesses while allowing the new distributors to trade in energy services -- including the retailing of gas and the marketing of energy efficiency and solar energy equipment. The restructuring will save consumers A$130 million, according to the state government, while opening up distributors to some amounts of competition. At the generation level, however, the NSW government is still debating whether to split the state's generation agency, Pacific Power, into three separate and competing generators.

Even before the restructuring a number of distributors were looking to innovative marketing plans to ensure market share, such as green pricing. These plans may ultimately prove a huge boost to budding renewable energy industries. Other Australian states have moved to 'corporatise' their utilities and are watching the Victorian model closely.

Better for renewables

However, the changes to the industry have already exposed a number of hidden subsidies which will disappear as distribution businesses come to grips with the true cost of doing business in a competitive market. This will undoubtedly lead to better markets for renewable energy technologies especially in remote areas which have been heavily subsidised in the past.

How much regulation the industry will see is ultimately dependent on how the competitive market performs. The Victorian government is keen to avoid the UK experience where, according to Geoffrey Swier of Victoria's Electricity Supply Industry Reform Unit, limited competition "has resulted in wholesale electricity pricing now being subject to regulation, rather than competition." The initial enthusiasm in the nation's capital, Canberra, has been tempered with the political and social realities of an electricity industry and consumers unused to such dramatic change, especially change which may conflict with other social and environmental goals. As one industry analyst notes "the future is pretty fuzzy."

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