Sydney's 1995 electricity heist

I had been putting together another New England blog round-up when my eye was caught by a story in the Armidale Express. Sadly it's not on-line.

Essentially, the message in the story was that mandated state increases in water charges in regional centres might be paving the way for an eventual state takeover of water resources. In Armidale's case, that would mean loss of the Council owned Malpas dam.

The story was linked to Sydney's earlier smash and grab raid on New England's electricity county council assets

In writing this story, I tried to check on-line sources to find out more details of exact funding arrangements for Malpas, as well as more information on management arrangements. I am glad that I did, for the two are not quite the same.

However, in checking I also dug back into the electricity story and decided to focus in this post on that, picking up water in a second post.

As it happened, at the time Sydney seized New England county council electricity distribution assets, I was doing some work on national electricity marketing.

I said to a colleague in the NSW Treasury that I thought that what had been done was wrong in principle. I did not receive a sympathetic response. They were, he said, assets finally owned by all NSW taxpayers. NSW taxpayers as a whole would benefit.

I leave it to you to judge.

The story begins  

The original idea for county councils was developed by Earle Page, then Mayor of South Grafton. The idea was to assist councils to develop new and shared services via entities controlled by participating councils. From this original start in the Northern Rivers, county councils spread rapidly including electricity supply.

By the early 1990s, electricity distribution throughout New England was carried out by a network of county councils. These arrangements were now to be transformed through the combination of National Competition Policy with NSW Government actions intended to extract the maximum cash from the system.

Introduction of National Competition Policy

In 1992 Australian governments established the independent Committee of Inquiry into a National Competition Policy for Australia[1]. Known as the Hilmer Committee after its chair (Frederick Hilmer) the committee reported in August 1993. It recommended:

• extension of the coverage of the Trade Practices Act 1974 to unincorporated businesses and state and territory government businesses
• extension of prices surveillance to state and territory businesses to deal with circumstances where other competition policy reforms had proven inadequate
• application of competitive neutrality principles so government businesses do not enjoy a competitive advantage over their private sector competitors simply as a result of public sector ownership
• restructuring of public sector monopoly businesses
• review of all legislation that restricts competition
• provision for third party access to nationally significant infrastructure.

On 25 February 1994, the Council of Australian Governments accepted the competition policy principles set out in the Hilmer report. Next year, 11 April 1995, the Council of Australian Governments reached three intergovernmental agreements; the Competition Principles Agreement, the Conduct Code Agreement and the Agreement to Implement the National Competition Policy and Related Reforms. . The agreements set out a national microeconomic reform program, the National Competition Policy. They also contained undertakings to implement pre-existing intergovernmental reform agreements in the sectors of electricity, gas, water and road transport.

Importantly, clause 7 of the Competition Principles Agreement extended the reform agenda to local government. States and territories undertook to work with local government in applying legislation review and reform, competitive neutrality and structural reform principles.

As part of the overall package of agreements, Governments also agreed to:

• restructure their electricity sector, apply competitive neutrality and review electricity regulation that restricts competition
• introduce a fully competitive National Electricity Market (NEM) in southern and eastern Australia, extend competition in supply so that all consumers could have choice of supplier and provide for specific bodies to have operational responsibility in the market[2].

This led to agreement to on the following objectives:

• the ability for customers to choose their supplier, including generators, retailers and traders (full contestability)
• non-discriminatory access to the interconnected transmission and distribution network
• no discriminatory legislative or regulatory barriers to entry for new participants in generation or retail supply
• no discriminatory legislative or regulatory barriers to interstate and/or intrastate trade.

Turning now to water, on 25 February 1994, the Council of Australian Governments adopted a strategic water reform framework which was later incorporated into the National Competition Policy agreements. The main objectives were to establish an efficient and sustainable water industry and to arrest widespread natural resource degradation, for which water use is partly responsible. The framework covered pricing, the appraisal of investment in rural water schemes, the specification of, and trading in, water entitlements, resource management (including recognising the environment as a user of water via formal allocations), institutional reform and improved public consultation.

Application to the NSW electricity sector

In May 1995, NSW Treasurer Michael Egan released the NSW Electricity Reform Taskforce Electricity Reform Statement[3]. As part of the changes:

• The existing 25 Electricity Distributors would be amalgamated into a small number of distributors and restructured.
• Distributors would be corporatised and operate under a commercial framework. This would cover aspects such as rate of return, asset valuations, capital structure and financial distributions to government.
• Each Distributor would have two subsidiary corporations, dealing separately with distribution network ("wires") and retail supply ("energy trading") operations. This structure reflected the distinctive nature of the two businesses: network being a regulated monopoly and retail supply being subject to open market competition.
• Electricity consumers would be able to exercise choice of energy supplier, as retail competition developed.

The arguments for the change can be summarised this way:

• Small operators could not survive in the new deregulated market
• NSW had to comply with National Competition Policy
• Economies of scale meant that retail electricity prices would fall in real terms from 9.3 cents per kwh in 1995 to 7.4 cents per kwh in 2000
• There was presently no incentive for county councils to maximise returns on assets.
• Financial arrangements governing county councils gave them preferential positions as compared to private sector firms.

In a remarkably revealing statement, the Statement said[4]:

A commercial framework requires that all distributors have an appropriate capital structure. Current debt levels of most distributors are relatively low, with an average gearing of approximately 13%, compared to the proposed 50% to 60% gearing of Victorian distributors.

Despite low profitability, rural distributors have been able to accumulate significant cash reserves as they have little debt and are not currently required to pay tax and dividends. In the absence of a commercial cost of capital, distributors are provided with strong incentives to eliminate debt and over invest in network assets. Local Government governance structures have contributed to the development of inefficient capital structures.

In conjunction with an increase in network sector returns to commercial levels, there is also an opportunity to review debt levels in order to achieve a commercial capital structure appropriate for mature, low risk utilities.

For example, financial modelling indicates that a 10% per annum regulated return on network assets will generate sufficient cashflow to support gearing levels of up to 50% for network businesses.

There was a need for change. However, the new arrangements completely ignored existing ownership arrangements. These were not Sydney assets. They were assets owned by country councils who were in turn owned by local councils. Further, those assets had been largely been built up by tariffs paid by local consumers that covered operating costs, interest payments and loan repayments.

Outcomes of the changes

The NSW Government did very well out of the deal. It:

• Was able to extract money by borrowing against assets, increasing gearing.
• Maximised dividend and other payments, forcing distributors to reduce costs regardless.
• Is now looking at privatising the assets to get a final return.

Consumers were not so fortunate.

While some consumers in some areas did experience lower real prices (this depended on starting prices), the higher financial costs imposed on distributors limited these gains. Further, in cutting costs, distributors cut key staff, maintenance and investment.

By the early 2000s they were scrambling to find replacement staff such as linesmen. Now in 2010 electricity prices are being greatly increased to overcome past under-investment.

I have not been able on on-line information to check price movements. However, the current Country Energy price for a retail consumer of 19.62 cents per kwh excluding GST can be compared with the 1995 average of 9.3 cents,

Local areas were least fortunate of all. They lost local jobs, they largely lost the support for local projects that had been funded from county council profits, and they got no return for the assets seized by Sydney.

New England County Council Case Study

I no longer have my copies of the NECC annual reports, so I have not been able to validate all my information[5].

The Electricity Development Act, 1946 established an Electricity Authority, empowering it to recommend the constitution of new county districts and the alteration of existing boundaries. Prior to this date, electricity generation and distribution in the area was carried out first by a private company and then Armidale City Council.

In 1948 the New England County Council was formed. The new Council decided to buy additional bulk electricity from Tamworth Council and to build its own hydro generation scheme at Oakey River. This was completed in 1956.

New England County Council tariffs were initially high by NSW standards in part because of the need to fund the Oakey Scheme. However, by 1995 the County Council was quite profitable, while tariffs were below the NSW average. The Council saw part of its role in keeping consumer costs down, while profits were being used to fund local activities.

I said earlier that financial arrangements with county councils needed to be refined independent of the changes actually introduced. One sign of this is that the County Council’s growing cash flow created a difficulty. There were no formal frameworks in existence as to how this money should be spent.

When NECC was expropriated by the NSW Government, Armidale lost head office jobs, the funding that had been going to community activities within the NECC area was lost, the chance of building a bigger business was lost. Local councils as owners received no payment, locals ratepayers and in a sense council shareholders received no local benefit, while there was little if any consumer gain via lower electricity prices.

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[1] National Competition Council, National Competition Policy, Major Areas of Reform, http://ncp.ncc.gov.au/pages/reform, accessed 10 May 2010

[2] National Competition Council, National Competition Policy, Related Reform - electricity, http://ncp.ncc.gov.au/pages/electricity, accessed 10 May 2010

[3] http://www.treasury.nsw.gov.au/__data/assets/pdf_file/0003/7941/TPP95-5_NSW_Electricity_Reform_Taskforce.pdf accessed 10 May 2010

[4] Ibid pp18-19.

[5] The historical material in this section is drawn from an Armidale City Council document on the history of electricity in Armidale - http://www.armidale.nsw.gov.au/files/12300/File/GasandElectricity.pdf accessed 10 May 2010. Material on later events is drawn from my own experience at the time.