The Eastern States Experience with Privatisation
When Mike Nahan and the WA Liberals talks about the all the supposed benefits that would come from privatising the WA electricity network, there’s a reliance on hypotheticals and projections.
But the people of WA only have to look eastwards to see the real consequences of selling off state power assets.
In 1998, the newly re-elected Liberal Government back flipped on a promise to not privatise SA’s electricity industry and went forward with the long-term lease of its distribution network and the sale of retail power company, ETSA Power, for just over $3.5 billion.
Less that 20 years later, South Australia is the poster child for nearly everything that can go wrong with privatisation. The state went from a vertically integrated system controlled by the SA Government to a plethora of private interests.
The high-voltage transmission lines are owned by ElectraNet (which is partly owned by the Chinese Government). The lower voltage street lines street are owned and operated by SA Power Networks (majority owned by Hong Kong-based Cheung Kong Infrastructure Holdings). And then a host of different companies act as retailers and generators (or both), such as AGL, Origin Energy, Simply Energy or Energy Australia.
So did privatisation and full contestability lead to more competition and lower power prices?
In July 2017, households were hit with power price rises of up to 20 per cent, resulting in not only the highest power prices in Australia but possibly the highest prices in the world.
The Australian Competition and Consumer Commission (ACCC) recently conducted analysis of household power bills around Australia. They found that household power bills rose by almost 50 per cent over the last decade.
And yet despite paying the nation’s highest power bills, South Australians had to suffer through the unprecedented ignominy of a state-wide black out in September 2016 when the power network went down. 1.7 million people were left without power.
Adding insult to injury, expert analysis by at the time of the privatisation (Quiggin and Spoehr, 1998) pointed out that the then government’s rationale for privatising failed to take into account retained earnings and other income derived by ETSA, leaving the state needing of offset the loss of income to the state.
The outcomes observed since that analysis support the conclusion of the time; it’s likely the privatisation of ETSA has cost the South Australian public between $1 billion and $2 billion.
This is why arguments that the privatisation of public assets is necessary to pay off government debt are so dangerous and short sighted. An opportunistic government may look to make a quick buck today, but the state and its people end up paying for decades to follow.
And the consequences of privatisation go far beyond the financial cost.
Victoria extensively privatised the state’s electricity system under the Kennett Government in the 1990s. Initial reactions to the move were positive, with record prices paid for government assets, and electricity prices falling sharply for large customers. The expectation was that full contestability, introduced in 2002, would extend similar benefits to small business and household customers.
In reality, the low prices offered in the early stages of market contestability proved to reflect the incentives to run down reserve capacity in the system, which was criticised at the time as ‘gold plating’. By the time full contestability arrived in 2002, there was little excess capacity left. Household and small business consumers faced increases in prices, which accelerated over time.
In the subsequent decade, outcomes for consumers have become steadily worse. Under privatisation and corporatisation, electricity distributors have been unwilling to invest in new network infrastructure unless they are guaranteed high rates of return.
This had tragic consequences when the frailty of the privately-owned system was exposed on 7 February 2009, when 173 people lost their lives and thousands of homes were destroyed in the ‘Black Saturday’ Bushfires.
The Bushfire Royal Commission found that “…five of the 11 major fires that began that day were cause by failed electricity assets; among the fires was that at Kilmore East, as a result of which 119 people died.”
This finding was supported by the findings of a Victorian Coronial investigation into the Marysville bushfire, which were released in December 2015, and concluded that multiple deficiencies in privatised power assets were the cause of several of the devastating bushfires on Black Saturday in 2009.
The Royal Commission made a number of recommendations calling for the urgent replacement of the ageing electricity distribution network and changes to the regularity of inspections and maintenance.
In response to Royal Commission’s call for an urgent upgrade of the network, power companies argued against the recommendation, telling the inquiry such proposals would cost billions of dollars and likely increase power bills by 20 per cent every year for 20 years.
It’s clear that once electricity networks are placed in the hands of private companies, either by sale or through long term lease, the only thing that guides decision-making around maintenance and investment in new infrastructure is profit. Is public safety a lower priority?
The people of WA don’t have to experience the pain of privatisation like our eastern neighbours have. We can avoid the financial losses, the instability and unreliability of the network, and the devastating consequences of a poorly maintained network.
We must keep WA’s publicly owned electricity system in public hands.