The SHOCKING Facts Behind Privatisation of Poles and Wires

Gary Speechley

The SHOCKING Facts Behind Privatisation of Poles and Wires

The Baird government is looking to offer a 99 year lease of 49% NSW poles and wires in a bid to fund his election promises that centre mainly on the westCONnex road project – a project thought bubble that started at an estimate $10bn but has grown to $15bn before a sod has been turned.

Well, slightly incorrect – two sods called Baird and Abbott turned two sods of soil last week using two silver shovels. They couldn’t find spoons big enough, apparently.

This is billed as a “99 year lease”. In any business parlance, that’s a sale. It isn’t any simpler than that.

NSW taxpayers will not see this asset returned to them. And with 49% control, any entity that buys this asset will seek to gain control – to 51% initially, and then outright monopoly ownership. They have shareholders to satisfy, after all. It will all be billed as offering economies of scale and cheaper electricity for the mug punters – that’s you and me, the taxpayers of NSW.

The Law of Diminishing Returns

Why offer to sell this asset now?

Well, its value is set to decline, so we’d better get in quickly!

  1. As more and more households and businesses take up renewable energy options, more and more entities will go “off grid”.
  2. As more and more localities seek to offer neighbourhood generation (such as the City of Sydney’s tri-generation options), there will be lesser dependence on the larger network of poles and wires.
  3. As Smart Grid technologies are adopted, where energy is generated and how it flows through the grid will be tightly and automatically controlled to balance and optimise power generation.
  4. Although we have more and more gadgets, they’re getting leaner and smarter in terms of energy consumption. A case in point is the now widespread adoption of LED-based lighting.
  5. Consumers are getting smarter too. Those with smart meters are scheduling dishwashers and washing machines to operate at night, when power is about one quarter the peak rate per kilowatt-hour.

As a result, the need to generate and distribute electricity at massive power stations will decline.

Let’s look further at those reasons.

1. Going off-grid.

The adoption of solar panels has been quite successful.

Consumers today are receiving only four or five cents per kilowatt-hour (kWh) they generate on to the grid, but energy companies are selling that same energy to consumers at between forty and fifty cents per kWh – all without having to do anything.

In many cases those electrons generated by solar panels travel only as far as the neighbour next door – often only as far as the nearest telegraph pole.

True, some consumers receive sixty cents per kWh for the energy they produce, but their numbers are limited; those by-back schemes have been closed off; and they are time-limited to expire in twelve to eighteen months.

At that point, they’ll be looking to rewire their households so that they offset the energy they buy off the grid at forty to fifty cents per kWh with the energy for which they’d only receive a few cents per kWh.

Further, it will make the argument for battery storage options more appealing.

Power companies have made good money at selling solar panels and securing the rights to the Renewable Energy Targets (RETs). The next sales wave for them will come from selling battery storage and inverters.

Elon Musk made billions out of PayPal. He now has interests in Tesla Motors, his electric-only car company, and SpaceX, with a contract to regularly launch supplies to the International Space Station.

Recently, Musk inked a deal with the US state of Nevada to build a US$5bn battery production facility, with a view to halving the cost of lithium-ion batteries by 2020.

Musk has form in being successful.

He also tends to leave his intellectual property open and accessible so that others can take up his ideas, rather than tying them down with patents and copyrights.

That means that adoption of new technologies occurs more quickly, and that drives economies of scale, lower pricing, and more widespread availability.

2. Local power generation

Technically, there is no reason to prevent a household, business, group or neighbourhood from setting up its own local generator and grid.

The City of Sydney has been looking at a pilot program to install tri-generation systems, with some systems already installed in city buildings.

Local generation has benefits in that losses over transmission lines and transformed are significantly reduced.

A coal-fired power station is very inefficient – only a fraction of the potential energy of the coal, gas or oil is converted to useful heat; much of the energy of the steam produced is lost, with evaporator stacks needed to dissipate the additional waste heat that cannot be used.

Power stations are many kilometres from the electricity markets they are supplying, so electricity is ramped up to hundreds of kilovolts to be sent over transmission lines strung across the countryside, and even more energy is lost in the electrical resistance of those transmission wires.

More energy is lost in transformers as the hundreds of kilovolts are transferred back to lower, more useable voltages such as 400 and 240 volts.

A local generator, be it a solar panel, wind turbine or tri-generation unit is far more efficient, and the losses in delivering power over tens or hundreds of metres is far less than the transformers and the hundreds of kilometres of transmission lines of conventional methods.

Further, solar panels require NO maintenance, except the occasional washing down by rain.

Politically, however, expect any sale of energy assets to include anti-competitive clauses.

For example, when the rail line to Sydney Airport was shut down, competition from buses was halted. There is no bus route to the airport – it’s a protection racket for the airport rail line and for the taxi industry.

These anti-competitive clauses would be used to legislate AGAINST the establishment of local generation grids in order to shore-up the old power generation models.

Your electricity bill includes a grid access charge – an amount that is charged each and every day simply because you’re connected to a grid.

Companies that buy our poles and wires won’t be happy with ANY form of competition to their monopoly.

3. Smart Grids

There now are international standards for Smart Grids, ratified through organisations such as the Institute of Electrical and Electronics Engineers – the so-called IEEE Standards.

The grid now is able to sense demand – both when demand occurs and where demand occurs. As a result, control signals can be sent to generator units and the amount of generation can be regulated as required.

In future, expect a grid to divert excess energy to battery, hydrogen, thermal or hydraulic storage options so that it can be re-used when required.

Some wind farms are using excess energy (say, at night when power demand is low, but the wind is still blowing) to break water down into hydrogen and oxygen – the famous electrolysis experiment done every day in high schools around the world. When power is required, the hydrogen is burned to generate electricity. There’s also additional value in selling the oxygen to industry and medical facilities.

Last year, albeit for only one or two days, power stations in Queensland could not sell their energy. More power was being generated by renewable sources such as solar than was required by consumers.

Expect the number of such days to increase.

4. Lower energy consumption

As more and more energy is generated by renewable sources, the need to generate electricity by conventional power stations will diminish.

Battery technologies for portable devices have improved the time needed between charges.

Car companies are offering solar arrays as part of the packing in selling electric vehicles, again to offset the need for power from the grid.

Solar panels have certainly made a significant change to the amount of conventional power that is generated.

LED bulbs use only one fifth or less of the energy required by incandescent light bulbs. A 5-watt LED easily competes with a 50-watt halogen, but it also is safer in that it generates far less heat and ultraviolet radiation.

Energy storage options are being installed in increasing numbers so that excess energy can be conserved and then made available when required. This offers load-balancing, but also is less demanding of traditional power generators.

Take the BlueGen units produced by Ceramic Fuel Cells in Melbourne (and Germany). The Australian-developed ceramic fuel cell takes natural gas and water, generates electricity that can provide base-load power, as well as hot water for home consumption. The unit is the size of a dishwasher.

5. Consumers are getting smarter

A condition of installing solar or other renewable sources of energy has been the adoption of smart meters. These typically offer three pricing regimes: peak; shoulder; and off-peak.

While peak pricing is between forty and fifty cents per kWh, off-peak pricing is ten to twenty cents per kWh.

Smarter appliances are not only more energy efficient, but can be programmed to operate at night to take advantage of the cheaper off-peak power rates.

Consumers are taking advantage of this in order to lower their electricity bills.

There is one other factor at play here as well.

I mentioned anti-competitive clauses earlier.

But there’s another sinister clause that the companies that buy government assets apply.

Investors want certainty from the monopoly asset they buy. If demand for electricity and distribution drops then the return on their investment suffers as a result.

So to guarantee the return on their investment, they apply another clause that states that if the demand for their product drops, government will make good on any shortfall.

Toll road projects have been notorious in miscalculating the volume of traffic per day – the figure they sell to government and investors that shows their project is worthwhile.

The Cross-City and Land Cove tunnels in Sydney, and the Clem Jones tunnel in Brisbane have all fallen into this trap.

Nearby roads are closed and other methods used to funnel cars into the tunnel, rather than bypass the toll.

But governments sign up to contracts that commit them (that is, us as taxpayers) to making good on any shortfall in revenue from what was expected as a financially worthwhile return.

We never discover these clauses initially because they’re all “commercial in confidence”.

When we do find out, it’s too late.

I’ve said that the demand for energy generation and distribution will decline. Investors won’t like that and will hold governments to commit to guaranteed returns by topping them up from our taxes.

Salivating Fund Managers

I heard recently from a fund manager on the topic of government asset sales.

He stated that whenever a monopoly government asset such as poles and wires is discussed, drool forms in the corners of their mouths, a sly smile emerges and their hands start to twitch.

Company and fund managers like nothing more that to buy into, or to buy outright, a monopoly enterprise, and to do so at a bargain-basement price.

They receive guaranteed returns for investors – their financiers and lawyers are smarter than those in government, so the funding is set up so that they pay minimal tax (that is, if they pay any tax at all) and the clauses they insert into contracts give them a dream investment – anti-competitive and guaranteed return clauses as I’ve discussed.

It was reported last year that since being sold, Sydney Airports Corporation hasn’t paid any income tax to the Federal government for Sydney Airport.

It’s like you buying an investment property and negatively gearing every single cent of it.

For a state government selling off poles and wires, it’s been reported that at least $1.7 bn in state revenue will be forgone each and every year.

Even if the investors’ share of that $1.7 bn per year return were to decline as generation and distribution falls, remember that they’re protected by the top-up clause, so they don’t lose out at all.

If the business DOES turn some profit (fools if they’ve structured it that way) then company tax is received by the federal government – not the state government.

Governments are notoriously inept at negotiating these agreements.

They over-value their assets and then under-sell them.

A few weeks ago, we were told that leasing 49% of NSW poles and wires would provide a $20 bn windfall to the state. Today, the figures being quoted are $13 bn or even $11 bn. That’s a change of almost 50%.

What is the real value of the asset to the people of NSW?

Probably somewhere in between.

But even if the asset returned only $867 m per year to government – being 51% of $1.7 bn, over 99 years that’s a lot of money.

Certainly a lot more money than a one-off $11 bn, $13 bn or even $20 bn – and that’s without compounding for inflation.

When John Howard set aside $1 bn from the sale of Telstra, creating the Millenium Fund, what did we get for it? We never found out, and today, you’d be hard-pressesd to find any reference to the Millenium Fund, let alone how the funds were dispersed.

When John Howard sold off many public assets, especially Defence-owned bases and properties, returns were often barely above 50% of their perceived market values. Indeed, funds were transferred from departments that owned properties into the Department of Finance so that sales figures could look more respectable. Try telling ASIC about that sleight-of-hand and getting away with it.

Governments of all persuasions ALWAYS sign these asset sale contracts.

If they don’t then they risk being seen as failing to deliver on their election promises.

They’ll take ANY OFFER, no matter what their proposed value was, and simply cut back on what they promised to deliver from this “once in a generation” opportunity they sold to the voters.

No matter what the sale figure, we’ll be told that the market decided the value in a fair and competitive process.

Slash-and-Burn Business Models

Once our monopoly asset is in private hands, the fun really begins.

The assets need to be rationalised.

First to go will be the workforce – we’re private enterprise and we don’t need this many people to manage and maintain our asset.

If there’s an underperforming aspect of the asset, then that will be moved across to become the government’s (our) responsibility. We’ll keep the profitable areas and let government handle the struggling areas of this now joint business.

The new owners also will look towards vertical integration. We control part of the process – poles and wire distribution.

They’ll see if they can pick up a generator business that might be for sale – government can always be tempted to sell something else. Then they’ll see if they can buy an energy retailer.

Then, with control of a generation business, a distribution business, and a retail business, they’ll have end-to-end monopoly control of a key market sector.

Up go the prices.

Just-in-Time Maintenance

The inquiry into the Victorian bushfires that killed so many people and destroyed so much property concluded that the fire started from an electrical spark from a telegraph pole.

Maintenance of privately-owned electricity assets then became an issue – just what level of asset management and maintenance was being applied by the owner of the power infrastructure?

One of the first casualties when assets change hands is that of maintenance.

The goal is always to return benefit to shareholders, not accountability to communities or government.

With a workforce that will already have been reduced, maintenance adopts a just-in-time model; fix what is failing only when it fails. Have just enough parts on hand to fix things when they fail. If power is interrupted to a community for a period of time while new parts are obtained, or workarounds implemented, well, that’s just the way service industries operate these days.

If a spark causes a fire or death and destruction, well, that’s covered by insurance.

Conclusions

So, this debate about selling poles and wires covers a wide range of issues and raises a whole lot of questions.

The answers have not been forthcoming.

Past history in the sale of airports, roads, banks, desalination plants and other assets shows that governments perform poorly on behalf of the tax payer.

They are too eager to sell assets that they simply cannot put a value on. They over-egg the sale beforehand, telling us of the innumerable benefits that will come our way, and then the assets are sold not with a “bang!” but with a whimper.

A short-term sugar hit to government, often selling an asset and claiming credit for limited returns lest their opposition get in and sell the asset instead of them.

It’s a race to the bottom, and taxpayers are the losers.

As for the westCONnex road project, should it go ahead at the expense of public transport or other infrastructure, we won’t be high-fiving Duncan Gay, or singing in our cars as Tony Abbott suggests we will.

We’ll be sitting stationary in a carpark, alongside rows of others sitting stationary in a carpark. Add more lanes, and you add more rows of people sitting in a carpark.

If you are tempted to sing in your car, what’s the point if, like everybody else around you, you’re the only occupant in the car to hear the song?