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Kate Cahill, Partner, +61 7 3258 6477, kate.cahill@hsf.com

5 DECEMBER 2013

EXAMINING THE PROSPECTS FOR PRIVATISING QUEENSLAND’S ELECTRICITY ASSETS

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• Overview of Queensland Government owned electricity assets

• Why are we talking about privatisation in Queensland?

– 2013 Queensland Commission of Audit

– Productivity Commission

– Infrastructure Partnerships Australia

– Federal Government

• The rationale for privatisation

• Prospects for electricity sector privatisation in Queensland

– status of the State Government’s plans

OVERVIEW

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OVERVIEW OF QUEENSLAND GOVERNMENT OWNED ELECTRICITY ASSETS

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QUEENSLAND’S ELECTRICITY GOCS

Generation

Transmission

Distribution

Retail Largely privatised since 2007

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•

• State’s largest generator: capacity to supply 45% of QLD’s power needs

• 10 power stations

• Coal, gas, hydro & diesel

GENERATION

(Source: Stanwell website)

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• 4 power stations

• Coal and hydro

GENERATION

(Source: CS Energy website)

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TRANSMISSION

• Licenced to operate > 13,000 km of

Queensland’s high-voltage

transmission network

• Operates Queensland – New South

Wales Interconnector

(Source: Powerlink website)

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DISTRIBUTION

• Supplies 700,000 customers in

regional Queensland (97% by area)

• Supplies 1.3 million customers

in south-east Queensland

(Sources: Ergon website and Energex websites)

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RETAIL

• Sells electricity to rural and regional customers only

• Customers can make one-time election to move to a private sector retailer

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WA SA TAS VIC NSW QLD

Generation1 M2 5 8 M11

Transmission 3 M6 9

Distribution 3 10

Retail M4 7 M12

OWNERSHIP OF ELECTRICITY ASSETS IN OTHER STATES

1 Excludes Snowy Hydro generation in Victoria and New South Wales.

2 Verve Energy, owned by the Western Australian Government, produces about 60% of electricity consumed in the South West Interconnected System (SWIS) (as at February 2012).

3 Privately owned electricity transmission and distribution networks mainly service mining operations in the Pilbara.

4 Customers in SWIS consuming more than 50 megawatt hours of electricity a year and customers outside the SWIS can choose their electricity retailer, although at present, Horizon

Power (GOC) is the only retailer in many regional areas.

5 Majority of generation is Tasmanian State government owned.

6 Basslink (interconnector) is privately owned.

7 Split and sale of Aurora Energy is expected to complete by the time full retail competition is introduced on 1 January 2014.

8 NSW Government is in the process of selling Macquarie Generation.

9 Excluding interconnector between QLD and NSW which is privately owned by Directlink.

10 With the exception of ACT, which is serviced by ActewAGL, a public private partnership.

11 Queensland state owned generators represent 64% of generation supply.

12 Following privatisations in 2007, Ergon’s wholly owned subsidiary, Ergon Energy Queensland Pty Ltd, retained certain regional retail customers that were inaccessible to the other

suppliers.

= Private ownership = Public ownership M = Mixed ownership

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WHY ARE WE TALKING ABOUT THE POTENTIAL FOR PRIVATISATIONS IN QUEENSLAND?

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• Estimates that $25-30 billion is required to restore the State’s triple-A credit rating

‘This reduction in debt cannot be done by adjustments to the state operating

statement…if the government were to achieve a consistent fiscal surplus of 1% of

revenue year after year, it would take 50 years to reduce debt by $25 billion.’

• Strongly recommends privatisation of the State’s electricity generation,

transmission and distribution assets (estimates combined book value of

approximately $25 billion)

• Echoes recommendation of 1996 Queensland Commission of Audit

• Also identifies alternatives to privatisation

• Other interim measures

• Suggests timing

2013 QUEENSLAND COMMISSION OF AUDIT REPORT

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• The current ‘incentive-based’ regulatory regime would be strengthened, rather

than diminished, by privatisation

• In contrast to private businesses, cost and availability of capital are less likely to

act as further incentives for performance

• Governments are held publicly accountable for costs and service levels which may

lead to short term decisions for political purposes

2012 PRODUCTIVITY COMMISSION REPORT

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Recommends that the Government commit to seeking a 2015 electoral mandate to

sell all publicly owned electricity businesses

Estimates that full privatisation would have a bottom-line impact to State finances of

between $40 billion and $48 billion (in 2012 dollars)

• Opportunity to restore the State’s triple-A credit rating, reducing the cost of

government borrowing

• Generational opportunity to reallocate capital to a ‘stalled’ infrastructure project

pipeline

• Opportunity to apply permanent downward pressure to the State’s electricity prices

relieving cost of living pressures and restoring the competitiveness of Queensland

businesses

• Opportunity to address a ‘conflict of interest’ where the Government is both a direct

market participant and an objective policymaker

2013 INFRASTRUCTURE PARTNERSHIPS AUSTRALIA REPORT

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October 2013:

• Assistant Federal Treasurer Arthur Sinodus listed the ‘effective deployment of

state balance sheets’ as one of ‘three key priorities in the Coalition’s

infrastructure policy’

‘This should start with the sale of existing assets to fund

higher-priority greenfield investment.’

November 2013:

• Federal Treasurer Joe Hockey signalled the Commonwealth's in-principle support

for a time-limited protection of the imputed tax revenues from State owned

corporations

PRESSURE FROM THE COMMONWEALTH GOVERNMENT

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REASONS FOR PRIVATISATION

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1. The State’s resources could be redirected to other sectors which are more suited

to State ownership

2. GOCs have conflicting motives which don’t always sit well with the overall

electricity regulatory regime

3. Private ownership enhances efficiency in the electricity sector

4. Historic reasons for State ownership in the electricity sector no longer exist

THE RATIONALE FOR PRIVATISATION

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PROSPECTS FOR ELECTRICITY PRIVATISATION IN QUEENSLAND

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• April 2013: Government’s response to the Commission of Audit report:

– Generators will not be privatised without a clear mandate from voters (most

likely at the 2015 election)

– Government will not seek a mandate to divest distribution and transmission

assets at the next election

• May 2013: Interdepartmental Committee on Electricity Reform (IDC) reported to

Government including recommendations from the Independent Review Panel to:

– stop building unnecessary infrastructure and improve the efficiency of network

businesses (IRP identified $5 billion in savings for network service providers)

– maximise the benefits of competition while protecting customers

– develop a more effective role for Government

STATUS OF THE GOVERNMENT’S PLANS

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• June 2013: Government’s response to the IDC report – endorsed the

recommendations

• September 2013: Government released discussion paper on 30 year electricity

strategy

Subsequently, the Government has announced plans to:

• establish a holding company model for the two distribution companies

• remove electricity price regulation in south-east Queensland by 1 July 2015

• review the uniform tariff policy and develop a long term tariff reform strategy

• implement the National Energy Customer Framework in 2014

• align Ergon Energy’s retail load with government-owned generators CS Energy

and Stanwell

• facilitate open and transparent community debate on the merits of continued

government ownership of energy assets for generation and retail

STATUS OF THE GOVERNMENT’S PLANS

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It was reported in late October 2013 that the Government had appointed Rothschild

to undertake a scoping study of Powerlink

This was met with a swift response from Treasurer Tim Nichols that the Government

has no plans to privatise Powerlink:

‘The Newman Government has already said that Queensland’s electricity distribution

and transmission businesses are not for sale, but we are currently considering

whether to seek a mandate to sell the State’s generation assets.’

However, the Government will ‘investigate ways to finance capital expenditure into

the future, without increasing debt and ultimately the burden on Queensland

taxpayers’

STATUS OF THE GOVERNMENT’S PLANS

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Generation

• Government is considering seeking a mandate at next election (2015) to sell CS

Energy and Stanwell

Transmission

• Powerlink scoping study looking at ways to ‘inject private investment’, but

Government is not looking for a mandate to sell it at next election

Distribution

• Government is not looking for a mandate to sell Ergon or Energex at next election

Retail

• No clear position, other than Government will not divest without a mandate

• Timing may depend upon how the Government tackles the uniform tariff policy and

retail competition reform

• Query whether Ergon’s retail arm is sold in conjunction with other electricity assets

IN SUMMARY