Electricity Reform Abroad and U.S. Investment

Electricity Reform at the State and Territory Levels

Since low-cost coal is relatively abundant, total generating capacity in the Australian electricity industry is dominated by large coal-fired power stations. Even though fuel usage varies from state to state (depending on the availability of natural energy resources), coal is the dominant fuel source, accounting for 80 percent of primary energy consumption ( Table 16 ). The state of Tasmania is the exception, where electricity generation is mostly fueled through hydroelectric power.

In the past, electricity generation in Australia was developed independently by the individual states on a need basis (the Australian Capital Territory, however, does not generate its own electricity). Total generation capacity varies among individual states and territories. For example, the states of Victoria, New South Wales, and Queensland account for a substantial majority of Australia's total electricity consumption. However, in the national electricity market, states will no longer supply electricity to customers directly in their respective states, but will participate in the national power pool. (See the section entitled "Creation of the National Electricity Market.")

The Australian electricity industry has implemented significant reforms in preparation for their eventual entry into the national electricity market. Although some states will not participate in the market, they have implemented reforms where possible to gain efficiencies to supply customers and generators. Each state government has made different arrangements (and adopted different time schedules) for separating the segments of their electricity industries for entrance into the national competitive market. The state of Victoria is the first and most advanced in its reform in the electricity sector compared to reform in the other states and the single territory (the Australian Capital Territory) that are participating in the national electricity market.

Victoria

In October 1993, the state of Victoria began its reform with the separation of the electricity system. The State Electricity Commission of Victoria was vertically separated into three segments: generation, distribution, and transmission. In 1994, only a year later, Victoria restructured its state-owned electricity industry further with the intention of privatizing it ( Figure 10 ). The generation sector was divided into 5 companies, and the Victorian Power Exchange was established to operate the wholesale power generation market. The former 29 electricity distribution companies were restructured into 5 companies.²⁸ The transmission sector was divided into two components: PowerNet Victoria owns the high voltage transmission grid network and was made responsible for its maintenance; and the Victorian Power Exchange was made responsible for pool operations and system dispatch. In addition, the Office of the Regulator General was created to promote competition in the generation and marketing sectors; to maintain an efficient and economic system; and to protect the rights of customers. ²⁹

Victoria permitted each of the five distribution companies to retain monopoly rights to supply power to customers in their respective geographic regions. However, in 1996 (in an attempt to introduce competition into what was still a state-owned system), large users (the contestable customers) were free to purchase electricity from any of the five distribution companies. The current monopolies that the five distribution companies have to supply electricity to noncontestable customers will be phased out by December 2000. In December 2000, all customers in Victoria will be contestable. ³⁰

In 1995, Victoria began the privatization of its electricity assets ( Table 17 ). Since launching its privatization program, the state has generated almost $16 billion in revenue, an amount which is mostly being used to repay state government debt.

Through the auction process, Victoria sold off all of its five electric power distribution companies (United Energy, Solaris Power, Eastern Energy, Powercor, and Citipower) in 1995 ( Table 17 ). Companies from the United States, and their consortia, led the way in purchasing these plants.

Victoria pursued a markedly different approach to privatizing its electricity industry than that undertaken in the United Kingdom. In contrast to the United Kingdom (where electricity assets were sold at prices set by the national government), Victoria conducted a series of staggered auctions of its five electricity distribution companies and its four generation companies being privatized. Furthermore, all of the distribution and generation companies were sold intact, and to other companies or consortia of companies. No restrictions were placed on foreign investors.

In the end, all of the newly-privatized Victorian electricity companies were, at least in part, purchased by U.S. and UK utilities. As a consequence, corporate control over these companies was concentrated in no more than a handful of companies, unlike in the United Kingdom where, at least initially, the new shareholders were exclusively portfolio investors. In all cases a premium was paid for shares in the newly-privatized Victorian electric companies. The Victorian treasury benefited fully from these premiums.

Interestingly, the pattern of the disposal of Victoria's electricity assets bears some resemblance to current electric utility restructurings in the United States. A case in point is the recently announced intention of New England Power (a wholly-owned subsidiary of New England Electric) to sell its electricity generation units intact to Pacific Gas and Electric. Apparently, maximum value was achieved via a transfer of corporate control to Pacific Gas and Electric. The divestiture could have been undertaken via a leveraged buyout, or via the creation of a new generation company and a distribution of shares in this company to New England Electric shareholders.

The first distribution company to be sold (United Energy) was purchased by UtiliCorp United (a U.S. company), and its Australian partners ³¹ for $1.2 billion.³² Initial bidders on the plant were Pacific Gas and Electric, (a U.S. utility), the French government-owned Electricite de France, and Scottish Power (a United Kingdom company). However, the latter two withdrew from the bidding process. ³³ The second distribution company, Solaris Power, was sold to Energy Initiatives (a subsidiary of General Public Utilities, a U.S. company) and the Australian Gas Light Company for $713 million ³⁴ plus an additional $110 million in franchise fees. ³⁵ Texas Utilities (a U.S. company) purchased Eastern Energy for $1.6 billion ³⁶ in November 1995. Two other groups (Pacific Gas and Electric and PacifiCorp, both U.S. companies), as well an Australian consortium bid on the plant. In November 1995, PacifiCorp won the bid for Powercor for $1.6 billion. The fifth distribution company, Citipower, was sold in January 1996 to Entergy (a U.S. company) for $1.2 billion. ³⁷

Between late 1992 and 1997, Victoria sold its four electric power generating plants ( Table 17 )). In December 1992, Victoria began its private sector involvement in the generation sector with the 51-percent sale of its Loy Yang B power station to the U.S.-based Edison International's Mission Energy Company for $2.4 billion, with the agreement that the government would purchase the station's electricity over the life of the plant. Almost five years later, in May of 1997, Edison Mission Energy purchased the remaining stake in the Loy Yang B power station for $66 million thus terminating Victoria's take-or-pay contract with the company. The trmination of this contract has enabled Victoria to further reduce its future state debt.³⁸

A second generation company, Yallourn-W, was sold in March 1996 to PowerGen PLC (of the United Kingdom) for $1.8 billion.³⁹ PowerGen PLC outbid several U.S. companies.⁴⁰ In August 1996, the Victorian government sold the Hazelwood coal-fired plant and coal mine for $1.9 billion to a group led by National Power PLC of the United Kingdom. National Power PLC purchased a 51.9-percent interest. Others in the consortium included U.S.-based PacifiCorp (a 19.9-percent interest), U.S.-based Destec (a 20-percent interest), and the Commonwealth Bank Group of Australia (an 8.2-percent interest).⁴¹

In May 1997, Victoria sold another power plant (the Loy Yang A coal-fired power station) and a coal mine. This was the largest energy asset privatization in Australian history. The Loy Yang A has the largest coal mine in Australia and is the lowest-cost electricity generator in Victoria, comprising 35 percent of the state's electric supply. ⁴² A group led by the U.S. company CMS Energy (50-percent interest) won the bid in May 1997 for $3.7 billion. Other partners in the consortium were NRG Energy (a subsidiary of Northern States Power of the United States) and Horizon Energy Australia, which each purchased a 25-percent interest. ⁴³ Other assets in Victoria scheduled for privatization include the Newport and Jeeralang gas-fired power plants, and Victoria's 29-percent interest in the Snowy Mountains Hydro-electric Scheme.⁴⁴ PowerNet Victoria Transmission, the owner of the state's high-voltage electricity transmission grid, is expected to be sold in late 1997.⁴⁵

Victoria also announced that it will privatize its state-owned gas utility. The utility will be separated into two or three distribution businesses and its retail sector will be divided into two or five businesses. The state's gas pipelines, Gas Transmission Company, will be sold as a single company.

New South Wales

In contrast to Victoria, New South Wales (the most populous of the Australian states ( Table 14 )) has not privatized its electricity industry. Instead, it unbundled the industry into corporatized state-owned entities. Reforms in New South Wales have focused on the separation of the Electricity Commission of New South Wales' generation and transmission corporations. In August 1991, the Electricity Commission of New South Wales was renamed Pacific Power and was restructured internally into six smaller business units. Pacific Power's total generating capacity is 11,512 megawatts, excluding the Snowy Mountains Hydro-electric Scheme's generation, and contributes 32 percent to Australia's generation capacity. In 1994, Pacific Power's electricity transmission network business unit was established as a separate legal entity. The Electricity Transmission Authority was separated from Pacific Power in February 1995 and was formed as a separate state-owned corporation now called Trans Grid ( Figure 11 ) . The management, operation, and maintenance of the state's high voltage transmission grid is the responsibility of TransGrid.⁴⁶ In October 1995, the previous 25 distribution boards were aggregated into six businesses and were later corporatized in March 1996 ( Table 18 ).

The New South Wales interim wholesale market began in March 1996 and became fully operational in May 1996. The market is regulated by the Independent Pricing and Regulatory Tribunal, and Transgrid operates the state's power pool. ⁴⁷ In July 1997, customers with energy consumption of 750 megawatts per year became eligible to choose their electricity marketer. This eligibility requirement brings the state in line with Victoria's eligibility requirements, which have existed since 1996.

The state government initially declared it would not privatize its electricity assets to compete in the national market but would continue to maintain ownership of electricity assets. However, in May 1997, the New South Wales treasurer, Michael Egan, recanted this decision and announced his intentions to privatize all of the state's electricity assets. This new decision is expected to face opposition within the state's ruling Labor Party as well as in the labor unions. The proposed privatization would generate an estimated $22 billion dollars in revenue,⁴⁸ which would be used to retire government debt. ⁴⁹ All of the assets would be auctioned off without restrictions excluding Pacific Power, which would be sold with a retained Australian majority ownership interest. ⁵⁰ So far, only three privately-owned projects have been initiated. In December 1995, Sithe Energies (a U.S.-based independent power producer which is 29-percent owned by the Japanese company Marubeni) and Broken Hill Proprietary (Australian-owned) began the construction of a 175-megawatt cogeneration plant at Smithfield (near Sydney, Australia), ⁵¹ with commercial operations to begin in 1997. ⁵² Energy Developments Limited is involved in a small-scale (4-megawatt) gas-fired power generation plant, and a proposed 90-megawatt coal steam methane power plant.⁵³

A consortium consisting of Air Liquide Australia Ltd, Itochu Corporation (a Japanese company), and Energy Australia (New South Wales' electricity distributor) was formed in 1995 to develop a 350-megawatt congeneration plant in Sydney. However, Energy Australia announced in 1997 that it would sell its interest in the project, citing that the company's long-term strategic objectives have changed due to its experience with the first stages of deregulation in the national electricity market. The company's 20-percent interest in the project will be sold to Itochu Corporation.⁵⁴

Australian Capital Territory

The Australian Capital Territory (ACT) consists of Canberra and a number of surrounding areas. The ACT corporatized ⁵⁵ its combined electricity and water utility company in July 1995 ( Table 18 ). This process included separating electricity regulation from the water regulatory function. The ACT does not generate its own electricity and must rely on imports from New South Wales and the Snowy Mountains Hydro-electric Scheme. In March 1996, the ACT began to participate in New South Wales' electricity market. In May 1997, the ACT began to operate in the national electricity market in conjunction with New South Wales and Victoria and will begin competition in electricity marketing in late 1997.⁵⁶

Queensland

In January 1995, the Queensland Electricity Commission was restructured and corporatized to form two new government corporations AUSTA Electric and the Queensland Transmission and Supply Corporation (QTSC). AUSTA Electric is responsible for electricity generation and QTSC is responsible for retail supply, distribution, and transmission. The QTSC has eight subsidiaries: the transmission section of the former Queensland Electricity Commission (Powerlink) and seven regional corporations in charge of distribution and marketing ( Table 18 ).⁵⁷

To further its commitment to the competitive national electricity market, the Queensland government plans to transform its monopolistic electricity industry into a competitive market by the end of 1997. AUSTA Electric has been split into three generating companies that will compete amongst themselves to supply the seven existing government electricity distributors. In addition, three new electricity marketing corporations will be created with operations to begin in July 1997. Currently, there is no physical electricity grid link between Queensland and the southern states; however, Queensland and New South Wales have announced that they will proceed with an interconnection between the two states by 2001.⁵⁸

Queensland began the privatization of its generation sector with the 37-percent equity sale of its Gladstone power station to a consortium led by Comalco (an Australian company) and Northern States Power (a U.S. company). Although there are no further plans to privatize electricity assets, the government will no longer control either electricity prices or AUSTA Electric's investments.⁵⁹ The Broken Hill Proprietary Company (an Australian company) began construction of a 105-megawatt gas-fired power station in 1994. ⁶⁰ By 1997, 30 percent of Queensland's generating capacity was owned by the private sector; that proportion is expected to increase as new power stations are constructed to meet expected electricity demand from 1998 through 2006.⁶¹ Energy Equity (an Australian company) has announced plans to build a gas- fired facility at Barcaldine. Australia Shell has started a feasibility study for the construction of a power station in Callide, Queensland.⁶² Also in 1996, Pacific Gas & Electric (a U.S. company) purchased Queensland's natural gas pipeline. AUSTA Electric is also considering additional supply options for new generating capacity. Proposals for the 1998-to-1999 time period include the recommissioning of the Collinsville and Callide-A plants; grid interconnection with the New South Wales transmission link; and construction of a 440-megawatt plant between the years 2000 to 2002. In the years 2003 to 2006, the state plans to build a power plant with generating capacity between 600 and 1,400 megawatts.⁶³

South Australia

South Australia accounts for 5.1 percent of Australia's total generating capacity ( Table 15 ). In 1995, the vertically-integrated state-owned utility, Electricity Trust of South Australia, was restructured and corporatized as ETSA Corporation ( Table 18 ). The corporation has four subsidiaries: ETSA Generation, responsible for generation; ETSA Transmission, responsible for transmission, system control, and system planning; ETSA Power, in charge of distribution and marketing; and ETSA Energy, responsible for gas trading.⁶⁴ In January 1997, ETSA Generation was separated from its parent company and became an independent government business (ETSA Generation was formerly a subsidiary of ETSA Corporation).⁶⁵ South Australia is scheduled to participate in the national electricity market in 1998.⁶⁶

Western Australia

Western Australia accounts for 7.6 percent of Australia's generating capacity ( Table 15 ). In January 1995, the vertically-integrated state-owned utility, State Electricity Commission of Western Australia, was divided into two independent electricity and gas corporations, trading as Western Power and Alinta Gas, respectively ( Table 18 ). Both corporations are currently state-owned. However, the Western Australia government has now decided to permit foreign investment in independent electricity generation, separate and apart from the Western Power and Alinta Gas operations. In 1995, Edison International (a U.S. company), through its subsi- diary Mission Energy, began a project to build a $111-million power plant.⁶⁷

Like Queensland, Western Australia is also privatizing other energy assets. Western Australia has announced its intention to privatize its gas pipelines. The CMS Gas Transmission Storage Company (gas pipeline), a subsidiary of CMS Energy (a U.S. company), will purchase a 100-percent interest in the West Australia Natural Gas (WANG) Pipeline near Perth, Australia. In addition, the company will purchase the Western Australia petroleum assets operated by Chevron, Texaco, Mobil and Shell.⁶⁸

Tasmania

The Hydro-electric Commission of Tasmania (HEC) passed legislation in June 1995 to allow the entry of new participants and extend customer choice in the industry ( Table 18 ) . The HEC remains a vertically-integrated, state-owned electricity business with separately organized generation, transmission and distribution. A 1993 feasibility study concluded that while it was technically possible to construct a subsea-link between the states, the project would not be economically viable until the year 2000.⁶⁹ In April 1997, the government announced intentions to introduce retail competition in its electricity industry and to sell some of its equity interest.⁷⁰

Snowy Mountains Hydro-electric Scheme

The Snowy Mountains Hydro-electric Scheme is a cooperative venture between the Australian Commonwealth government, New South Wales, and Victoria. It represents a vital part of both Victoria's and New South Wales' electricity supply arrangements. The Scheme sells power to the central government of Australia and to the electric distributors in the states of New South Wales and Victoria. It has a generating capacity of 3,740 megawatts, representing over 10 percent of Australia's capacity.

Under the national electricity market reforms, the Scheme will not compete with New South Wales and Victoria in generation. However, prior to the completion of the national electricity market, the Scheme will be corporatized. It will then be expected to sell electricity on the national grid in competition with other state and interstate generators.

File last modified: October 22, 1997

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