Electricity Reform Abroad and U.S. Investment

Privatization and Reform Outcomes

Investment in Australia

The level of foreign investment in the Australian electricity industry has increased and is expected to continue to expand as reforms and privatization in the electricity industries continue.⁸⁰ The reforms aimed at developing fair and open competitive markets are leading to opportunities for private investment in the electric industry. In 1995, the direct investment position in Australia in the category "other industries" (of which electricity is the major part) almost tripled from the prior year's level partly due to the acquisition of Australian electricity assets.⁸¹ (According to the U.S. Department of Commerce, direct investment involves the establishment of a new firm, the expansion of an existing firm, or the acquisition of a business enterprise or real property in which a foreign person or company obtains direct or indirect ownership of at least ten percent of controlling equity).⁸² The 1995 total direct investment position in Australia (by the United States and other countries) was $104.2 billion, a $13.1- billion increase from investment during the prior year ( Figure 12 ).⁸³ Of this increase ($13.1 billion), the United States accounted for almost $5 billion and total direct investment has increased every year since 1988 ( Figure 13 ).

American companies' attraction to foreign investment in Australia can in part be traced to the passage of the 1992 Energy Policy Act in the United States, which, for the first time, permitted U.S. utilities to own an equity interest in foreign utilities.

The introduction of electricity reform in Australia has given U.S. companies (as well as companies from other countries) the opportunity to invest in an electricity system which has the potential for improved efficiency. In fact, some U.S. companies have stated that investments in Australia's electricity market would give them expertise in operating in a deregulated electricity market and therefore would give them an added advantage when deregulation begins in the United States.⁸⁴ Slow economic growth in the United States, Australia's low political risk, and their new regulatory climate for electricity are additional factors. ⁸⁵ Efficiency gains are already evident in New South Wales and Victoria, the two states with the greatest degree of reform and privatization.

Prices, Labor Productivity and Customer Service

In February 1997, the New South Wales Independent Pricing and Regulatory Tribunal reported that wholesale electricity prices in Australia have steadily decreased since 1993, representing a 32-percent drop in real terms over a four-year period.⁸⁶ Victoria has also realized a decline in electricity prices of 6 percent as well as improvements in service quality. Due to continued improvements in labor productivity between the years of 1991 and 1995, returns on assets have also increased. The labor productivity increases have, in particular, been attributed to Victoria's reform and privatization efforts.⁸⁷

An Australian Chamber of Manufacturers' (ACM) survey of its contestable customers (large end users) in Victoria reported that approximately 2,500 Victorian companies were eligible to enter the wholesale power market in 1996. The survey was developed to examine prices, customer satisfaction with service, and supply conditions in the market. Of the 800 contestable customers who were given the survey, the ACM had 312 respondents. Of the 312 respondents, about 78 percent of the respondents believed their negotiated electricity prices were cheaper compared to rates prior to the 1994 beginning of the Victorian wholesale power market. Only 10 percent believed they were worse off under the new arrangements. The average price reduction response per respondent was about 10 percent, with savings varying between 1 percent and 39 percent. While price was the major consideration for most customers when choosing a supplier, almost 33 percent of the contestable customers reported an improvement in service, while almost 64 percent reported no change. As for supply conditions, of the 312 respondents, 93 percent had negotiated a new contract subsequent to the 1994 reform. Thirty-five percent of the respondents who had negotiated a new distribution contract had also changed their electricity supplier.⁸⁸

In constructing its national electricity market reform, Australia plans to expand upon the UK model by large end users (contestable customers) to directly compete for generated power in the national electricity pool. This concept was tested (on a smaller scale) by allowing these customers to compete for power within the individual power pools of their own states (first in Victoria in 1994, and then in New South Wales in 1996).

If the results of the ACM survey of this type of customer (large end users) are considered to be representative of all of the large end users in Australia, several questions might arise. Why are the majority of these customers choosing to use the marketing services of a distributor to compete in the power pool on their behalf, instead of cutting out this "middleman" and directly competing for their own power needs themselves, as the electricity reform allows? The answer to this question is not entirely clear. It may be that the large end users need time to acquire the skills and gain the experience necessary to effectively operate in the competitive power pool process. It may also be that purchasing these services through contractual arrangements from a distributor experienced in the power pool bidding process lowers the risk of pool competition for a relatively small charge. Perhaps purchasing these services is simply more convenient. Or, it is possible that this trend (of large end users retaining distributors to compete for power on their behalf) is transitory, and that more and more of these customers will compete in the power pool as they acquire the necessary skills to do so. As the national electricity market in Australia matures, the nature of the relationship between "middleman" distributors/marketers and large end users requiring power from the national pool may become more apparent.

File last modified: October 22, 1997

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