Market forces dampen sell-off euphoria

01 Apr 1999Archived News Energetics in the News

 

Energy privatisation, the foundation stone of the Kennett revolution that has reshaped the Victorian economy, appears likely to result in higher energy prices in coming years.

 

After price cuts following deregulation, the energy pricing wheel has turned with businesses facing rising power prices. Power bills for many companies are likely to rise above pre-privatisation levels. Prominent gas deregulation is also set to boost gas prices.

The $28 billion energy-sector sales program, which has seen the electricity and gas industries broken up and privatised, was at the core of a new minimalist vision of the role of government. It was the centrepiece of Treasurer Alan Stockdale's debt management policy, allowing him to reduce debt from $32 billion to $6 billion and interest payments from 14 per cent to 3 per cent of revenue.

Electricity reform will be complete in 2001, when markets for residential and small business users become "contestable" (able to choose which electricity retailer they want to use). But bigger businesses have been living with so-called contestability for more than three years.

The results are surprising. At first, competition delivered a windfall to business, with prices dropping as much as 35 to 40 per cent, according to the energy consultant Mark Searle of Energetics.

A survey conducted last year by the Australian Industry Group found that "the contestable market has been an outstanding success in NSW and Victoria", with 91 per cent of Victorian firms believing they were better off.

The cardboard recycler Visy Industries, a heavy electricity user, says it "gained substantial real-price reductions when contestability was introduced", which has enhanced the company's ability to operate in export markets. The paper manufacturer Amcor says that "in broad terms, energy costs have dropped".

The Shepparton-based SPC concurs, with the company spokesman, Ken Baxter, saying "it probably cut 20 per cent off our bill".

But the good times appear to be over with clear indications that prices are rising.

Mr Searle, who advises businesses on their energy needs, says there were two factors behind the initial drop. With residential and small business customers tied up in regulated supply arrangements until 2001, the electricity retailers had a guaranteed income that gave them confidence to slug it out in the corporate market.

And this, says Mr Searle, is what they have been doing. "Some were adopting the mentality of 'get the client at any cost'."

Newly privatised generators did the same in a market that was being opened to interstate competition, reducing prices from the producer end as well. As a result, electricity that had once sold for more than $30 a megawatt hour was selling for $16-18 a mW/h last year.

That pushed the industry into trouble, with the generator Loy Yang forced to capitalise an interest payment, and discounting policies by retailers "coming back to bite some of them very badly", Mr Searle says.

"That has changed the view of economics of the industry. The conventional wisdom a year ago was that any retailer would need a base of a million customers (to be viable). Now it has been pushed out to 1.5 or maybe two millions," he says.

  • The Age 15.9.99
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