The proposed partial privatisation of the electricity distribution and transmission networks (Networks) in New South Wales announced on 10 June 2014 by the State Government of New South Wales (State) will, if completed, mark the final phase of the privatisation of the electricity sector in New South Wales. The privatisation of the Networks is contingent upon the current Government receiving a mandate at the State election in March, 2015.
The State Government of Queensland has also announced in September 2014 that it proposes to privatise not only the Queensland transmission and distribution networks, but also its generation and remaining retail assets, by way of long term lease subject to it receiving a mandate at the next State election (which may occur between March and June, 2015). This should also mark the final phase of the privatisation of the electricity sector in Queensland.
In this paper we highlight the significant issues that potential private sector investors will need to be aware of including those that will need to be addressed if the privatisations are to proceed. Whilst the focus here will be on New South Wales, the same issues will largely apply to Queensland with one fundamental difference as referred to below.
The Networks in New South Wales are currently 100% State owned and comprise of:
The State has stated that it intends to maintain an overall 51% ownership level across all four electricity businesses including maintaining 100% of Essential Energy. The shares that will be retained by the State will come under the guardianship of a new New South Wales Future Fund which will be a statutory asset fund with the potential to fund future liabilities of the State, and with a particular responsibility to protect the value of assets held by the State.
The State has also imposed four conditions for the partial privatisation which are stated to be designed to promote the public interest and address community concerns. These are:
A fundamental issue for investors is what is actually for sale. The State has not yet identified how it will apply the 51% retention of ownership in practice.
As a result it is not certain if investors will be able to obtain control of the Networks and this will clearly impact on any decision of investors to bid for the Networks. On this we must await further clarification from the State.
Two other factors that which may impact investors are:
The partial privatisation of the Networks will be effected by way of a 99 year lease of the Networks. This lease structure has been utilised before by the State in other privatisations. It has also been used (albeit with a 200 year lease) in the privatisation of the electricity distribution network in South Australia.
Enabling legislation will be required to be enacted by the State to facilitate the privatisation and to best achieve the Government’s objectives in an efficient and timely manner. The legislation is likely to be similar to the Electricity Generator Assets (Authorised Transactions) Act 2012 but dealing with the lease of the Networks. The Electricity Corporation (Restructuring and Disposal) Act 1999 of South Australia may also be used as a model on some aspects.
A likely structure for each Network may be:
The ultimate sale structure may vary but the underlying issues for investors will remain essentially the same in relation to the State retaining an ownership interest.
The key issues of the arrangements governing the shareholders of Lessee Co will include:
There is likely to be some tension between the desire of the State to provide comfort to the electorate about the control of the Networks and its role as a regulator and the requirements of investors that the Networks and their operation is de-politicised and run as a private sector business.
The Networks are heavily regulated under the National Electricity Law and the National Electricity Rules. The Rules are made by the Australian Energy Market Commission but enforced by the Australian Energy Regulatory (AER) with the potential for limited merits review to the Australian Competition Tribunal. How the regulatory framework determines the Networks’ returns will be a fundamental issue for investors to understand.
Given their monopoly status, the Networks must apply to the AER every five years to assess their terms and conditions of supply. The current AER determination (which was for a transitional regulatory control period for 1 year) expires on 30 June 2015 and the next revenue determination will apply for a regulatory control period from 1 July 2015 to 30 June 2019. The National Electricity Rules (in chapters 6 and 6A) set out the framework that the AER must apply in making its determinations for distribution and transmission networks.
The AER uses a building block model that accounts for a network’s operating and maintenance expenditure, capital expenditure, asset depreciation costs and taxation liabilities, and for a return on capital to determine a maximum allowable revenue over the regulatory control period.
Most of the core transmission or distribution services provided by the Networks are heavily regulated under the Rules. There are, however, other services such as metering that are able to be negotiated with customers within the framework provided by the Rules.
The significance of this issue has been highlighted by the draft revenue determinations recently released by the AER for the Networks. The draft determinations propose an overall reduction of allowable revenue by between 24% to 35% to address perceived “gold plating”. This reduction, if adopted, has been estimated to reduce retail electricity prices in New South Wales by as much a 10% for an average household or small business.
The AER will issue its final revenue determination for the regulatory control period for 2015 – 2019 on 30 April 2015 following further consultation with the Networks and the stakeholders. However it seems certain at this stage that the determination will be the subject of a limited merits review by the Australian Competition Tribunal; this will add up to another 6 months to the process. Thereafter the determination may be the subject of a judicial review with further resulting delays for up to another 6 months. In addition to the reduction in network revenue, which will follow as a consequence of the final determination, investors will also need to factor into any bid the 1% reduction that needs to be discounted off regulated prices for the regulatory control period (unless the Government agrees that this has been more than achieved by the AER’s determinations).
Investors may not have certainty therefore for a fundamental aspect of the Networks’ business prior to at least the first one or two privatisations being completed. The impact of this upon the sale proceeds that may be received by the State on any partial privatisation remains to be determined.
The partial privatisation of the Networks will be effected by a 99 year lease to Lessee Co. This structure should be reasonably familiar to investors and financiers and should not raise any insurmountable issues.
The key terms of each lease are likely to include the following:
Whilst not peculiar to the lease structure, two other significant issues that will need to be dealt with are:
The financing of the Networks will present challenges for the State, investors and financiers. However this should not be unique to the Networks. Some particular issues to consider at this stage are:
Whilst the issues for the privatisation of the transmission and distribution networks in Queensland will be similar to New South Wales, one fundamental difference is that in Queensland there will be a full privatisation. As such the complex issues relating to investors and the State being co-owners of the Networks will not arise in the case of the Queensland transmission and distribution network and the privatisation process will be more straightforward for investors. From an investor perspective, this may be a significant advantage over New South Wales. In relation to regulated returns, the same issues can be expected to apply in the case of Queensland. The AER will in due course be making determinations for the next regulatory control periods for Queensland (being 1 July 2015 – 30 June 2020 in the case of distribution and 1 July 2017 to 30 June 2022 in the case of transmission) and, subject to the outcome of any review of the AER’s determination for the Networks, it can be expected that the AER will take a similar approach here and significant reductions in allowable revenue will follow.
There is little doubt that the partial privatisation of the Networks will be an excellent opportunity for the State to invest in new infrastructure as outlined in Rebuilding NSW and also represents an excellent opportunity for the private sector to invest in one of the last remaining significant assets in the electricity sector on the eastern seaboard of Australia. As one commentator has stated: “it is the right thing to do for NSW”. The same may be said for Queensland.
 Mr Martin Ferguson, Infrastructure Partnerships Australia Reform Series, 21 November 2014.
The author would like to acknowledge the contribution of his colleagues to this article including his partner, Thomas Jones and Chelsea McClements (Overseas Legal Trainee, Slaughter and May).
The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.