Deal with it

Sometimes deals just have to be made.

O'Farrell would say that we need the $3 billion that the power generator sale will generate, and that we cannot afford the $6 billion in investment and upgrades that will be necessary in the future.

He's right, at least in part.  As I have explained before, O'Farrell has a big agenda, and that agenda requires cash.  Pennies (or, at least, billions) will have to be pinched.  Whether this is the way to do it (and, let's be fair, I could suggest a couple of alternatives) is another question.

The real story, however, is what O'Farrell gave away to make the deal.  The Shooters have been pushing for the right to hunt feral animals in national parks for a long time, and they knew full well that O'Farrell needs to get the generators sold.  So what better issue to demand a concession on?

Stock photo of O'Farrell looking annoyed, from here

After all, whilst the Shooters do sit on the same side of the political spectrum as O'Farrell, that doesn't mean that they need to give up opportunities for a bit of a sweetener for their pet issues.

Whether you agree with O'Farrells' decision or not (and I think we can assume that, all things being equal, he would rather not have had to make the deal he did) the sale of the power generators would be cheap at twice the price.

There are simply not enough people who care about this issue enough, in my opinion, to do him much political hurt. On the other side, this is something that the Shooters will LOVE - they will be trumpeting this success at the next election.

The online articles I have read today have almost universally broadcast the deal O'Farrell made with the Shooters, but it's a one-day story. Labor have bigger fish to fry, and it's unlikely that the complaints from the Greens will have much traction outside of Greens voters.

The view of one Greens staffer

This is politics.  Fortunately (in my opinion) we have checks and balances like the Upper House to, at least in theory, keep the power of the Premier in check.  Of course, whether you believe that those checks and balances have worked for the greater good in this case will depend on your political persuasion - but I'm pleased to see O'Farrell having to give up something to get what he wants.

That's the way our government is SUPPOSED to work - and, frankly, I'd like to see the minor parties (including the Greens) being a little more pushy about these things. With a bit of luck, we might get some good policy out of it.

But maybe not so much this time.

A Position of Power

Privitisation is, in many ways, one of the defining differences between the left and the right.

The right believes that governments are bad at running businesses, and wherever possible business should be left up to business.

The left believe that business are pretty good at screwing everyone possible if it means an extra dollar or two.

To some extent at least, both are right.

That's not meant to be a shameless attempt at fence sitting - my view that governments are pretty bad at running businesses.  Almost invariably a business run by government will be less efficient, often because of higher wage costs.

Privitisation almost always leads to lower wage bills, usually through a reduction in pay and conditions but often also because of redundancies. A service provided a business will therefore often be a lower quality service. It's little wonder that unions oppose privitisation almost as a reflex.

There is a middle ground somewhere - privitisation is not always right any more than it is always wrong.

The best known example of privitisation in Australia is Telstra.  The Howard government made a packet out of the sale (although not as much as they should have) that was spent on (mostly) tax cuts. It's not really fair to compare service in telecommunications over different decades, but the prevailing view is that the service provided by Telstra today is of a far lower quality than when it was a government asset.

Photo from the ABC

That actually provides a pretty neat seque to the discussion about electricity privitisation debate in NSW, for this reason: the Howard government sold not only the retailer but also the infrastructure - the phone lines themselves.

These days Telstra rents that same network to the other telecommunication companies, and is undoubtedly a more valuable company than it would be without that asset.  But the kerfuffle about the NBN shows, in part, the dangers of selling off infrastructure like a telephone network.

Before the last election Labor practically tore itself apart deciding what to do with the electricity network.  In the end, thanks to the Coalition opposing the deal, Labor was not able to secure the sale.  Iemma's quote summed up the situation quite neatly:  "The leader of the Opposition [O'Farrell] knows that the Government's approach is right. Yet for five minutes of political advantage he has displayed all the principles of an economic vandal."

Following from Iemma's demise, the Labor Party's position seemed firmly anti-privitisation.  In fact, O'Farrell's refusal to rule out privitisation was the reason for a particularly unpleasant ad leading up to the election:



O'Farrell repeatedly said that they would wait for the Tamberlin report, which I have written about here.

The GenTrader deal never really made any sense, and in my view it is sensible in principle for the retailers to be sold.  Of course the price that can be obtained is a different story entirely, and that will be a question of fact at the appropriate time.

No doubt, however, we'll be plagued by a thousand different calculations of the "true value" of the asset and the actual realised amount, such that it will be almost impossible to perceive, through the fog of partisanship, whether the government has actually secured a good deal.

The controversial and interesting aspect of the Coalition cabinet's decision, however, is the fact that the decision has been made to keep the "poles and wires" in public hands.

This has important implications because the value of the sale is drastically reduced as a result. The poles and wires are far and away most the valuable part of the network, and selling the full network would result in a massive windfall for the government.

Nick Greiner has come out and said that the government has "absolutely, totally no alternative" to flogging the poles and wires if it wants to "move the needle" on infrastructure.

In fact, the Daily Terror had this on its front page earlier this week:

From this story

The Terror has also published this editorial that calls O'Farrell a "fencesitter".

The graphic abour really explains the Terror's point of view quite neatly - the assets should be sold so that the money can be spent. O'Farrell has made a lot of expensive promises, and we all know that the money has to come from somewhere.

The current political landscape makes it difficult for O'Farrell to borrow large amounts (although it would be interesting to see if the Terror pursued him for borrowing in the same way it has pursued the Federal Government).  Further, no one needs to think hard to remember what a sparkling success public-private partnershipshave been in this state.

It is not unreasonable to suggest that the poles and wires should be sold so that the money can be spent elsewhere.  The discussion then becomes opportunity cost - what is the better use of the government's money?

That is the nub of the discussion - by not selling the poles and wires the government is retaining its $20 billion odd investment in the power network.  If sold, the retailers would need to pay for access.  They will of course need to pay no matter who owns the wires, but at present the cash flows straight to the government.

John Robertson is claiming that power prices will rise as a result, and he is probably right.  Services provided by government usually increase in price and decrease in quality once sold.

But the Terror has hit on O'Farrell's problem - he has to find the money to pay for his promises.  If he wants to avoid borrowing (and presumably he does) then he needs to start selling things. Presumably this is why Mike Baird, Gladys Berejiklian, Greg Pearce, Pru Goward and Andrew Constance all argued for the full sale.

I hope for his sake that at that cabinet meeting he explained where he is going to find this money.  If he is going to be the Infrastructure Premier we all know he wants to be, he will need cash.

Power to the People

The Tamberlin Report has been released, and, suffice to say, it is a doozy.

It is long - some 264 pages, plus an executive summary, plus appendices.  I'm certainly not going to purport to summarise the whole thing.

What I do want to do is talking about a few of the issues that are or have been politically interesting:

• The value for money of the sale
• The resignation of the directors
• The proroguing of parliament and
• What happens next.

Value for money

It is incredibly hard to calculate the value for money that the state may or may not have received . Any conclusion rests on so many assumptions and caveats that there is no way there can be a definitive answer.

Do we include the cost of losing a AAA rating?  Do we factor in the future cost of upgrading the network?  And what exactly we comparing?

It's therefore unsurprising that we have seen parties with vested interests trying to push their perspective on a confused public. 

The goal of assessing the value for money was expressly listed in the terms of reference:

Indeed, an entire topic of the report is devoted to the issue:

The conclusion is that, broadly speaking, the deal was in the state's interests:

It is necessary to clarify a few of the issues above.

As you may recall, in 2008 the Iemma government decided to lease the power stations and sell the retailers.  This came after NSW Labor just about tore itself apart over the issue - so much so that it was one of the major causes of Morris Iemma's demise.

O'Farrell had tipped him over the edge by cannily/cynically (depending on your perspective) opposing the privatisation, despite the fact that most believed that it was what the Coalition actually wanted to do.

A privatisation as sought by Iemma would have required, as I understand it, legislative change.  This is why O'Farrell was able to stymie the move - Labor needed the Coalition's votes to get it through.  Without them, the sale as envisioned could not happen.

In those circumstances, if there was to be some privatisation then Labor needed another solution.  For various complicated reasons, what has been called the "GenTrader" option was this solution. 

It wasn't the ideal solution, but given the Coalition's position Labor's options were limited. The report has found that, in those circumstances, the price obtained was a fair one.

Resignations

The resignation of a number of the directors of the electricity generation companies was a major scandal. It served to tar the transactions - it was seen as being proof that the deal was bad for NSW.

Having now read Tamberlin's report, I certainly did not, until tonight, understand the actual reasons why the directors had resigned. It certainly puts a different spin on exactly what occurred.

There are 3 major electricity generation companies in NSW - all wholly owned by the state.  They are Macquarie Generation, Delta Electricity and Eraring Energy. Those corporations sit under the State Owned Corporations Act 1989. 

The report explains how the Act characterises the role of a State Owned Corporation:

Section 20N of the Act is important:

Without getting too bogged down in the detail, the directors were compelled by the Minister (Eric Roozendaal) to approve the sale.  Given that the Minister is (for present purposes) speaking for the shareholders of the company, the Directors were obliged to comply.

The problem, as I read the statements of the directors of Delta and Eraring who resigned, as quoted in the report, they were all of the opinion that the deal was not a good deal. Many used the word "moral" rather than "legal" in describing their decision to resign.

Their individual reasons bear reading, if you are interested, and can be found on pages 135-166 of the report.

In any event, history shows that those directors were very promptly replaced the transaction proceeded as intended by the government.

Proroguing of Parliament

The report does not have a great deal to say about this, which is unsurprising given that it lies outside the general ambit of the inquiry.

Given what the directors who resigned have subsequently said about the sale, the fact that parliament was prorogued is entirely unsurprising.

The report helpfully summarises events leading up to the proroguing:

What the report is clear about is that the directors who resigned were within their rights in not attending the Committee's hearing, given that Parliament had been prorogued.  There can be little doubt that the fact that they did not attend and give evidence spared the Labor government significant embarrassment in the lead-up to the election.

What Happens Next

The report cavasses a number of different options. 

In a discussion of the adoption of the GenTrader model (page 213), the report makes it clear that the best option would have been the original scheme as proposed by the Iemma government. In those circumstances, it unsurprising that the report dismisses the status quo as being undesirable.

However, the report also does not approve of unravelling the GenTrader arrangement, not least of all because of the damage that would do to the State's reputation.

The report favours the sale or lease the generators of electricity to "encourage private investment in baseload electricity generation in NSW."

The report also examines whether the transmission network and distribution networks should be sold.  Those two terms are defined in the executive summary:

The report reaches the following conclusion:

Conclusions

The final recommendations of the report are as follows:

Unsurprisingly, the report doesn't particularly assist either Labor or the Coalition.  It (at least partially) vindicates Labor actions and the GenTrader option by indicating that the only better option was blocked by the Coalition.

It suggests that privitisation of further elements of the electricity network would be a good thing.  This is good for the Coalition because I think most people believe that this is what the Coalition wants to do.  It is an awkward position for the Coalition because there will be a massive campaign against it - perhaps even a campaign to match the NSWinconsin protests earlier this year.

It would reinforce the perception that the Coalition is the party of big business, not the party of the individual. I'm not sure how many times the Coalition can reinforce that view without doing serious damage to their chances at the next election.

Having said that, the Coalition needs the cash from this sale.  They made a lot of infrastructure promises, and they need to fund them somehow.  This would seem like the most sensible source for those funds.

O'Farrell repeatedly (some might say famously) refused to rule out privatisation before the election.  It looks like this report might be the excuse he has been hoping for, and the route to the cash injection his promises desperately need.

Solar'd up the River

The people are angry, and they are marching.


The Carbon Tax rallies have been, to say the least, a sight to behold.  After major rallies in the capital cities and Canberra, there was apparently a rally in Rob Oakeshott's electorate in the last week.


Today a very different group gathered in Sydney - thousands, by some reports. 

A picture for today's rally, from http://www.abc.net.au/news/nsw/

This group has, whether for environmental or financial reasons, taken a very different position in the environmental debate.


This group has invested in solar panels.


They did so on the basis that, if their solar panels' power production exceeded their use, that they could "feed" the excess power back into the network and receive a rebate of 60c per kilowatt hour.


Many people (like Peter Rejto) ran the sums and decided that the rebate made it financially viable to invest in the panels.


But it all came crashing down last Friday (Friday the 13th, for those of you who, like me, notice and appreciate these things). 


Minister for Energy and Resources Chris Hartcher, who had announced a few weeks before that no new applications would be considered, announced last Friday that present participants who were receiving 60c per kilowatt hour would have their rate reduced to 40c per kilowatt hour.


Some of the home owners on the scheme were at the 60c rate, whilst others had signed up after the rate was reduced to 20c.  When the rate was reduced to 20c, those who had signed up at 60c got to keep that price.


Those on 20c will be unaffected by this change, but those on 60c are to have their rate reduced.


The wailing and gnashing of teeth has been deafening.


That said, the move would not have come as a shock to many people.


When the fee payable to new applicants was reduced to 20c Labor was still in power.  There was a small hoo-ha whether Keneally had advance knowledge of the change and managed to get her panels before it all took effect, but none of the participants could complain too much - those who got in early would still get the higher rate. 


The problem was that the scheme was massively popular - it seems that the government under-estimated the enthusiasm (or ability) of the public to invest now to save costs later.


It had been introduced by John Robertson (as the then Energy Minister). The budget for the scheme was $355 million, but the cost quickly sky-rocketed as people clambered aboard.  


The scheme's potential cost was quickly far too much for the government, and Labor has admitted (at least according to this Liberal Press release) that the scheme needed to be closed off.


From a policy perspective, however, the 60c rate was too high.  Way too high. The difficulty was that the 60c rate is enshrined in legislation.


I had no idea that there was actual legislation on this until I noticed a quote from today's rally,


John Kaye MLC said that the move was "semi-illegal".


I had a look around and discovered that we are blessed with the Electricity Supply (General) Regulation 2001.  If I have understood it correctly, regulation 104L does in fact prescribe the rate of 60c per kilowatt hour for those persons who connected before 28 October 2010.


Apparently Hartcher conceded that to make the change will require retrospective legislation (see here) although to me, based on a quick glance around the act it simply seems that they need to amend the legislation to reduce the rate.


It is strange that they would concede that the legislation is "retrospective", because whilst the intricacies of legislation are a mystery to most people, the words "retrospective legislation" are not.


One might have expected, when questioned on how the changes would be made, that Hartcher would give a long-winded, legal jargon heavy answer that provided nothing any journalist could understand, much less quote.


Having said that, whether the change is identified as "retrospective" is probably not going to matter to Joe Citizen who invested in solar panels intending to recoup his spending from feed-in tariffs.


There has also been a lot of talk about the Libs reneging on "contracts".  I don't have solar panels so I have no idea what kind of documentation you have to execute, but I suspect that whatever paper work was entered provides the government with an out.  


But in the political arena, again, a small print escape is not going to get anyone off your back in this kind of situation.


The letters page of the Herald has been pretty busy.  


Norman Arnott of Forestville said "If Mr O'Farrell and his team bring this change to law, they will, in my view destroy any credibility and trust I had in them when I voted for them on March 26 in both houses."


Landon Mangan of Umina Beach said "Unfashionable it may be to find shortcomings of the O'Farrell government, but proposed retrospective legislation on solar panel payments is breaking a contract, breaking faith, betraying a trust and costing me about $5000."


A few more creative letter writers suggests that the voters unilaterally reduce all fees payable to the State Government by 33% and see how that goes.


The real kicker, however, is that the NSW Liberals said they would not do this before the election.


I've had a pretty thorough Google at the issue, and I've been unable to find any sort of formal election policy announcement on the topic.  I can't find any record of O'Farrell, for example, promising not to reduce the rate.


What I have found, however, is this speech from Pru Goward, Liberal member for Goulburn.

Pru Goward.  Picture from the ABC

The speech is in reply to the second reading of the Electricity Supply Amendment (Solar Bonus Scheme) Bill 2010, which was the piece of legislation  that reduced the rate for new signups from 60c to 20c.


She goes on for a while (quite a while, in fact) about the inability of the Labor government to properly budget for the scheme, and then says this:

"We also understand that all existing participants must have their existing agreements honoured."


As if that wasn't enough, she really nails her colours to the mast in the next 2 sentences:


"This side of politics particularly understands the importance of retrospectivity. I want to be very clear on this point: A future O'Farrell-Stoner Government, a Liberal-Nationals Government, will also honour those agreements."


How stupid can you get?  


How stupid to make that promise then (given, and let's be honest, how many people would have known she had made that promise if the government hadn't broken it?).


How stupid to, after it has been said, come back round and change the price, and not think this line would be thrown back in your face by anyone with a vested interest.


How stupid not to simply keep paying the exorbitant rate, trumpet the amount to the media as a sign of your commitment to the environment, look good for honouring a bad deal you didn't strike, and simply blame Labor for the financial damage it is doing.


No wonder the people are marching.

Thirst for Power

The sale of New South Wales' power assets by the Labor government is, to say the least puzzling. The way in which it has been handled is even stranger, especially in light of present circumstances.


I think it is safe to assume that Labor as a whole has given up on any sort of meaningful victory on 26 March and is firmly focussed on preventing an absolute annihilation. If they manage to avoid an awful result then there is a chance of winning government back in 4 years time.


Given that, it seems incredibly odd that the government is rushing through the sale of these power assets at this time. It's more than a little hard to work out what they are trying to achieve.


The sale was always going to be unpopular. We all remember the chaos in 2008 when Costa and Iemma tried to force the sale through.


So, what are Labor doing? We know they expected trouble - that's why Keneally prorogued parliament on 22 December 2010.


Now the Upper House's report into the sale has come down more than a month before the election, and suffice to say it delivers a massive slap to the Labor government.


According to Rev Fred Nile, who chaired the committee, NSW could expect to receive, instead of the $5.3 billion figure that has been bandied about, only $600 to $700 million. The value for money is so bad that the report recommends that parts of the contract be rescinded to "allow the incoming government to reassess the future of the electricity industry in NSW."


The deal is due to be finalised on 1 March, exactly 3 days before the caretaker provisions kick in.


There can be little doubt that this deal will be raked over incessantly by the Coalition, and the media will quite rightly continue to write story after story about it - hammering home the perception that Labor are too stupid or too corrupt to run a state properly.


So, I come back to my original point - what are Labor playing at?


One theory is that perhaps there is some vested interest they are seeking to fulfil - a donor to satisfy. I've heard no such suggestion, and i presume that if some of the major players were donors we would have heard all about it.


Another theory is that Roozendaal is seeking to improve his chances of a cushy private sector job after the election. He qualifies for the parliamentary pension on 24 June 2011 and many expect him to quit not long after. Perhaps he sees completing this sale as a audition of sorts for the private sector.


On the other hand, maybe it's legacy. Someone near the top of NSW Labor sees this sale as being good for NSW and wants to make this sale the good thing that this government is remembered for.


Finally, maybe the idea is to give Labor the opportunity to attack O'Farrell on his prevarication about further privatisation - making the sale starts the conversation, and any time O'Farrell attacks on this point it reminds people that a Coalition government will probably sell of further assets. That said, it is difficult to see why it why it was necessary to make this sale to start that conversation.


When it's looked at holistically, it is very difficult to see how pushing this sale through has in any way improved Labor's position with the electorate. The unions are upset because they foresee job losses. The public have seen Labor mess up yet another major project. And O'Farrell has yet another bat to whack Labor around the head with (as if he needed another).


And all for what gain exactly? When the sale could simply have been delayed and left to O'Farrell to sort out?


It's all awfully odd.