The government of New South Wales has announced an intention to privatise its State owned electricity transmission and distribution network assets, and to use the proceeds to retire debt and fund new infrastructure projects.
The sell offs are subject to the outcome of upcoming elections in NSW, to be held to be held on 28 March 2015, in which the proposed privatisations will be contested. Preparations are currently underway to ensure that the sale processes can commence in a timely fashion following the election if the current Liberal government is re-elected. It has indicated that the State’s transmission network owner, TransGrid, will be the first of the NSW businesses to be leased, followed by the distribution businesses AusGrid and Endeavour Energy. The timing and sequencing of these subsequent sales is yet to be determined, but it is likely that the privatisation process will be undertaken over a period of about two years.
However, if the opposition Labor Party wins the NSW State election it has promised to reverse the current government’s privatisation policy. Such a change in policy occurred recently in Queensland following the election defeat earlier this year of the Liberal National Party government in that State, with the incoming Labor Party government immediately reversing the power sector privatisation policy of the previous government. Current polling suggests that it is less likely that the Labor Party will win the upcoming NSW election.
It is proposed to effect the privatisation by offering a 99 year lease of 49% of its network businesses, but the government has indicated that it may undertake one transaction by way of an IPO if market conditions change. The long term lease structure was employed by the South Australian government, when it privatised its network businesses 15 years ago. The structure was also proposed for the now aborted privatisations in Queensland. Taxation and stamp duty considerations will be paramount in determining the precise structure that the transactions will take.
The equity value of these network businesses is substantial, such that in most cases prospective bidders will need to form bidding consortia. Pension and infrastructure funds (both domestic and foreign), along with sovereign wealth funds and large offshore utilities, are likely to make up the majority of the bidders for the networks. The finance debt of the network businesses is also substantial, and is currently provided by the NSW State Treasury, so upon privatisation the debt of the businesses will need to be replaced.
There is a degree of regulatory uncertainty associated with these businesses. A recent draft determination of the Australian Energy Regulator proposed a significant reduction in the annual allowed revenues for the NSW networks. This draft determination is the subject of an ongoing consultation process, with the regulator’s final determination expected in April. It is likely that aspects of the final determination will be the subject of an appeal by the network businesses.
Recent market developments such as the uptake of solar panels and the prevalence of embedded or distributed generation projects also presents a degree of ‘stranded asset’ risk, particularly for the TransGrid assets.