O’Farrell’s big challenge


There’s a certain macabre fascination to watching the NSW ALP’s post-election recriminations, a bit like watching the aftermath of an horrific train smash.  However, it’s an essentially pointless exercise given that the size of the Coalition’s majority means that there isn’t an even slightly realistic scenario that would have Labor back in power in New South Wales inside 8 years at the very least.

The only useful questions revolve around what policies the O’Farrell government intends pursuing and, even more importantly, how it proposes to fund them. Troppo colleague Richard Green has been focused on those issues for some time, as evidenced by his excellent post recording and analysing an enterprising interview with (likely) incoming Liberal treasurer Mike Baird.  Judging from an article in The Australian only a few days ago, Baird continues to favour a financing scheme involving infrastructure bonds assisted by “incremental tax financing” rebates from increased stamp duty revenues generated by the infrastructure in question.  It’s an interesting idea.  Even more promisingly, Baird seems so far to have retained the scepticism Richard noted about the discredited vehicle of Public Private Partnerships for which NSW Labor became notorious.  Baird and O’Farrell also propose setting up Infrastructure NSW, which we can only hope will be a body with sharper regulatory teeth and greater independence than its federal equivalent created by Kevin Rudd.

However, even if Richard’s reservations about infrastructure bonds and tax increment financing prove unfounded, they’re unlikely to prove capable by themselves of underpinning more than a small proportion of the massive public infrastructure backlog which is just about the only lasting legacy of the failed Labor government (apart from a successful Sydney Olympics early in its 16 year term in government).  The central challenge for O’Farrell, Baird and the NSW Coalition is to find an economically and electorally sustainable means of financing these huge public expenditures that is also consistent with Liberal principles.  The Libs certainly won’t get away for long with Labor’s hackneyed recipe of empty spin and dressing up in hard hats to provide a televisual illusion of growth and development.  NSW voters’ bullshit detectors are well developed after 16 years of training from local Labor spin doctors.

If (as I hope) PPPs are no longer a favoured vehicle, there’s always the option of increased public borrowing.  However, as Richard Green reported, Baird is understandably wary of going far down that road, in part because of the perceived danger to NSW’s AAA credit rating.  Despite Nicholas Gruen’s regular arguments in favour of increased public borrowing to fund productive infrastructure, and the simplistic Costello-induced public aversion to government debt, I’m rather persuaded by this observation from veteran Troppo commentator Derrida Derider:

John Quiggin has written several times (eg here) about the way governments and corporations are held to very different standards by the ratings agencies, and how this seriously distorts infrastructure financing. It makes PPPs viable that ought not to be and government projects unviable that ought to be.

More sophisticated governments that go in for PPPs know this, but it is a fact of life they’re powerless to change and so have to take into account. They would say don’t confuse “is” with “ought” – that government bond financing of infrastructure ought to be more favourable doesn’t necessarily mean that it is.

If O’Farrell and Baird favour neither heavy reliance on PPPs nor major short-term increases in government debt, they are logically left with only 3 options: increased state taxes, large cuts in existing government spending, or asset sales.  It’s unlikely the Coalition will adopt the first of those to any significant extent.  They’ll almost certainly undertake a razor gang exercise early in the first term, but that isn’t a long-term recipe for funding infrastructure on the scale that is needed.

That leaves asset sales, but O’Farrell unwisely ruled out selling the remainder of the NSW electricity system in the wake of the Keneally’s government’s disgraceful and probably corrupt bargain basement sale in its dying days.  It’s almost impossible to see those sales as anything other than a ruthlessly cynical move to deny at any cost to the public interest O’Farrell’s access to a huge pot of privatisation proceeds that could fund the public infrastructure investment that Labor squibbed for an entire decade.  O’Farrell and Baird simply can’t afford to let Labor get away with it, and that doesn’t just mean using a royal commission to reveal the depth of iniquity.  They probably shouldn’t attempt to unwind the deals themselves for fear of inflaming business concerns about sovereign risk.  However, if the ABC’s Alan Kohler is right they don’t need to do any such thing:

But he needs to move fast – once the price of carbon reaches $30 a tonne, black coal power generation starts to become non-viable, which is the point of the exercise.

The real value lies in the distribution assets – Energy Australia, Integral and Country Energy. Industry sources say these could raise more than $20 billion for NSW taxpayers. And then there’s the 58 per cent of Snowy Hydro owned by NSW, for which there would be keen bidding – say, another $5 billion.

All up O’Farrell could raise $30 billion for his state if he hadn’t wimped it during the campaign and promised not to privatise. He needs to quickly announce that the state’s finances are so bad that that promise can’t be kept.

I couldn’t agree more.  Unlike Labor, the Coalition isn’t hamstrung by owing fealty to the trade union movement, and it should capitalise on that strength while it can.  The combination of asserting (however dubiously) a “black hole” bequeathed by Labor and a royal commission showing graphically just how disgraceful the Labor asset sale really was, should allow O’Farrell to walk away from his ill-advised “no sale” promise with minimal damage.  It’s clearly the best policy response if “Juliar”-style reputational damage can be avoided or kept to a minimum.  With that sort of money plus local capital works funded from “tax increment”-subsidised infrastructure bonds, not to mention more competent NSW applications to Infrastructure Australia for federal funding appropriate to Australia’s erstwhile “premier state”, we could actually see New South Wales return to its position as Australia’s economic engine-room and Sydney become the exciting world city that it should be but sadly just isn’t after 16 years of squandered opportunities under what was, at least over the last five or six years and possibly longer, arguably the worst government Australia has even seen.1

  1. Although it’s a photo finish with WA’s Burke government and Queensland’s Bjelke-Petersen regime. ~KP []

About Ken Parish

Ken Parish is a legal academic, with research areas in public law (constitutional and administrative law), civil procedure and teaching & learning theory and practice. He has been a legal academic for almost 20 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in the early 1990s.
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observa
observa
10 years ago

Perhaps you’re being a bit hard on NSW Labor re the price obtainable for NSW electricity assets, given the carbon tax genie is out of the bottle now. What would any prospective purchaser be thinking about a ‘fair’ price with the Greens in a coalition Govt in Canberra now? My personal view is NSW squibbed the issue of power privatisation in the past and has now missed the boat to the detriment of NSW taxpayers. That’s probably what prompted O’Farrell to oppose privatisation now, despite the natural attraction. Just make the best of a bad lot now.

John Quiggin
John Quiggin
10 years ago

O’Farrell could announce it like this

We promised not to do it (just like Labor) and we know it’s a bad idea (just like Labor) but we have to keep the financial markets happy (just like Labor)

That should make the voters really happy

Mobius Ecko
Mobius Ecko
10 years ago

All well and truly good but then O’Farrell should have done this before the election and not find excuses to break promises afterwards. Based on the attacks on Gillard/Juliar over just one lie that was rightly broken due to changed circumstances, the opposition and other movements stridently using O’Fibarrell would be justified, especially since O’Farrell has several times from both opposition and on the second day in government stated he would not use excuses as to why he can’t get things done and has stated many times he would not break promises.

Also O’Farrell in opposition over a long time attacked everything the government did, even the rare good things. In that constant stream of attacks he inferred he would fix things, yet even before the election he started back tracking and setting up beds for future excuses for why he won’t meet all that he inferred or promised in opposition. Blaming the Federal government on funding is one of those beds and the state of the State finances, figures that he’s already cooked as his very first act in government, is another.

My last point is that infrastructure in NSW was running down before Labor got into power 16 years ago. I think Labor in its first term actually made a move to fixing some of it and then lost its way very badly.

O’Farrell will end up being a disappointment but as he has the dominant right wing MSM on side much of his failures and broken promises will be glossed over, just as the failures and broken promises that would have made headlines with the previous Labor governments have now been mostly underplayed in WA and Vic.

Patrick
Patrick
10 years ago

Observa, no-one’s being harsh, KP went light-touch. NSW electricity privatisation was the biggest f***-up in Australian politics this decade, and the biggest reason was the unions who couldn’t bear to face up to the 20th century, never mind this one.

KP, I don’t know that conversion is very promising, I suspect that about the only thing which retains its value is the concrete bed (a few tens of millions of it, but not a big part of the few-several hundred million whole).

I too agree entirely with Alan Kohler, except that I think he should also unwind the Gentraders, compensate the winning bidders (just pay transaction costs and break fees for their lenders + interest, that will be enough imho) and then sell the stupid stations. Maybe set a reserve price and if you don’t get it (on the biggest coal stations for example) then keep them (and replace them with nuclear ones).

Finally I think you know exactly what Quiggin is saying, KP, he basically thinks that everything that the State happens to do it should continue to do because otherwise the sky will fall in.

Fred Argy
Fred Argy
10 years ago

Well argued piece.

I do not recall what I said back in 2008. I’m afraid I am very forgetful and am not close to the recent literature, as is John Quiggin.

But I have two concerns Ken. First we are being offered yet another NSW “black hole” which makes little sense: the estimates are subject to inevitably changing conditions (spread over four years) and the 4.5 billion deficit amounts to only 2 percent of the amount O’Farrell Government must spend on its activities over the next four years. It’s not a big deal.

Secondly, I accept that Derrida Derider has a point. With a long historical learning experience now behind them, governments might be able to transfer more responsibility to the private sector than in the past – as far as soundly-based economic infrastructure is involved.

But social infrastructure is different. Private ownership makes sense only if there is a genuine transfer of risk involved, if the private sector is clearly better at bearing and managing the risk than the public sector, if there is strong competitive bidding and the public interest can be safeguarded. These four conditions are hard to fulfill in practice.

It is possible that privatization of the grid or retail electricity outlets, where there is little monopoly, might be OK, but I still hope the borrowing option remains open at least for other parts of the social infrastructure.

Richard Tsukamasa Green
Richard Tsukamasa Green(@richard-green)
10 years ago

I am very skeptical that a downgrade of the credit rating would have significant effects on the ability to either source funding nor make it more expensive. The power of ratings agencies largely comes from two sources.
The first is the idea they have information about borrowers that potential lenders do not, which might be plausibly be true of obscure companies but is not true at all when it comes to large borrowers with well studied accounts such as governments.
The second is the quasi regulatory role that they were given by poorly considered regulations that required some institutions (such as pension funds) to invest a certain amount in certain graded investments. This was a large reason why it was so easy to get money into the dodgy mortgage backed securities in the US for instance. This was the main reason Baird gave me (he cited Japanese pension funds as an example) whilst acknowledging the AAA rating was “completely arbitrary”. These institutions know how hopeless the ratings agencies are, but they don’t have a choice but to follow them.

But there is a great deal of money floating around that is not governed under these rules. The post GFC environment makes accessing this funding easier, not harder, since it’s not going into stocks or corporate bonds, real estate and the propensity to save is greater. An aversion to risk after a crash makes traditionally safer borrowers even more attractive than before, and this does mean governments.

This is why the spread on say, US or Japanese bonds remains very low [fn1]. And their debt is growing due to recurrent expenses rather than one off investments which contribute to future growth like infrastructure, and has been growing for a long time and is coming on top of high levels of debt (relative to GDP). When Japan was downgraded earlier this year the yield on their bonds didn’t budge (not did it the other times it happened), so they’re not reliant on pension funds.

If these governments are having so little difficulties accessing low cost financing, then I can’t imagine a state government with a fraction of the debt to GDP (or GSP) ratio, where debt is lower than it was 16 years ago and where the budget has forecasted surpluses shouldn’t have much difficulty at all. NSW has defaulted before, but that was in a whacky era where the government was also afraid of two separate paramilitary groups and invasion by the Commonwealth. The Commonwealth covered the payments then, and the implicit guarantee from another very low debt government is still there, which assuages potential lenders. Other subnational governments (in Canada or Germany) aren’t badly off despite cut ratings.

It’d take a great deal to justify the assumption that a credit downgrade (if it did happen) would really have any appreciable impact on the ability to access credit or the price of it.

Ignoring market dynamics (monopoly power etc.) if privatisation of power brought in a price (less sales costs) that was greater than the future dividends discounted by the bond rate it would make sense (financially) to do so, but no plan has proffered one. If privatisation had happened as Carr suggested, the budget would be in worse shape. Until a high price is found, then it is a fiscally irresponsible option.

So there remains the political case, the idea that they will scare the voters if they lose the AAA rating. Note (as I pointed out above) the debt is lower than in 1995 and the budget is only noise off from balanced. No-one in voter land knows this, they’re assuming the opposite. It didn’t help Labor, but the infrastructure deficit that funded it harmed it. There’s no electoral dividend in the superficial fiscal responsibility that was in vogue during the past 15 years, at least at state level. Were the Libs to increase debt, the budget would be blamed on Labor anyway, and they’d still get the credit for whatever they built with the debt.

As I see it, both fiscal and political reality still favour debt financing.

[fn1] The outlying Eurozone countries are a special case.

Richard Tsukamasa Green
Richard Tsukamasa Green(@richard-green)
10 years ago

Cheers for the kind words though Ken!

derrida derider
derrida derider
10 years ago

observa, the effect of future carbon pricing on sale returns was one of the arguments made back in the 2008 NSW debate – including by me.

And yes, government debt is treated worse by banks and ratings agency than comparable private debt. That’s wrong, but decrying a wrong doesn’t change it – when governments do their sums they have to live with the figures as they are, not as they should be.

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
10 years ago

Ken, you talk of the “massive public infrastructure backlog which is just about the only lasting legacy of the failed Labor government.” Perhaps you think it’s massive. But in fact there was a lot of investment in infrastructure. My complaint is that it was at a much higher cost to the people and the state than it needed to be.

Moreover selling the electricity assets may be an OK thing to do but I suspect the only decent reason for doing so is micro-economic – to stop them being a soft touch for the unions gathered at the trough. And if that’s the case one should be prepared to take them.

The idea that by selling such assets you give yourself much leeway on infrastructure assets that don’t make a commercial return is mostly nonsense. After all if you ran those assets properly you’d make more money by keeping them than you’d save in interest by selling them.

Yet I see what is mostly fallacy repeated again and again as if selling a commercial asset enables you to fund the same amount of non-commercially returning infrastructure assets. And this doesn’t require any fingers wagging at Quiggin for wanting the ratings agencies to be what they are not. They understand this stuff perfectly well, as demonstrated by their fairly deliberate policy of ‘looking through’ PPPs at the sustainability of the state’s financial model.

NSW could more than double its borrowing giving it tens of billions to play with if it countenanced the move from AAA to AA which is still a strong rating. And over any decent period of time, by charging for what infrastructure they could charge for, like roads they could turn however much of that investment was of the relevant kind cash positive fairly quickly thus strengthening, not weakening their future financial position.

Tel
Tel
10 years ago

… but we have to keep the financial markets happy …

What does that actually mean (from the point of view of a government) ? Are governments answerable to voters, or are they answerable to someone else ?

One thing that NSW Labor can have a long, hard 8 year think about is this: governments are answerable to voters. To some extent, happy financial markets lead to happy voters, but frankly the average Bruce on Sydney streets isn’t checking credit rating agencies, and after the very public screw-ups over US mortgage securities, you have to wonder why anyone would pay attention to such ratings.

The real value lies in the distribution assets – Energy Australia, Integral and Country Energy.

Absolutely, but strange that no one stops to ask themselves why these are so profitable? There’s only one set of wires coming into my house, and they are owned by Integral Energy. Doesn’t matter what retailer I go to, I still pay Integral Energy to deliver.

That’s right, all distribution assets are monopoly assets, they can’t fail to be profitable because while both the generators and the retailers actively compete, the distributors compete with no one at all.

Frankly, the NSW government (of any colour) would need rocks in the head to sell the distribution assets.

derrida derider
derrida derider
10 years ago

I reckon O’Farrell is now in a position where he can just ignore inconvenient past promises. No voter familiar with their history will expect any NSW government to be honest anyway, and they’ll buy “the black hole means all bets are off” spiel because they’re happy to think the worst of the previous government.

So expect lots of privatisation.

John Quiggin
John Quiggin
10 years ago

As Nicholas says, the actual cost to NSW of inconsistent ratings agency policies is not great. To some extent, financial markets cancel the ratings agency effect by preferring government debt to comparably rated private debt and in any case, the premium for AA over AAA is only a fraction of a percentage point.

The big problem is not to treat the ratings agencies as if they are credible judges of economic performance.

DD, you’re right as far as O’Farrell is concerned. By the time the cost of breaking promises catches up with the Libs he will probably have moved on. But that doesn’t mean there won’t be a cost. At some point, either Labor will clean up its act and present a new face, or the Greens will expand to the point of being a credible alternative. When that happens “we’re no worse than the last lot” won’t be a winning line.

Patrick
Patrick
10 years ago

I actually thought, and maybe this is spectacularly naive of me, that it simply wasn’t necessary for the government to do it…the government’s role should be ensuring the regulatory framework that is in it’s citizens best interest.

observa
observa
10 years ago

Umm..it might well be a bit naive of you Patrick if this report is any guide-
http://www.news.com.au/breaking-news/childcare-struggling-to-meet-new-government-standards/story-e6frfku0-1226032709898
It’s all very well wanting to shift childcare workers more upmarket, but the dangers in doing so were pretty obvious. O’Farrell won’t be alone in inheriting that thorny conundrum from the Feds now. Another nasty analogous tradeoff for the States to deal with, compliments of the worst economic illiteracy in Canberra since the Whitlam Govt.

observa
observa
10 years ago

Hold your horses long suffering NSW taxpayers! Like NBN Mike, Bazza has just some mind-boggling eleventh hour tender prices for all those electricity assets-
http://www.telegraph.co.uk/finance/newsbysector/energy/7507015/France-ditches-carbon-tax-as-social-protests-mount.html

observa
observa
10 years ago

Anyone for that Plan B, third way, constitutional free market of mine chaps? ;)

conrad
conrad
10 years ago

Observa, not only is that carbon tax stuff from France old news (constantly recycled in the English news), but if I remember correctly, France produces about 1/5 the amount of carbon per citizen as Australia, so it’s hardly relevant (so they’ve implemented Abbott’s idea which Abbott would never implement anyway). It also wouldn’t very surprising if they get such a tax back sooner rather than later (I seem to remember there already is a system for trading other forms of air pollution, so it’s not like they are not used to this sort of thing), since the main reason it was scrapped is because it was a mess and potentially unlawful, not because people were against taxing carbon.

Incurious and Unread (aka Dave)
Incurious and Unread (aka Dave)
10 years ago

Ken,

I wouldn’t take the comments from Kohler as gospel. He is often seen not to have a clue on these matters.

I recall seeing some modelling on the CPRS (I haven’t got time to dig it out) that said black coal stations would lose about one third of their value. It is brown coal that is hammered under carbon pricing, not black coal.

To say that black coal stations have zero value when the carbon price is $30 is equivalent to saying that they should all close down. Given that black coal represents (from memory) around 70% of generation, that suggestion is clearly ludicruous.

Having said that, given the current uncertainty around carbon pricing and compensation, now would be the very worst time to contemplate privatising NSW generation.

Converting black coal stations to gas firing is technically straightforward. You just need to install new “burners” in the furnace and connect up a bulk gas supply. It is not something that requires technological innovation.

The reason that it is unlikely to be economic – compared with building new, gas-fired CCGT stations – is that the converted stations would be thermally inefficient compared to CCGTs, thus using more gas and emitting more carbon. They would also, of course, be much older.

John Quiggin
10 years ago

You did notice, observa that your hot news is a year old. Greg Hunt made the same mistake and I heard it being tweeted on Sky News. Obviously the denialosphere is running behind with its talking point of the day.

john walker
john walker
10 years ago

Have doubts about whether the public service ( and more generally the whole nation) has the skills base needed to actually build major infrastructure; we have a lot of micro-managers , MBAs, lawyers and so on… and stuff all in the way of heavy engineers . And if the SMH today is correct, even tradies that can do pretty basic maths/physics are also becoming a rare breed.

derrida derider
derrida derider
10 years ago

It’s true, Dave, that if the coal stations have zero value then they would close. But so long as they have any significant positive value at all they won’t close, because that means their revenues must exceed their operating costs. Given the very low operating costs of Australian coal stations (especially those extra-dirty Victorian brown coal ones) I’d be surprised if a $30 a tonne carbon price would be big enough to achieve this.

The capital costs are sunk costs. The fact that the owners may no longer be making enough operating profit to service the debt incurred from that capital expenditure just means they’ll be forced to sell the stations cheap – that is, to someone who doesn’t need such a debt burden and who can therefore make a quid from them. It won’t actually close down the stations.

Where the carbon price reduces coal emissions is by making FUTURE coal stations unviable because the capital cost is then not sunk but prospective.

Ken Parish
Ken Parish
10 years ago

“But in fact there was a lot of investment in infrastructure.”

Nowhere near enough, and I can’t recall speaking to anyone who disagrees (until now). It’s certainly true that a lot was done in the leadup to the 2000 Olympics (road, rail and other infrastructure) but very little since.

Neglect of hospitals (lots in country NSW, and especially Hornsby, RNSH and northern beaches hospitals in Sydney) is a recurrent issue.

On rail, to the best of my knowledge the only things Labor did (apart from the rail line to the Homebush Olympic site, and the airport-city link which again was a pre-Olympics initiative and is now poorly patronised because it’s privately run and fares are too expensive) was the Chatswood-Epping extension and some upgrading to the main western line to Parramatta. Failure to tackle either a north-western line or south-western urban extension (given that those are Sydney’s major growth areas) has caused large-scale road congestion and high voter resentment in outer urban seats.

On road, it’s mostly been PPP-funded tollways, in many cases fuelled by other road closures to force commuters to use the toll roads, and in some cases they failed financially anyway. The M5 is now an expensive parking lot for much of the day every weekday, and should have been widened years ago.

On both road and rail, the failure to create orbital links so people can conveniently commute across town without having to go into the CBD and out again is a major failure. Mind you, Melbourne is just about as bad in that respect (although the M3 and M80 freeways are a good start that has no Sydney equivalent to the best of my knowledge).

Finally, high speed rail links to Newcastle and Wollongong are badly needed, so that people can live there and viably commute to Sydney. That would go a long way to reducing congestion in Sydney itself and avoid further urban sprawl. The Victorians at least upgraded the Ballarat line to reasonably high speed status some years ago. Admittedly it’s a bit harder and more expensive to do that around Sydney because it’s hillier and with lots more estuaries to cross.

“I suspect the only decent reason for doing so is micro-economic – to stop them being a soft touch for the unions gathered at the trough.”

Having spent the last decade watching from close quarters universities attempt to adapt to provide services in a competitive market environment, I’m strongly of the view that public bureaucracies just aren’t well fitted for such things. Admittedly, the micro-managing stance of the federal government in higher education hasn’t helped, but that’s only a part of the story.

My view is that services are more often than not best provided wherever possible in a contestable environment where consumers have choice and providers are forced to adapt and be flexible and responsive to consumers. To a considerable extent the electricity market is well fitted to that model, and therefore I don’t see any sensible reason not to privatise it. The observation that “if you ran those assets properly you’d make more money by keeping them than you’d save in interest by selling them” is logically true, but assumes that government is actually likely to be capable of running them properly. Failing to stand up to the unions is only one aspect of that incapacity.

That said, the O’Farrell government certainly should not allow the grid/distribution network to be purchased by anyone who also operates a power station. That would simply duplicate the mistake the Howard government made with Telstra, by creating a quasi-monopoly wholesale distributor with a vested interest in screwing retail competitors.

john walker
john walker
10 years ago

Ken
They made a pretty good has of the freight line duplication, building earthworks and massive concrete infrastructure ,and then checking for buried service pipes is not a good look.

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
10 years ago

Thanks Ken, I don’t think I disagree with anything you’ve said. I’m not arguing for continued public ownership of any given electricity assets.

Incurious and Unread (aka Dave)
Incurious and Unread (aka Dave)
10 years ago

DD

“Where the carbon price reduces coal emissions is by making FUTURE coal stations unviable because the capital cost is then not sunk but prospective.”

Exactly right and I suspect that is what the $30/tonne carbon price that Kohler refers to achieves. Which would mean that, at that price, existing black coal stations are unaffected. It simply means that their future competitors are gas-fired rather than coal-fired.

A back of the envelope calculation: black coal avoidable cost is around $15/MWh, new entry CCGT cost is around $50/MWh, CCGT has about half the emissions intensity of black coal. So a carbon price of (50 – 15) / 0.5 = $70/tonne is needed for new CCGT to displace existing coal. Could be more or less depending upon relative fuel costs, but I would guess that it is in that ballpark.

Even with that carbon price, there would inevitably be a transition period, whilst the new CCGT was built and the new gas supply sourced, during which black coal would remain profitable.

Like I said, Kohler hasn’t got much of a clue.

Ken Parish
Ken Parish
10 years ago

Dave

You might be being a little unfair to Kohler. He says: “once the price of carbon reaches $30 a tonne, black coal power generation starts to become non-viable …”. That statement is consistent with what you’re arguing i.e. it “starts” to become non-viable in that at that point new power stations will be gas-fired rather than coal. Kohler does not state or imply that existing power stations become non-viable at that carbon price point.

john walker
john walker
10 years ago

What do you think of Ian Verrender’s view about the brown coal generators? :
“Both firms bought in between 1996 and 2000, using a sliver of equity and massive debt, when the issue of climate change was well known. Those loans are non-recourse. They don’t ricochet back to head office in the event of default. They are secured over the local assets. And should they fail, a vast syndicate of banks – including our four majors – will be heavily in the red.”

Incurious and Unread (aka Dave)
Incurious and Unread (aka Dave)
10 years ago

Ken,

OK, fair enough. But, either way, Kohler’s “he needs to move fast” on privatisation is the wrong conclusion. If NSW generation is soon to become non-viable, then privatisation is irrelevant. Alternatively, if it has long-term – albeit diminished – value under carbon pricing, it is better to wait for the dust to settle before privatising.

This is the problem I have with Kohler. He seems to be a shallow thinker.

Patrick
Patrick
10 years ago

JW, I think anyone in 1996 who seriously envisaged carbon trading/caps/etc would have been considered delusional. Can you remember how long ago 1996 was??

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
10 years ago

Patrick, IIRC 1996 was the year before Kyoto. I’m thinking that if we got a global agreement to reduce carbon emissions by ~5% indexed to 1990 emissions, or whatever it in late 1997 at Kyoto that there might have been some public discussion and government indications of something like it being considered seriously by 1996. The Rio Summit was 1992 and it foreshadowed the climate change convention.

Are you suggesting based on this that there’s a case for compensating capital owners who made decisions then? Are you seriously trying to tell me that this didn’t come up on a risk analysis when buying the assets? If so, can we at least discount them back to 1996 using the discount rates that ought to have been used for taking such a risk?

Incurious and Unread (aka Dave)
Incurious and Unread (aka Dave)
10 years ago

Patrick/Nicholas,

If anything, it was the purchasers who were delusional. They bought the Victorian power stations, before the National Electricity Market commenced, on the basis of predicted NEM prices of $40/MWh. Instead, prices plummeted to around $20/MWh and stayed there for 5 years. The buyers lost a bucketload of money.

I very much doubt – given such cavalier and optimistic projections – that the buyers gave future carbon pricing a second thought.

Incurious and Unread (aka Dave)
Incurious and Unread (aka Dave)
10 years ago

Ken @32,

Garnaut is concerned about the systemic financial risk associated with one or more generators becoming insolvent. Since generators and retailers all trade with one another, individual insolvency could potentially have the same sort of cascade impact on the Australian electricity market that Lehman et al had on the banking sector.

I think that risk is overstated, but it is the sole plausible economic argument for compensating generators.

Garnaut is throwing the generators a bone, when they were arguing for a steak. I don’t think they will be happy with it.

john walker
john walker
10 years ago

Actually Mr Verrender states that the purchases took place “between 1996 and 2000″ -What exactly dose he mean by ‘between’?
” .. when the issue of climate change was well known.”
I first read about climate and the threat of fossil carbon induced greenhouse when I was a teenager in the early 70s.

It also sounds like the good old combination of moral hazard and “psychic wealth”, why worry we will be out of here ,with the fees, before it all blows up – somebody else will pay the tab.

Nicholas Gruen
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Nicholas Gruen(@nicholas-gruen)
10 years ago

Winston Churchill on the NSW ALP Government.

When the situation was manageable it was neglected, and now that it is thoroughly out of hand, we apply too late the remedies which then might have effected a cure. There is nothing new in the story. It is as old as the Sibylline books. It falls into that immense dismal category of the fruitlessness of experience and the confirmed unteach¬ability of mankind. Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self preservation strikes its jarring gong these are the features which constitute the endless repetition of history.

Cited in James, Robert Rhodes, Churchill: A Study in Failure 1900-1939, Pelican, 1970.

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derrida derider
derrida derider
10 years ago

Yes, John, its absolutely true that these companies don’t deserve a red cent in compensation – they had every reason to expect something like this and the price they paid should have reflected it. Nor is there an economic efficency case for compensating them, precisely because the costs are sunk and will neither defer appropriate future investment nor cause existing plants to shut down and disrupt supply.

But of course, as Clint Eastwood remarked to Gene Hackmann before executing him, “deserve aint got nothing to do with it”. Political reality means these companies and their bankers won’t have to wear the consequences of their own misjudgements.

john walker
john walker
10 years ago

dear derider
“these companies and their bankers won’t have to wear the consequences of their own misjudgements.” is the phrase (and problem) of the age.

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