BY ANTHONY BENBOW
PERTH — On October 10, 125,000 homes in Western Australia lost electricity when a computer fault caused the Collie power station to shut down for two-and-a-half hours. This followed widespread blackouts in the south-west area of the state in late September, caused by a generator failure at the Muja power station.
These were simply the latest in a string of incidents with WA's electricity supply which have fuelled public anger at the state Labor government's plans to "reform" Western Power, the government-owned electricity utility.
WA deputy premier and energy minister Eric Ripper will introduce his Electricity Corporations Bill into the state parliament in November. The legislation is based on a report prepared by the government-appointed Energy Reform Task Force (ERTF), whose brief was to promote competition in the electricity supply industry.
Western Power currently consists of the South West Interconnected System (SWIS) — which covers the Perth metropolitan area, the south-west corner, much of the wheatbelt and Kalgoorlie — and the North-West Interconnected System (NWIS), which covers the heavy industry in the Pilbara, roughly Karratha to Port Hedland.
All the remaining towns and centres, from small Kimberley communities through to major towns like Broome and Esperance, have their own local generating plants.
Revenue from the SWIS subsidises the cost of providing power to the other areas; last year's subsidy was almost $50 million. In addition, Western Power contributes a profit of around $200 million per year to general state government revenue.
Under the ERTF reforms, Western Power would be broken up into four 91×ÔÅÄÂÛ̳. One section, named Regional Power, would consist of the NWIS and all the regional stations. The SWIS would be split three ways — State Generation would take all the generating plants, State Networks all the transmission (large lines) and distribution (smaller lines) networks, and State Retail would cover metering and billing functions.
Private generating and retailing companies could then move into the market, competing with State Generation and State Retail.
State Networks would be overseen by network and system management to ensure access to the wires, and a wholesale electricity market would exist between the generators and the retailers.
Ripper claims the proposal to "desegregate" Western Power into four separate units will unleash a wave of economic benefits, but with none of the problems of electricity that have hit other areas of the world where similar reforms have been implemented.
The ERTF report claims that "average real retail electricity prices will be around 8.5% lower with reform". It claims that this price decrease "will be the key driver in boosting the economy's Gross State Product by up to $590 million per annum, and generating 3900 additional jobs".
It claims that electricity consumers will "benefit by up to $240 million per annum, and the greater competitiveness of the economy is estimated to increase exports up to $505 million per annum". This is despite the desegregation proposal costing around $70 million to implement.
Privatisation
So how can an electricity system be restructured to generate both lower prices for the consumer, and higher profits for the investor, while still delivering a reliable, quality service to all? The answer is, it can't.
While the four 91×ÔÅÄÂÛ̳ of Western Power will remain government-owned, their structure will change massively. The ERTF report defines them as "government business enterprises" and states that they must operate to make a profit, or "for a commercial return". The whole thrust of the changes is for future investment in the electricity infrastructure to come from the private sector. Far from ruling out priviatisation, Ripper is introducing the first stage of it.
The likely future effects of this are already evident in WA. Over the past few years, Western Power has been dealing more with the private sector for the provision of some generation and the contracting out of some work previously done in-house.
A recent Generation Status Review report reveals that Western Power will only have half the backup generating capacity it needs in 2004. It is also not clear how private companies will be persuaded to upgrade a lot of the ageing transmission and distribution infrastructure. In many rural areas, upgrades are needed. The estimated cost is $50 million.
The government's own figures put the lie to its claims the general public will benefit. The ERTF's economic benefit figures, cited above, are based on an October 2002 study conducted by the Allen Consulting group. However, Ripper is downplaying another study conducted at the same time by Deloitte Touche Tomatsu that shows electricity prices could rise as a result of desegregation.
Electricity prices
The experience of privatisation of public power utilities around the world is that prices rise for household consumers. The most recent example is South Australia, where prices have jumped by 25%.
The WA model is not immune from this — the proposed system is based on long-term contracts (not a "spot price" market like in SA), and generators are required to have excess capacity available for peaks of demand. However, long-term contracts on their own are not sufficient — there has to be a mechanism whereby electricity can be traded short-term to meet the requirements of competition, and the peaks of demand.
The ERTF report proposes an instrument called the Residual Trading Market, where electricity can be bought and sold to meet this demand. The RTM will operate like a spot market, but the report insists it be fixed "a day ahead", i.e., the bids to supply electricity must be finalised the day before supply.
This is to try to prevent power supply environments like those in SA, where the spot market only operates half an hour ahead of demand, and the price of electricity in heavy peaks can go from $20-40 per MWh to $10,000 per MWh!
However, under the WA government's proposed model, the start/finish times of the "day ahead" market are not specified. The ERTF report claims the RTM market will be "cleared", i.e., the bidding process will be closed "late in the day". So, all the generators could wait until "five minutes to midnight" before putting bids in, waiting to see how many wholesale/retail companies want electricity to sell — how and much the generator companies can push up the price. So price peaks are not ruled out.
As a counter to this, the ERTF report proposes a system where all electricity generator firms must have excess capacity, so supply always exceeds demand. However, the government's own consultants — Charles River and Associates — have pointed out that this is not likely to be the best "business model" as excess capacity will tend to keep prices — and profits — down, thus making it less attractive for companies to "invest" in power generation capacity.
Thus, under this model, the government will have to guarantee profits in order for companies to build generators.
There is also a plan to introduce "retail contestability" in the future, under which price restrictions are removed, retailers can charge what they like, and customers can "shop around" for the cheapest power supplier. In practice, this is likely to lead to residential customers paying more than business users.
The ERTF report is full of proposals, couched in terms of "encouraging competition", for reducing jobs in the electricity industry and eroding workers' conditions. An example is the report's proposed "ring-fencing" clauses — ostensibly aimed at preventing dominant players in the market (e.g., State Networks) from investing in, for example, generation companies, undercutting the "new" participants in the generation side of the industry. The main effect this will have is to ensure the new companies begin with wages, working conditions and training requirements that are not up to the standard at Western Power. (This is already evident with companies like State West Power, owned by Wesfarmers.)
Training is vital, particularly in the lines area, where the voltages are lethal. Currently, six years of training and on-the-job experience are required for a Western Power line worker. In the private sector, the training can be as little as six weeks and there are already cases of death and injury being suffered by private contractors working on lines.
The ERTF report does not detail the required safety and technical standard for future work. If training collapses, then future maintenance and operation of the system will be jeopardised.
From 91×ÔÅÄÂÛ̳ Weekly, October 22, 2003.
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