Victoria may join Snowy Hydro sale - Business - Business - theage.com.au

THE process for the NSW Government's planned $3 billion privatisation of Snowy Hydro is gathering pace. A significant (but ultimately not critical) question is whether Victoria will be left behind.

NSW is committed to the sale of its 58 per cent of the corporatised Snowy Hydro and the Federal Government, which owns 13 per cent, announced yesterday it would also sell its stake into the float.

Victoria, with a 29 per cent interest potentially worth almost $900 million, has been equivocal about its attitude to the sale, citing concerns about the impact of the sale on environmental and agricultural flows. It hasn't, however, ruled out a sale. Its decision is said to be imminent, as is NSW's appointment of its advisers for the sale process.

The next 24 hours or so could see a flurry of action.

If Victoria opted out — the issue of environmental flows is highly political given that the independent MP, Craig Ingram, is opposed to the sale — it would complicate but not frustrate the privatisation.

Instead of offering 100 per cent of Snowy Hydro in a float, NSW would need to set up a new company to hold its 58 per cent interest, which becomes 71 per cent interest with the Commonwealth's announcement that it will sell into the process, in what would effectively be a joint venture with Victoria.

How that would work in practice — whether it would give Victoria leverage or leave it powerless — isn't clear given that the relationships between the existing stakeholders are governed by a complex shareholders' agreement.

What is clear is that the issue of how the flows within the Snowy scheme are managed is separate to the issue of Snowy Hydro's ownership, with an enforceable agreement between the three governments and the company that governs how the flows are managed. Snowy Hydro operates under a water licence issued by the NSW Government.

If the Victorian Government has any real concerns about the environmental or agricultural flows, it could use the leverage provided by the privatisation process to strengthen the arrangements with NSW and the Commonwealth. A clean sale of all of Snowy Hydro would be simpler and more attractive to investors, and far preferable for the company, than a partial sale. It would also raise more money for the governments than a compromised structure.

The problem for Victoria, if it decides to stay out of the sale process, is that it might well end up in exactly the same position that led NSW to the conclusion that the company should be privatised.

Snowy Hydro doesn't just operate the iconic Snowy Mountains Hydro-Electric Scheme. It has begun diversifying its operations, acquiring the Valley Power gas-fired generation plant in Victoria and building a 320 megawatt gas-fired peaking plant at Laverton North. It also owns an energy retailer, Red Energy.

NSW chose to sell its stake in Snowy Hydro after the company asked its shareholders to either contribute capital to finance its expansion or be diluted by capital raisings from external investors.

Snowy Hydro's expansion, and its ambitions to continue diversifying to both reduce its dependence on hydro capacity and give it more flexibility to match capacity to peak demand — hydro isn't necessarily the most flexible energy source, given the priority awarded to its other uses — has changed the character of the governments' position.

For NSW, with a state balance sheet that is stretched, it would be unpalatable to invest more taxpayer funds in Snowy Hydro so that the company can itself invest in Victorian gas-fired generators, or indeed in plants in South Australia or Queensland.

That may be an issue that Victoria would confront if it chose to soldier on alone — it might be called on to help underwrite Snowy Hydro's expansion plans elsewhere.

Certainly, the company has demonstrated that there isn't anything in its current arrangements with the governments that inhibits its ability to diversify.

A more significant issue, however, is that of risk. With Snowy Hydro investing heavily in gas-fired plants, looking to build a renewable energy business and planning to expand its fledgling retail operations, the risk profile of the business is evolving. The company is becoming more complex and increasingly engaging directly in competition with private sector entities.

Given the history of the energy sector, the governments would be uncomfortable about not only continuing to underwrite the financial requirements of Snow Hydro's expansion plans but the increased risks that flow from those plans.

If the water management issues are unaffected by the sale — or the sale provides an opportunity to strengthen the governments' ability to dictate the flows — the prospect of sharing $3 billion and ensuring a cessation of risk has to be appealing to all three of the shareholders.

Given the politics of energy privatisation in NSW, the decision to sell the Snowy Hydro stake was quite bold.

If the float is successful — and it ought to be, given that the company's output represents about three-quarters of all the renewable energy within the eastern mainland electricity grid and the recent sales of Southern Hydro and Pacific Hydro have shown the market's appetite for renewable energy — it will be interesting to see if it re-ignites the NSW electricity sector privatisation debate.

As the Victorian experience has shown, it is quite possible to regulate the power companies without owning them.

bartho@theage.com.au