• EnergyAustralia chairman Graham Bradley sounds alarm about Snowy Hydro ownership
EnergyAustralia chairman Graham Bradley sounds alarm about Snowy Hydro ownership
13 Mar, 2018, No Comment

Summary: EnergyAustralia chairman Graham Bradley has raised the alarm about a potential threat to competition from a full federal government-owned Snowy Hydro amid suggestions that the government should require Snowy to sell its disruptive electricity retailing businesses.....

"The electricity retailing sector now faces a new competitor with deep pockets, namely the Commonwealth of Australia, which now owns two second-tier retailers, Lumo Energy and Red Energy," Mr Bradley said.

"The question being asked is how the Commonwealth might choose to intervene in the commercial decisions of Snowy now that it owns 100 per cent?"

Mr Bradley's comments put in sharp relief broader industry concerns about the increasingly powerful state-owned generator-retailer, which have crystallised with Canberra's recent $6 billion-plus buyout of the NSW and Victorian governments' stakes.

That move has put the ownership of a major clean energy generator and the country's fourth-biggest electricity retailer under its sole control. Snowy's influence over the generation market is only set to increase with the $4 billion-plus Snowy 2.0 storage project that would lift its capacity by 2000 megawatts.

Federal Energy Minister Josh Frydenberg insisted Snowy will continue to act as an independent commercial business.

"Snowy Hydro will continue to operate as it does now, providing energy and helping stabilise the grid," Mr Frydenberg said.

Snowy chief executive Paul Broad also rejected the suggestion of any government influence, noting that Snowy directors are subject to corporations law and so must act in the company's best interests.

He pointed to Snowy's track record of driving competition in electricity supply, supporting the competition watchdog's 2014 attempt to block AGL Energy's acquisition of Macquarie Generation.

"It's the reduction in competition, in our humble belief, that's been behind a lot of price rises and the more competition the better for consumers," he said. "Outside the three big guys, we're the most competitive to them. We are the ones that makes their life difficult."

Shared concern

Mr Broad suggested competitors were trying to force the sale of Lumo and Red because they want to buy the retailing businesses themselves.

But Mr Bradley questioned how industry could be assured that a future government would not take a different view and EA is far from alone in its concerns.

Grattan Institute's Tony Wood pointed to the example of the Queensland government directing Stanwell Corporation last year to take action to reduce wholesale prices and therefore prices for consumers, but also profits.

"We've seen the Queensland government do exactly what people are concerned about in a sense when they effectively directed their generators to reduce their profit and behave in a non-commercial way," he said.

"Whatever Josh says today doesn't alter the possibility that a future government may take a different view that they'd like to control what [Snowy] does."

The high valuation put on Snowy in the buyout has also raised eyebrows and prompted questions as to how that might play into future decision-making on policy.

The price tag equates to multiple between enterprise value and Ebitda of more than 10 times, compared to about eight for listed AGL Energy and about 7.6 for Origin Energy.

Snowy's long-life, clean energy generation portfolio justifies a higher multiple than AGL or Origin, while the valuation includes a premium for control that is absent in those other utilities, one source said. He also noted the Snowy multiple is based on historical earnings as opposed to future estimates for the listed players.

Conflicts of interest risk

Even so, the price has raised questions whether government will run Snowy to preserve that value or could take decisions for political reasons that may erode it.

"The Commonwealth has a strong reason to seek commercial returns from Snowy to justify the high earnings multiple paid to the states, but future governments may not feel so constrained," Mr Bradley said.

The head of junior retailer Powershop said the federal government's ownership of Snowy was just one of many issues that play into the outlook, including the design of the National Energy Guarantee and AGL Energy's Liddell closure.

"This is another one in that long list of things that has to be factored into any investment decision," said Powershop's Ed McManus.

"It's always possible that a government-owned entity would act with other forces rather than with economics and financial rationality.

"[But] if they were to behave in a financially irrational way, that's ultimately costing taxpayers because they won't be getting a return."

Grattan's Mr Wood said governments would have been better to privatise Snowy back in 2006.

"You've now got a federal government-owned generator-retailer in the market and the government has been very critical of these sorts of animals," he said.

"It seems to me to set up some conflicts of interest that would have been far better avoided."


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