HARD SELL FOR POWER ASSETS
9 July 2008
Elizabeth Knight
Government financial advisory jobs are not especially lucrative. But the selling of the NSW-owned power assets for the Treasurer, Michael Costa, will mean that investment banks Lazard and CSFB have to work very hard for their money.
Over the past week the focus of this challenge has been on the potential impact of the carbon emissions trading scheme that has been highlighted by the economist Ross Garnaut.
Since his report featuring the urgency of the scheme and emissions targets was released last week, the debate has reached fever pitch and is sorely testing the Rudd Government's resolve to stick with its election promises to have a scheme running by 2010.
Rudd is picking through a minefield, attempting to dodge bullets from unions, business and most particularly, Costa - all of which have a vested interest in watering down targets and stretching the timing of any emissions-related response to climate change.
Whether he is a true cynic or not, Costa has a lot at stake. He is desperate Rudd's actions do not devalue the power assets he wants to sell over the next 12 months.
And until a proper operating regime is designed by the Federal Government on how an emissions scheme will work, selling these assets will remain a nightmare.
In the first instance, the timing of a scheme is not set in stone, the pricing is to be determined - and neither do we know the extent to which increased costs to power companies can be passed on to the consumers.
Equally, a decision has not been made on whether emitters will be awarded subsidies. In other countries - especially in Europe - there has been plenty of compensation to companies affected by environmental mandates.
There have been estimates concerning the additional costs to consumers, but there will be much debate on whether this will reduce our energy use. Those attempting to maximise the price of the NSW power assets will argue that consumers will wear a bigger electricity bill and that even a 10 per cent increase in price will not alter patterns of use.
The elasticity of demand clearly changes with each product or service, but it is interesting to note the figures on traffic volume released yesterday by the road toll company Transurban for the quarter to June 30, 2008 (compared with the same period last year). These numbers showed that traffic volumes have held up on a series of roads - most of which are used by commuters - despite the rise in fuel prices. But to suggest that placing an emissions impost on power companies will not reduce their value to some extent is fanciful.
The aim is for consumers to use less carbon-producing energy. The scheme must increase the price of power to get that outcome and without compensation to the producers. This should put pressure on the earnings of power companies and therefore their value.
For Costa, it is easy to focus on the defects in Rudd's environmental policy - he may even be able to lobby to mitigate the effects in some way. But Costa and other owners of the infrastructure assets cannot change that these assets are simply not as valuable as they were a year ago, because the financial environment has changed.
A year ago the NSW Government was talking about pocketing $15 billion for privatising the power generators and retail assets. Not even Pollyanna would come near that number today. Financial engineers cannot buy these assets with cheap debt, gear them further and pay shareholders a massive dividend from the windfall, because in this expensive debt environment the numbers no longer stack up.
They are no longer especially attractive assets because shareholders have to receive their dividends out of good old-fashioned earnings - just like they did 10 years ago.
The assets won't have a great earnings growth trajectory - and depending on how the emissions scheme is structured, the earnings could well be under pressure.
The optimists are now focusing on a price of $10 billion for the NSW Government assets and there is every chance expectations will need to revised down again before Costa signs the contracts.
©008 Copyright John Fairfax Holdings Limited. www.smh.com.au
The Sydney Morning Herald
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