SNOWY SCHEME SALE by Max Talbot



We have as a contributor, and subscriber, one of the best resources of information about Snowy Hydro Ltd - a senior executrive with the company [OUR company] who is as outraged at this sale as we are.

I have had this information ready to publish and now is the time to release this valuable insight by Max Talbot.

Who Is Max Talbot you ask?

Max Talbot, had 43 years with electricity, 18 of those with Victorian Energy, 25 with Snowy Hydro. Appointed Executive Engineer in 1979, was involved in corporate agreements, including water licenses. He was promoted to Executive Officer Strategic Engineering of further planning Snowy Hydro assets, projecting for 20 years, from where he retired in October 2003.

SNOWY SCHEME SALE
Community Forum - Cooma, 20th April, 2006

Speaker Max Talbot

Tonight I wish to cover:

The Decision to sell the Snowy Scheme

The NSW Government was the first domino to fall announcing that it would sell its 58% share in Snowy Hydro Ltd (SHL) the operators of the Snowy Scheme, in December 2005. The Commonwealth (13% share) and Victorian (29% share) governments followed soon after.

The NSW's Government's justification for the sale was that Snowy Hydro needed additional capital to invest in the Schemes infrastructure and to grow the business otherwise it would "wither and die". However, I suspect NSW's decision was really about getting itself out of a looming budget deficit.

The Commonwealth and Victoria's justification was that as minority share holders they really had no choice and it was in the best interests of the State and Nation to sell - but why is it that these interests are never spelt out? With a combined share holding of 42% they only need a further 10% to have a controlling interest - OR - the Commonwealth with its massive budget surplus could buy out the States - so there always was a choice.

The sale is proceeding at breakneck speed without debate in either the NSW or Victorian Parliaments (not required under the terms of the corporatisation legislation) and with only token debate in the Federal Parliament.

In the Federal Parliament the motion to sell put forward by the Liberal/National Coalition was supported by Labor subject to an amendment. The amendment, apart from restating, water release requirements embodied in Snowy Hydro's Water Licence, contained motherhood statements regarding increased employment and Scheme maintenance practices.

The amendment is totally ineffective as it is in no way binding on Snowy Hydro.

The amendment was accepted on behalf of the Government by Gary Nairn, our local Representative who also supported the sale and commended the motion to sell to the House.

Snowy Hydro - The Business

Snowy Hydro Ltd, the corporatised entity that replaced the SMHEA commenced business in June 2002. It is a wholly Government owned unlisted corporation.

Snowy Hydro is a significant player in the National Electricity Market (NEM) providing peak energy and related services to the market and a range of risk management services (financial derivatives or insurance) to other market participants.

Snowy Hydro occupies a unique position in the NEM and is a profitable business with annual income of $450m per annum and net profit before tax of $200m.

It has a 75 year Water Licence that gives it rights over the collection, storage and release of the Snowy Schemes water. The central condition of the licence is that it must release minimum quantities of water annually for irrigation and the environment.

Truths, Half Truths and Spin True, BUT by virtue of the terms of the water licence, that is weighted towards use of water for electricity production and trading, Snowy Hydro has rights over the collection, storage and release of the Snowy Schemes water that is tantamount to ownership. The fact that Governments still own the water is purely academic as they have handed rights over its management to Snowy Hydro for the next 72 years.

  • You don't need to hold much water to back the insurance products.
 SPIN - If this is so then why is it that Snowy Hydro are storing excess water collected over its minimum release obligations in Lake Eucumbene year after year? And, why do they value this excess or 'above target' water so highly if it is not being stored to defend their trading position.
  • Snowy Hydro need additional capital to grow the business and to maintain the Schemes infrastructure.
 Questionable? Snowy Hydro has significant cash flow and has the capacity to maintain the schemes infrastructure and to grow, having retained earnings since corporatisation of $188m and having invested $500m in gas turbine plant. It is not a question of growth but rate of growth. As in all things in life it is prudent to hasten slowly.

Snowy Hydro occupies a unique position in the NEM with its products likely to be more sought after as the market grows - it is unlikely to wither and die.
  • The contention that anyone can build a few gas turbines and compete with Snowy Hydro.
 True, however the fact that other market participants haven't done so to date indicates to me that the costs associated with building and operating gas turbine plant makes them uncompetitive. Also, you would need more than a few gas turbines to compete with Snowy Hydro's large generating capacity.
  • A figure of $1.5 billion is needed to refurbish and modernise the Schemes infrastructure over the next 5 years.
Spin - Snowy Hydro's long term (20 year) Strategic Plan estimates that an average of $25m will be required annually to refurbish and modernise the Schemes infrastructure. That is $125m not $1.5 billion over the next 5 years and is well within Snowy Hydro's ability to finance from cash flow. I suspect the $1.5 billion includes the building of more gas turbine plant and/or acquisition of other market participants.
  • Snowy Hydros' headquarters will remain in Cooma and local employment will increase.
 SPIN - Any undertakings given by Politicians or present management are worthless as they are not binding on future owners.
  • That a shareholding cap (eg of 10 or 15%) will ensure that Snowy Hydro is not controlled by a foreign entity.
 SPIN - Will not hold water, (pardon the pun). The cap will only be in place for a short time (3-5 years) but not withstanding this relatively few institutional shareholders (most likely foreign) can gain control of the Company immediately.

I understand that a trade sale is still on the agenda - this would see the Snowy Scheme sold to the highest bidder - most likely a foreign multi-national.

  • That the Agreements developed to corporatise the Scheme are binding no matter who the owner is.
 TRUE, BUT are the Agreements adequate to protect the National interest in the hands of private enterprise for the next 72 years? Governments have not taken the time to satisfy themselves that they are.

  • Compensation is payable to Snowy Hydro for release of additional water (into the Snowy) whoever owns the Company.
TRUE, BUT when in government ownership any payments made to the Company eventually return to Governments, once in private hands, however, compensation payments flow to shareholders - most likely foreign.

I believe that Governments and Snowy Hydro are peddling a lot of spin and half truths - I haven't seen any compelling reasons to justify the sale.

WHY WE SHOULD BE CONCERNED

The Snowy Scheme is being sold:
  • With undue haste - 9 years to Corporatise 6 months to privatise.
  • Without consultation or Parliamentary debate (NSW/VIC).
  • Without a due diligence exercise into the adequacy or otherwise of the Corporatisation agreements to protect the National interest in the hands of private enterprise.
  • The Corporatisation agreements are marked 'Commercial in Confidence' when clearly they are not. Why is this so?
  • 70 Plus years is far too long to hand control of the Snowy Schemes water resource to private enterprise.
  • The licence cannot easily be revoked, nor can it be varied without paying millions of dollars to Snowy Hydro in compensation.
  • In a period of climate change - - Every drop of water is precious and in the future will be valued at many times what it is worth for electricity production - control over it should not be in private hands.

    - Future water use priorities cannot be foreseen - irrigation versus environment versus human consumption. The licence makes no provision for such changed water use priorities - e.g., growth in downstream communities.
  • Undertakings given by politicians and Snowy Hydro in the lead up to the sale are worthless if not embodied in the corporatisation agreements.
What can we expect from a privatised Snowy Hydro? This is an ill-conceived decision by Governments for which they should be condemned, made without forethought or an understanding of the long-term consequences - which are unknown.

The overriding issue that should concern all Australians is that Governments are handing control (tantamount to ownership) of 2500 giga litres annually of the Nations scarcest natural resource, water, to private enterprise the terms of which are embodied in a Water Licence that is current for the nest 72 years and which for all practical purposes cannot be amended. I believe they are selling our heritage for 30 pieces of silver.

SNOWY HYDRO SALE - AN UPDATE


From recent public statements (Terry Charlton Managing Director of Snowy Hydro on Channel 9 Business Sunday 16th April and John Della Bosca NSW Minister for Finance, etc., ABC Bega and Cooma Community Forum 20th April), it appears that NSW's justification for the sale hinges on Snowy Hydros' need for capital to grow and become an even more prominent player in the National Electricity Market.

Apart from anything else this should be of concern to Governments and the community as Snowy Hydro already has significant influence in the market and what we do not want as consumers is a monopoly provider in any segment of the market.

Snowy Hydro have acquired a gas turbine power station and are building another in Victoria and I believe are planning a third in NSW.

Their reasons for doing this are essentially two fold, I believe, firstly to reduce their derivative trading risk and secondly to discourage others from entering their market segment - so they are already increasing their influence and this can reasonably be expected to increase significantly once sold.

It is apparent from the abovementioned public statements that the original purpose of the Scheme, to provide water to the inland, is being studiously ignored and it is now purely an electricity business that must grow and increase its influence in the electricity market.

It is not necessary for Snowy Hydro to grow and increase its influence in the electricity market provided it continues to generate sufficient cash flow to maintain the Scheme's infrastructure to ensure that it has the capability to effectively manage the Schemes (and the Nations) Water resource in the National interest for the foreseeable future.

From 25 years developing maintenance and refurbishment strategies for the Scheme I am aware that it can be adequately operated, maintained and refurbished on an ongoing basis for significantly less than $200m per annum.

Snowy Hydro can easily achieve this level of earnings the arithmetic being relatively simple:

Lets get the focus of the debate back to the real issue and purpose of the Scheme - water resource management and drought security.

With respect to the latter the Scheme was designed to provide minimum releases through a repeat of the worst recorded drought sequence which commenced in 1936 and extended for 5 years and 4 months on the Murray and 9 years and 7 months on the Murrumbidgee. In drought years Scheme releases represent 33% and 60% of flows in the Murray and Murrumbidgee respectively.

This 'purpose' is being exposed to considerable risk by the sale due to inadequacies in the Water Licence and in regulatory oversight.

Having just read John Howards 'A road map to guide the nation into a bright future' (SMH April 21) I do not believe that the sale of Snowy Hydro and Governments actions surrounding the sale to date sit comfortably with many of the sentiments expressed.

For example, Gary Nairn, Federal Member for Eden-Monaro, when commenting on the motion passed at the Cooma Forum - that the Commonwealth buy out the States, stated that there is "no way that the Commonwealth is going to bail NSW out of its budgetry difficulties"

To my mind this statement conflicts with the Prime Ministers sentiments, (expressed in the abovementioned article), that governments at all levels of the Federation have an obligation to work together for the benefit of the community.

If you require to download this speech, we have it in a word document - click here