New South Wales Auditor-General Supports Power Sale

By Angela Macdonald-Smith

Aug. 21 (Bloomberg) -- The auditor-general of Australia's New South Wales voiced support for a plan by the state government to divest electricity-retailing and power-generation assets, removing a potential obstacle to the sale.

After reviewing the plan the auditor-general's office said today the strategy for transferring assets to the private sector appears appropriate for maximizing taxpayer value. Job guarantees last longer than previous sales of this kind, while protection for customers from price increases seem consistent with steps taken in other states or countries, it said.

State Premier Morris Iemma in June empowered the auditor- general to oversee the proposed sale or lease of power retailers and producers to win Opposition support for the move. The transfer of ownership, which is being opposed by labor unions, may raise A$10 billion ($8.7 billion), the state has estimated. Iemma said today he will proceed with the reform legislation.

The auditor-general's report ``removes one potential roadblock to the privatization process,'' Sajal Kishore, associate director of Asia-Pacific energy and utilities at Fitch Ratings, said in a statement. ``There still remain a number of factors which may have a negative impact on the final valuation of these electricity assets.''

The auditor-general's office today recommended some changes to the proposed timing of the sales, which the government has proposed to undertake sequentially through the end of 2009.

Reserve Price

Selling the generators and retailers at the same time would encourage new entrants and new investment into the market to promote competition, it said. Each transaction should have a reserve price, the report, posted on its Web site, shows.

The government in June proposed starting the sale process with Energy Australia's retail operations by the end of the year. That would be followed next year by the sale of the retail arm of Country Energy and the long-term lease of the Macquarie Generation and Delta Electricity power plants, then by an initial share offer in a company that combines the retail operations of Integral Energy with power producer Eraring Energy by the end of 2009, State Treasurer Michael Costa said.

Iemma said today the government will consider the auditor- general's recommendations, which shouldn't delay the process.

``New South Wales taxpayers can't afford for this process to be delayed any further, or the value of our assets will fall,'' Iemma said today in an e-mailed statement.

Carbon Effect

Still, the details of Australia's proposed emissions trading system, to start in 2010, will affect the valuation of the coal-fired power plants, Fitch said.

``Uncertainty over how the Carbon Pollution Reduction Scheme will affect the electricity generators' cash flows and the present state of credit markets are likely to affect the value of proceeds,'' Kishore said.

Overall investor appetite for the assets is also uncertain, Fitch said. Origin Energy Ltd., fighting a hostile takeover from BG Group Plc, AGL Energy Ltd. and CLP Holdings Ltd.'s TRUenergy Pty unit are likely to want to participate in the process, while International Power Plc will mostly be interested in the generation assets, it said.

Babcock & Brown Power's financial constraints may rule it out of the process, while Japanese and Chinese companies that already have stakes in Australian power assets may be interested, Fitch said.

The New South Wales Parliament should be recalled as soon as possible to pass the electricity reform legislation, industry lobby group Infrastructure Partnerships Australia said in a separate statement.

``The auditor-general's recommendations toward offering generators and retail businesses simultaneously are sensible, as is setting of a reserve price for the assets,'' Brendan Lyon, executive director of Infrastructure Partnerships, said in the statement. ``We only get to sell these assets once, so we have to ensure we get it right first time.''

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net