When the State Electricity Commission of Victoria was broken up and sold for $25 billion in the early 1990s it was hailed as a master stroke by the financial establishment, who made a fortune from commissions and fees because the mainly foreign investors paid well over the odds for the Latrobe generators and because the ''risks'' associated with running the now fragmented electricity supply industry would be transferred from the state government to the new private owners.
What a joke. In full-page advertisements in daily newspapers recently, TRUenergy, which operates the Yallourn W power station, claimed the CPRS as proposed would bring down the electricity sector in Victoria and families and businesses would pay the price.
Well, not all the price. According to TRUenergy, if the CPRS is eventually passed, ''over $8 billion is wiped from the balance sheets of private generators immediately''.
Wow! And this is after compensation in the form of free pollution permits has been increased 50 per cent as a result of the negotiations between the Government and the Opposition. This is estimated to be worth some $2 billion to the three Latrobe Valley generators over 10 years on the basis that the cap on emissions is reduced by only 5 per cent and possibly worth twice this amount if the cap is reduced by 20 to 25 per cent. On top of this, generators are also offered government guarantees for any borrowings for loans in their highly geared companies, which might have to be rolled over during the next 10 years.
All this bounty led Greens leader Bob Brown to describe the amended CPRS accurately as a ''polluter's paradise'' but TRUenergy chief executive Richard Macindoe says this is not enough for the Yallourn generators because all their $8 billion equity will be wiped immediately the CPRS legislation is passed.
Bollocks. The written-down value of the six gigawatts of capacity of the four generator companies (Hazelwood 1.8Gw, Yallourn W 1.4Gw, and Loy Yang A&B 3Gw) is about $4 billion according to consultant and management educator John Legge, who worked as an engineer on the construction of the power stations in the 1960s. The SECV depreciated power stations over 25 years. The oldest and dirtiest stations, Hazelwood and Yallourn W, were written off years ago. The Loy Yang generators were put in place in stages from the 1980s and would have a residual value less than a third of construction costs.
The threat to close them is empty. If the generators failed to maintain the stations during the transitional period to cleaner electricity supply, the State Government has emergency powers that allow it to take over and run the assets.
But it wouldn't come to that. The politicians in Canberra have put together a CPRS that will give free pollution permits worth anything between $7 billion and $20 billion over 10 years, depending on whether the cap is reduced 5 per cent or somewhere up to 25 per cent following the eventual Kyoto Mark II agreement. Only a mug would give up the chance to get their hands on this cash flow.
The generators say they don't get the money unless the price of electricity rises. True. Macindoe said after the Government/Opposition deal was announced that the price of electricity would double in the next four to five years if the CPRS went ahead as planned. If that happens then the value of the free permits will more than double to $15 billion to $20 billion and the generators might then be worth $8 billion or more expressed as the present value of the stream of future earnings.
There are a number of scenarios that could bring this massive bonanza about, including bullying the government into generous long-term fixed contracts and converting the brown-coal generators to natural gas, which would reduce carbon dioxide emissions by 75 per cent and allow the generators to sell all their free permits. Under the CPRS rules, they can buy unlimited supplies of cheap, dodgy carbon offsets from Indonesia and PNG to avoid using any of their free permits to actually produce electricity.
The flawed CPRS should be replaced with a broad-based carbon tax. If it was set initially at $10 a tonne it would be hardly noticed, it would raise $5 billion a year and all the money could be spent on green infrastructure instead of the financial bubble if the CPRS goes ahead.