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Australia: Open Arms, Open Access, and the Outback

Fortnightly Magazine - June 15 1996

U.S. utilities find

a wealth of opportunity

down under.Australia.

It drew more than $7 billion in investment from U.S. electric utility subsidiaries at the end of 1995. Ongoing privatization will likely draw billions more.

Five electric distribution companies and a generating company have been sold in Australia's southeastern State of Victoria, and four more generating companies are expected to go on the block. Unregulated subsidiaries of U.S. utilities already own or have interest in Victoria's five distribution companies, or "distcos."

And then there are several smaller investments: Northern States Power's NRG Energy, Inc.'s share of the $100-million recommissioning of a Queensland power station; Southern California Edison Corp.'s purchase, via Mission Energy Co., of a 51-percent stake in a Victoria power station for $1.1 billion; TransAlta Energy Corp.'s $39-million joint venture to build a western Australian power plant.

Other Australian states, such as Queensland, also are privatizing. Five of the country's six states are expected to move toward a National Electricity Market grid, although four aren't now connected. Sometime after 1997, however, power will be traded in a pool or through a series of regional interconnections.

What's the attraction for American utilities?

"It is perhaps the most attractive regulatory climate for the kind of transition that the electric energy industry is making that I see anywhere," says Frederick W. Buckman, president and CEO of PacifiCorp.

H. Jarrell Gibbs, president of Texas Utilities Electric, whose company, like PacifiCorp, also invested in an Australian distco, says slow U.S. growth and Australian privatization are fortuitous: "Otherwise, you would have electric utilities in the United States looking for ways to grow without any ways to grow."

The march to Australia matches a trend in overseas utility investment in general, notes Barry M. Abramson, a Prudential Securities analyst. In countries with little political risk, companies will readily invest. "Many of these markets are restructured and deregulated, similar to how the United States might look in a few years: generation separated from transmission, which is separated from distribution," he says. "They want to learn. They want to diversify risks."

According to Prudential Securities, recent Australian acquisitions have garnered $1.5 to $2 billion each, 10 times the typical foreign investment for the period 1992-94.

Another attraction, according to Prudential, is that Australia is slowly allowing residential customers to choose electric suppliers. In addition, Australia has a price-cap system; therefore, operators have incentives to cut costs and increase efficiencies (em unlike in the United States, where rate-of-return regulation still reigns.

What do the Aussies think about the American "invasion"?

For one, they say, privatization and competition already have meant lower prices (em up to 20 percent in some cases. But they have brought closer scrutiny of distco reliability.

"Routine outages are suddenly news," says Keith Orchison of the Electricity Supply Association of Australia, Ltd. (ESA), a trade group. "Whereas two or three years ago, you were lucky if you found a paragraph at the back pages of the morning newspaper, now it's more likely to be on the front pages. And on some occasions, it's actually the front page lead."