A goodly chunk of the future corporate profits from the NSW power sale are destined to wend their merry way to the Cayman Islands.
This is probably why the winning bidder – a consortium of Victorian power group Spark, asset manager Hastings and three offshore funds – could afford to stump up the heroic $10.3 billion to trump the Transgrid tender; they ain’t counting on paying much tax.
NSW Premier Mike Baird has sold the state’s electricity business, but there could be tax implications.
NSW Premier Mike Baird has sold the state’s electricity business, but there could be tax implications. Photo: Edwina Pickles
Ten billion is a terrific price, and it may well be that, should battery storage technology commercialise in the coming years and customers flee the grid, this may prove to be one of the greatest ever asset sales. Whether the benefits outweigh the pain on customer power bills in the medium term though is moot.
We don’t know a lot about the winning bidder. The government has disclosed the names of the buyers as “NSW Electricity Networks Assets Pty Ltd as trustee for NSW Electricity Networks Assets Trust and NSW Electricity Networks Operations Pty Ltd as trustee for NSW Electricity Networks Operations Trust”.
This group and their merchant bankers appear to be lining up a stapled security trust structure redolent of the devious Spark Infrastructure, which led the bid and has a big presence in the electricity markets of Victoria and South Australia.
Bearing in mind that Spark has had an almighty tonking from the Tax Office in recent years for its nefarious tax avoidance practices and that the duty of paying tax falls not to a trust but to the members of a trust, it is worth looking behind the buyers to their members and their domicile.
Searches of the corporate database show a NSW Electricity Networks Asset Holdings was registered earlier this month on November 12. Two of its five shareholders are based in the Cayman Islands: Tawreed Investments Ltd and Wren House Infrastructure Investments Assets II Ltd.
NSW Electricity Networks Operations Pty Ltd, registered on November 6, has one shareholder, NSW Electricity Networks Operations Holdings Pty Ltd.
Again, searches of the latter show the Caymans’ duo Wren House and Tawreed are two of the five shareholders. These two represent respectively the Abu Dhabi Investment Authority and the Kuwait Investment Authority, collectively 40 per cent of the consortium equity.
Transgrid chipped in $405 million to the state coffers last year, and seeing as its contribution is expected to fall this year, $10.3 billion is a first rate sale price. It represents 160 per cent of the “regulated asset base” (RAB).
Commercial operators, however, don’t fork out that kind of premium for kicks. What the price says is that, not only does the Australo/Cayman plan on paying little tax, but that they are expecting favourable treatment from electricity price regulators.
Have any promises been made in this regard? It’s hard to know but the power industry is famous for “gaming” its regulators.
Under the DORC (depreciated optimised replacement cost) formula for valuing assets, energy companies value their assets at “replacement cost” rather than at their actual cost – that is the cost it might take to replace it rather than the cost that it actually cost.
The upshot for customers is that they are effectively, in many cases, being billed again for something for which they have already paid. In other words it is eminently rortable and perennially rorted.
Further, the heat is now on Spark and co, having stumped up such a lavish offer, to make a decent return. Upon news of the deal, Macquarie and Citi both downgraded their share market valuations.
Spark will pay $751 million for its 15 per cent stake and is now raising $405 million in equity to fund it. The market values Spark at 1.3 times its regulated asset base but it is paying 1.6 times for Transgrid’s RAB.
According to Macquarie, which was an underbidder for the 99-year lease of Transgrid, Spark’s method of financing means that net debt as a percentage of the regulated asset base is 110 per cent. There is a tax aspect to this; the extreme leverage means any profits Spark makes from Transgrid will be soaked up in finance charges on the big borrowings before tax is paid.
Electricity prices doubled in the past seven years as the network operators “gold-plated” their networks (they get paid for how much they spend, and they spent a lot). That spending went directly onto customer power bills.
In the wake of the gold-plating bonanza, the Australian Energy Regulator (AER) did the right thing by consumers this year and cut prices for the present regulatory period. Having stood up to the network giants however, the network giants promptly stood over the regulators and appealed the decision.
A courtroom swollen with 40 lawyers arguing for higher bills for a three-week hearing earlier this year is rumoured to put the cost of this stoush at $90 million. Such an orgy of pettifogging is unlikely to gird the loins of regulators to act in the public interest in future, particularly if they lose the case.
So don’t expect any significant drop in energy prices in the near future, at least until technology prevails and renewable energy and more efficient battery storage become a widespread commercial reality. This will happen. Unfortunately though, as more savvy and well-heeled consumers move off the grid, the network operators will have to spread their costs across a smaller customer base. This means poor people will be hit hardest, as usual.
Energy poverty is already a reality. Figures released last week by the AER showed 31,979 households were disconnected from electricity last financial year. The year before it was slightly higher at 32,940.
In lieu of the $10 billion sale the state will now forgo its annual dividends from Transgrid which amount to $2.4 billion since 2005.
An interesting aside is that, under the federal government’s asset recycling incentive program, NSW is due $1 billion from Canberra for the Transgrid sale. This is presumably money to replace the state dividends, and money the Feds might have expected to have got back from corporate income tax. Yet the tricky and highly leveraged trust structure devised by the Australo/Cayman consortium suggests they will be lucky to get much at all.