Kazakevitch, Gennadi; Goh, Sheau Yin --- "States of play - Electricity" [2006] MonashBusRw 44; (2006) 2(3) Monash Business Review 34

States of play
Electricity

Gennadi Kazakevitch, Sheau Yin Goh

An analysis of interstate competition in Australia’s wholesale electricity market reveals NSW’s positive financial performance is due more to government privileges than productivity improvements, write Gennadi Kazakevitch and Sheau Yin Goh.

The formation of Australia’s national electricity market (NEM) in 1998 brought together a whole range of competing generators with different structures, efficiencies and infrastructures. When the dust settled, Victoria and South Australia were privately-owned and NSW and Queensland state-owned.

To establish if there is neutrality in the NEM or if government-owned sectors have an advantage over private ones this study evaluated and compared the performance of private and government-owned electricity sectors across a range of common comparative performance measurement tools including ratios and growth indices. It also examined earnings before interest and tax (EBIT), operating profit before tax (OPBT), return on equity (ROE) and return on assets (ROA).

Specific comparison between Victoria and NSW electricity industries deserves special attention for three important reasons. First, they directly compete in different ownership structures; second, Victoria has Australia’s largest privately-owned generation capacity (8892 MW), and NSW has the biggest government-owned capacity (12,809 MW, excluding Snowy Hydro); and, finally, prices in each state are comparable.

The overall results indicate that privatisation in Victoria did not raise profits. In fact Victoria reportedly performed dismally in its EBIT, OPBT and ROA although more economically efficient compared with NSW, Queensland and, to a certain extent, SA. The privatised Victorian industry had positive growth in industry gross product per selected labour cost, electricity generated per employee, EBIT per employee and sales revenue per employee. It also demonstrated financial efficiency by having the highest EBIT per unit of electricity generated. However, ownership did have a differential impact on levels of government assistance, with NSW and Queensland getting higher government grants and lower interest rates than Victoria thus worsening Victoria’s financial performance, already plagued by low wholesale prices and assets bought at inflated prices.

Therefore, it is apparent NSW’s positive financial performance is due to government privileges rather than productivity improvements. Similarly, Victoria’s comparatively inferior financial performance is more of an ownership-related issue rather than an efficiency-related one.

In view of the findings discussed, a uniform ownership structure across the NEM member states is needed if we are to enjoy a level playing field.

State-by-state comparison, 1989/90 to 1996/97 Queensland ECONOMIC INDICATORS: % OF CHANGE (PER EMPLOYEE)* Electricity generated: 46.75% Earnings before interest and tax: 56.80% Sales revenue: 133.06% Earnings before interest and tax: 56.80% Sales revenue: 133.06% Sales revenue: 133.06% FINANCIAL INDICATORS OF THE GENERATION SECTOR: % OF CHANGE* Return on equity: -24.61% Return on asset: 100% Earnings before interest and tax: 49.96% Return on asset: 100% Earnings before interest and tax: 49.96% Earnings before interest and tax: 49.96% New South Wales ECONOMIC INDICATORS Electricity generated: 95.29% Earnings before interest and tax: 184.53% Sales revenue: 145.7% Earnings before interest and tax: 184.53% Sales revenue: 145.7% Sales revenue: 145.7% FINANCIAL INDICATORS Return on equity: -16.22% Return on asset: 253.85% Earnings before interest and tax: 38.64% Return on asset: 253.85% Earnings before interest and tax: 38.64% Earnings before interest and tax: 38.64% Victoria ECONOMIC INDICATORS Electricity generated: 142.18% Earnings before interest and tax: 284.05% Sales revenue: 565.98% Earnings before interest and tax: 284.05% Sales revenue: 565.98% Sales revenue: 565.98% FINANCIAL INDICATORS Return on equity: -61.24% Return on asset: -95.45% Earnings before interest and tax: 13.15% Return on asset: -95.45% Earnings before interest and tax: 13.15% Earnings before interest and tax: 13.15% South Australia ECONOMIC INDICATORS Electricity generated: 47.05% Earnings before interest and tax: 1024.9% Sales revenue: 419.46% Earnings before interest and tax: 1024.9% Sales revenue: 419.46% Sales revenue: 419.46% FINANCIAL INDICATORS Return on equity: 117.65% Return on asset: -116.67% Earnings before interest and tax: 440.23% Return on asset: -116.67% Earnings before interest and tax: 440.23% Earnings before interest and tax: 440.23% * ABS published information regarding electricity generated between the years 1990/91 and 1996/97 for Queensland and SA. Information for NSW and Victoria was published until 1997/98. A common time period, 1989/90 to 1996/97, was chosen to enable comparisons to be carried out.

State-by-state comparison 1989–2001

Index: one year = 100

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Public access: www.mbr.monash.edu/previous_issues.php (six month embargo applies)

Cite this article as

Kazakevitch, Gennadi; Yin Goh, Sheau. 'States of play'. Monash Business Review. 2006.; Monash University ePress: Victoria, Australia. http://www.epress.monash.edu.au/. : 34–35. DOI:10.2104/mbr06044

About the authors

Gennadi Kazakevitch

Dr Gennadi Kazakevitch is Senior Lecturer in Economics at Monash University. The areas of his research include market structures, deregulation, competition and economics of high technology and digital product markets.

Sheau Yin Goh

Sheau Yin Goh graduated from Monash University in 2004 with a First Class Honours degree in Business and Commerce. She is a Senior Executive in the Central Bank of Malaysia.