Briefing Note to Government on the Review of the Tasmanian Electricity Supply Industry

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1 Briefing Note to Government on the Review of the Tasmanian Electricity Supply Industry 1

2 Disclaimer Infrastructure Partnerships Australia provide no warranties and make no representations in relation to the information provided in this paper. It is not intended for and should not be relied upon by any third party and no responsibility is undertaken to any third party. Infrastructure Partnerships Australia 8 th Floor 8-10 Loftus Street Sydney NSW 2000 T (02) F (02) W For more information about this briefing note contact: Brendan Lyon Chief Executive Officer Infrastructure Partnerships Australia T (02) Jonathan Kennedy National Manager, Policy Infrastructure Partnerships Australia T (02) Ilya Zak Policy Officer Infrastructure Partnerships Australia T (02)

3 About Infrastructure Partnerships Australia Infrastructure Partnerships Australia is the nation s peak infrastructure body. Our mission is to advocate the best solutions to Australia s infrastructure challenges, equipping the nation with the infrastructure assets and services needed to secure enduring economic growth and key social objectives. Infrastructure is about more than balance sheets and building sites. Infrastructure is the key to how Australia does business, how we meet the needs of a prosperous economy and growing population and how we sustain a cohesive and inclusive society. Infrastructure Partnerships Australia seeks to ensure governments have the maximum choice of options to procure key infrastructure. We believe that the use of public or private finance should be assessed on a case-by-case basis. IPA also recognises the enhanced innovation and cost discipline that private sector project management and finance can deliver, especially with large and complex projects. Our membership comprises the most senior industry leaders across the spectrum of the infrastructure sector, including financiers, constructors, operators and advisors. Importantly, a significant portion of our membership is comprised of government agencies. Infrastructure Partnerships Australia draws together the public and private sectors in a genuine partnership to debate the policies and priority projects that will build Australia for the challenges ahead. 3

4 1 Executive Summary Tasmania is currently grappling with the twin challenges of maintaining a stable fiscal position in the face of dwindling public revenues, and maximising downward pressure on electricity prices for Tasmanian households and businesses. The appointment of an expert Panel with a mandate for energy sector reform represents a very positive commitment by the State Government to addressing both these challenges. If acted upon, the Panel s proposed reforms - particularly the Hydro-trader model and the packaging and sale of Aurora s retail base - would markedly improve the functioning of the State s electricity sector compared with the status quo. But while the implementation of these reforms would represent a marked improvement, Infrastructure Partnerships Australia (IPA) urges you to consider them, at best, transitionary measures towards the goal of a wholly private electricity market. Experience both in Australia and overseas has demonstrated that a fully privatised electricity market provides the most effective and enduring means of applying downward pressure to electricity prices; increasing business competitiveness and addressing cost of living pressures. In Victoria, privatisation and associated reforms have been so effective in generating competition that one in four consumers now change their energy provider every year - the highest switching rate of any electricity market in the world (VaasaETT, 2010). Privately owned and operated networks are a further critical component of an optimally efficient electricity market, reducing operating costs and improving investment decisions. Analysis shows that Aurora Energy s operating costs and capital expenditure per customer is significantly higher than privately owned and operated networks, including those businesses most comparable in structure (EUAA, 2011). With network costs accounting for a growing share of a typical household electricity bill, policymakers can no longer ignore this unparalleled opportunity to exert greater downward pressure on prices. Direct price benefits aside, the privatisation of electricity businesses provides Tasmania with a generational opportunity to bolster its fiscal and broader economic position, ensuring a robust safeguard against future external economic shocks. Aside from significant capital proceeds a full sale would liberate additional budget capacity through the transfer of hundreds of millions of dollars in required investment onto the private sector, greatly enhancing the State s capacity to invest in critical social and economic infrastructure. Infrastructure Partnerships Australia (IPA) estimates that the full privatisation of Tasmanian electricity businesses could unlock between $6.57 billion and $7.9 billion in capital proceeds (see Appendix A for workings). This figure is comprised of: Retail businesses worth between $ million and $326.1 million; Generation businesses worth between $3.2 billion and $3.97 billion; and Network businesses worth between $3.1 billion and $3.6 billion; In addition, the privatisation of transmission and distribution would result in the transfer of $455.7 million in required capital investment over the next two financial years alone from the public to the private sector, unlocking additional capacity on public balance sheets. 4

5 Ultimately, while electricity prices in Tasmania may compare favourably with other states, this should not impede the case for further reform. Rather, the State Government s response to the Panel s report should be guided by the clear opportunities for further efficiency and competition gains, and their subsequent impact in reducing the prices paid by Tasmanian households and businesses. A fully private market coupled - in the longer term - with the removal of retail price regulation, will provide the most effective and enduring means of Tasmania realising its goals for the sector. Importantly, this would also bring Tasmania into line with other states such as Victoria, South Australia and New South Wales, further supporting the achievement of a fully functioning National Electricity Market (NEM). 5

6 1.1 Recommendations (Summary) The following diagram represents a Four-Step reform pathway to ensure an optimally efficient and competitive electricity market in Tasmania, whilst maximising the value of taxpayer equity stored up in State owned electricity businesses. 6

7 1.2 Key Points The privatisation of Tasmanian electricity businesses represents the most prudent pathway for delivering an optimally competitive and efficient electricity sector that will ensure maximum downward pressure on prices for households and businesses. At the same time, privatisation provides Tasmania with a generational opportunity to bolster its fiscal and broader economic position, ensuring a robust safeguard against future external economic shocks and enhancing the State s capacity to invest in critical social and economic infrastructure. State Government revenues have been significantly and adversely impacted by the global downturn. IPA estimates that electricity privatisation will strengthen the State s fiscal position by between $6.57 billion and $7.9 billion in capital proceeds alone, with the transfer of future required investment from the public to the private sector unlocking even greater additional balance sheets capacity. The fiscal and economic benefits of privatisation are already well demonstrated in Australia. Victoria, where privatisation of the electricity sector was completed in 1997, was able to reduce its net debt ratio from 26.7 per cent of GSP in to just 3.1 per cent by Similarly, South Australia, which completed privatisation in 2001, reduced its net debt from 29.5 per cent of GSP in 1998 to 12.5 per cent in The failure of successive governments to undertake bold structural reform is being borne by the State s consumers in the form of higher electricity prices. Research has shown that the current structure of the Tasmanian electricity market is resulting in consumers paying up to 16 per cent more than they would under an efficient market price (Frontier, 2011). Aside from directly benefiting households and businesses through price reductions, moving from a regulated retail electricity price to an efficient market price would buttress Tasmania s economic growth. Research has shown that an efficient market price would increase State GSP by $22 million in 2016, increasing to $33million by 2020 (Adams, 2011). Under a business-as-usual scenario, Tasmanian energy consumers will continue to pay more for power than they should. Retail prices in Tasmania have doubled since 2000 and this trend is forecast to continue (AEMC, 2011). A lack of supply side competition - coupled with the limited capacity of interstate transmission links - is leading to opportunistic pricing by State owned generators. The ACCC s 2010 and 2011 State of the Energy Market reports cited opportunistic bidding by Hydro Tasmania, with this bidding resulting in the highest price ever recorded in the NEM at $12,400 per MWh on 7 and 8 August 2010 (AEMC, 2011). Electricity privatisation will also have considerable national economic benefits. The Energy Reform Implementation Group (ERIG), which was established by COAG to advise on market reform, estimated that privatisation and associated reforms would increase (real) GDP by about $400 million per year (ERIG, 2007). 7

8 % Of Total Generation in NEM 2 The Case for Reform Australia s energy sector has a strong track record of reform; to date this has delivered a permanent increase in real GDP of $1.5 billion per annum (ABARE, 2002). But while Australia has undoubtedly come a long way since the days of single, vertically integrated utilities under full government ownership, two very important realities remain. Firstly, reform momentum has stalled. This has meant the progression towards a fully functioning NEM has yet to reach its logical conclusion. Secondly, significant differences remain between the states in respect of the ownership, efficiency and overall performance. Retail competition in Tasmania remains limited (see Figure 1), while State owned generation corporations have an effective monopoly over generation capacity (see Figure 2). Figure 1 Electricity Retail Market Share (Small Customers) By Jurisdiction, 2011 Source: ACCC, 2011 Figure 2 Installed Generation Capacity (& Ownership) By Jurisdiction, % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Tasmania South Australia Victoria New South Wales Queensland Government Private Source: ACCC,

9 Clearly, reform of Tasmania s energy sector has stalled, with initiatives implemented to date having only limited success. With legislative restrictions preventing new retail entrants from supplying small customers, and Hydro Tasmania s continued dominance of the wholesale market, an efficient market price is unlikely to be achieved without structural reform. Key drivers for structural reform include: Tasmania households and businesses are paying above the odds for their electricity, with considerable price reductions possible if Tasmania achieved an efficient market price. Research provided to the Panel by Frontier Economics estimates that (noncontestable) consumers could realise price reductions of up to 8 per cent in 2012 and 16 per cent in 2013; Tasmania is amongst the best placed of all Australian jurisdictions to achieve marked reductions in retail electricity prices through increased wholesale market competition, yet has the least competitive market. In recent years, wholesale cost increases accounted for over 50 per cent of retail price rises in Tasmania, compared with less than 20 per cent across the entire NEM; Past microeconomic reform in the Tasmanian electricity sector has had only limited success in increasing retail sector competition, with the result that Tasmanian households and businesses are not experiencing the considerable benefits that retail competition has brought consumers in other states. Each of these factors has been outlined in greater detail below. 2.1 Inefficient Pricing The Panel s report compares the prices paid by Tasmanian electricity with those paid by consumers in other NEM jurisdictions, finding that Tasmanian prices appear quite favourable. However, such a comparison ignores the vast investment made in recent decades developing Tasmania s electricity sector - cumulative supply side investments mean no new capacity will be needed until at least 2020 (AEMO, 2011). Drawing price comparisons with other states as a basis for determining the adequacy of current market design also misses the point. Rather than assessing whether Tasmanian consumers are paying the same as those in other jurisdictions, Government should focus on whether Tasmanian consumers are paying a truly efficient market price. In this regard, Frontier Economics research, provided to the Panel, suggests Tasmanian consumers are currently paying much more than they should be, with a move from a regulated retail price to an efficient market price reducing prices paid by non-contestable consumers by just over 8 per cent in 2012, and by nearly 16 per cent in 2013 (Frontier, 2012). The deadweight loss to the State of this higher price is also significant and cannot be ignored on the basis that current prices compare favourably with other jurisdictions. The Centre of Policy Studies provided research to the Panel estimating that a reduction in retail prices (under an efficient market price scenario) would increase State GSP by about 0.03 per cent, or $7 million in 2012, rising to 0.13 per cent, or $33 million, in 2020 (Adams, 2011). Ultimately, it is this prospect of lower prices that should be a key driver of reform not how well current prices compare with those of other states. 9

10 2.2 Contribution of Wholesale Costs While Tasmania has mirrored the trend of sharp price rises across the NEM in recent years, the underpinning causes of these price rises have varied from those of other states. While price rises in mainland states have generally been attributed to growth in peak demand relative to average demand, leading to higher network charges, the major driver of price rises in Tasmania has been increased wholesale energy costs. In and , wholesale costs increases accounted for over 50 per cent of retail price rises (see Figure 3). Figure 3 Cost Components of Non-Contestable Customers ( & ) Source: Office of the Tasmanian Economic Regulator, 2010 Cleary, a number of factors are contributing to this variance in cost drivers compared with other states, such as Tasmania s higher proportion of industrial consumption and concentrated demand profile. However, this is no way diminishes the fact that wholesale costs represent a principal lever with which policymakers can seek to reduce electricity costs for Tasmanian households and businesses. The reality, however, is that a fundamental lack of competition in Tasmania s wholesale electricity market means that future wholesale costs will not be subject to sufficient downward pressure. As cited by previous evidence provided to the Panel, the latent market power wielded by Hydro Tasmania is damaging the objective of creating a competitive market by deterring new entrants (Frontier Economics, 2011). Realising wholesale cost reductions as a means of driving down retail electricity costs for households and businesses should be a key principle underpinning the Government s response to the Panel s report, alongside the need for greater retail sector competition. 2.3 Limited Retail Competition and Synergies with Wholesale Market While competition is not an end in itself, it has been well demonstrated that competition provides the most effective and enduring means of driving efficiencies, innovation and ultimately, downward pressure on electricity prices. In recognition of this, all NEM jurisdictions except Tasmania have now introduced Full Retail Contestability (FRC), allowing customers to enter a contract with their retailer of choice. While Tasmania has made some progress towards achieving FRC, including extending contestability to customers using at least 50 MWh per year from July 2011, reforms to date have done very little to change State owned Aurora Energy s dominant market position. 10

11 As cited by the Panel s report, the structure of the wholesale market and the subsequent lack of wholesale competition represents a principal barrier to entry into the retail market. The Panel states: It is incontrovertible that Hydro Tasmania possesses significant latent market power, and can use this market power to profitably influence the Tasmanian spot price in a far wider range of scenarios than generators in the NEM. A further concern highlighted by retailers is the highly variable and comparatively unpredictable demand of low volume customers. The current situation in Tasmania makes it clear that combined with the latent market power of Hydro-Tasmania, the private sector isn t interested in assuming this demand side risk. Accordingly, and given the low levels of market entry in the sectors where contestability exists, it is evident that the introduction of FRC will have limited impact on competition unless accompanied by structural reform of the wholesale market. 11

12 3 A Clear Reform Pathway The Independent Review of the Tasmanian Electricity Supply Industry represents a positive commitment by the State Government to increase the competitiveness and efficiency of Tasmania s electricity market. The reform options put forward by the Panel are also welcome developments that will encourage debate and generate further momentum for the reforms that are needed. In particular, IPA supports industry s stated preference for the Hydro-trader model over other options, as well as the packaging and sale of Aurora s retail base over an organic growth approach or the status quo. But while the actual implementation of these reforms would represent a marked improvement on the status quo, IPA urges the State Government to consider these reforms, at best, transitionary measures towards the goal of a fully private electricity market across retail, wholesale and networks. The full privatisation of State owned electricity businesses, including retail, wholesale and transmission and distribution, provides Tasmania with the only effective means to ensure maximum and sustained downward pressure on prices. These benefits have been well demonstrated in Victoria, which privatised its electricity sector between 1995 and The Victorian electricity sector experienced a marked lift in efficiency in the year following privatisation, with sector productivity growing at almost twice the rate of New South Wales. Victoria also provided a first-hand illustration of the direct correlation between increasing sector productivity and electricity prices, with real electricity prices falling by 8.9 per cent for households, and by 11.4 per cent for businesses in the period immediately following privatisation (Access Economics, 2001). Aside from retail price impacts, privatisation also presents Tasmania with a generational opportunity to bolster its fiscal and broader economic position. Again, this has been well demonstrated by experiences in Victoria and South Australia. Energy privatisation enabled Victoria to reduce its net debt ratio from 26.7 per cent of GSP in , to just 3.1 per cent by Similarly, South Australia was able to reduce its net debt from 29.5 per cent of GSP in 1998 to 12.5 per cent in While Tasmania is currently in a strong fiscal position relative to other states, a full sale would ensure a further safeguard against future external economic shocks in the context of declining revenues, and would greatly enhance the State s capacity to invest in critical infrastructure. Aside from significant capital proceeds, privatisation would also unlock considerable additional budget capacity by shifting hundreds of millions of dollars in required investment and a high degree of risk onto the private sector. The following reform pathway is designed to ensure an optimally efficient and competitive electricity market in Tasmania, whilst maximising the value of taxpayer equity stored up in State owned electricity businesses. 12

13 3.1 Retail Market Reform Recognising the limited extent of private sector participation in the State s retail electricity sector, the Panel identifies three broad options to encourage greater competition. Of these options, this briefing note strongly supports the recommendation for the packaging of Aurora s retail customers both contestable and non-contestable into bundles, which could then be transferred to the private sector. By some distance, this option would do the most to encourage retail competition. This approach would also increase competition in a much shorter timeframe than would occur under an organic growth approach. In addition, privatisation would also shift considerable risk from taxpayers to the private sector. The Panel s draft report notes that as a relatively small retail business in the context of the NEM, Aurora Energy is already exposed to scale disadvantages. The introduction of FRC would be expected to further diminish Aurora Energy s customer base and consequently negatively impact its financial performance as its largely fixed cost base will be spread across fewer customers. Accordingly, unless privatisation is pursued then Tasmanian taxpayers will be exposed to increased risk due to the threat of increased retail competition. However, ensuring a truly competitive retail sector will require reform beyond just the packaging up and sale of Aurora s retail customer bundles. To be successful, retail sector reform retail must be accompanied by the packaging up and sale of Hydro Tasmania. This is outlined in greater detail in section 4.2. Longer term, the achievement of competition objectives will be dependent on removal of retail price regulation. Once an effectively competitive market is established, price regulation has an adverse impact, imposing distortions on the effective functioning of the market to the detriment of consumers. Regulation is also costly in terms of administration and compliance, further adversely impacting the objective of a truly efficient price. The Australian Energy Market Commission (AEMC) has also been instrumental in advancing the case for retail price deregulation, where competition is facilitating the delivery of efficient outcomes. In its 2008 review of the effectiveness of competition in electricity and gas retail markets in Victoria, the AEMC found that effective competition in Victoria protects consumers against the exercise of market power as firms strive to deliver goods and services consumers demand at least cost and to improve their products, services and processes. The AEMC report also stated that the removal of retail price regulation can further extend the benefits of competition to consumers by enabling them to choose from a wider range of energy products and options (including tariff innovation) than is currently the case. This recommendation was duly embraced by the Victorian Government, with retail pricing regulation removed on 1 July Pricing reform in Victoria, and in South Australia, provide important lessons for Tasmania. In particular, retail price regulation will need to be phased out once privatisation has been fully embedded and competition is established. This will ensure the maximum benefits of a truly competitive market such as increased transparency, greater price flexibility and tariff innovation are passed on to Tasmanian households and businesses. 13

14 IPA Recommendations Government must legislate a clear timeframe for the introduction of Full Retail Contestability (FRC). Government should also develop a clear timeframe for the full privatisation of Aurora (retail). As a first step, it must assess the optimal disaggregation of Aurora s assets and customer base with the aim of maximising competition, as well as sales proceeds. Longer term, Government should develop a clear timeframe for the removal of retail price regulation. This is dependent on the establishment of an effectively competitive market and should be based on advice from the Australian Energy Market Commission (AEMC). 3.2 Wholesale Market Reform Recognising the latent market power of State owned Hydro Tasmania, and its adverse impact on market entry for the wholesale and retail sectors, the Panel s report identifies three wholesale market reform options. Of these three options, IPA supports industry s stated preference for the Hydro-trader model. But while the implementation of the Hydro Trader model would represent a marked improvement on the status quo, IPA urges the Government to consider the Hydro-trader model, at best, a transitionary measure towards the goal of a fully privatised wholesale market. One of the key economic functions of electricity retailers is to reconcile the low risk appetite of consumers with the highly volatile wholesale electricity market. Following privatisation and structural separation efforts in the 1990s, mainland retailers have found that one of the best risk mitigation strategies has been to take ownership of generation assets (ACCC, 2011), leading to the Gentailer model. For example, electricity retailers Origin Energy, TRUenergy and AGL collectively generate about 30 per cent of electricity in the NEM, and have commissioned 58 per cent of new generating capacity since 2007 (ACCC, 2011). NSW Gentrader Experience The lessons learnt from the separation of generation assets and trading rights under the previous NSW Government should be considered; while the NSW Gentrader model varied from the proposed Hydro-trader model in ownership structure, the two models have the same competitive goals. A 2011 Judicial Inquiry into the sale of electricity assets in NSW found there was no compelling case for the State to retain any equity in generation assets. The Inquiry also concluded the Gentrader model represented a second best option with manifest disadvantages for government and taxpayers compared with an outright sale of generation. With no capacity to generate electricity competitively in Tasmania, an entrant retailer would thus have fewer options to hedge NEM pricing risk as efficiently as it would in other NEM jurisdictions. At best, this would result in a higher risk premium charged for electricity, moving further away from the shared objective of an optimally efficient market price. At worst, there will continue to be limited market entry. Accordingly, to create a truly competitive retail market the proposal to package up and sell Aurora (retail) must be accompanied by equivalent reform in the State s wholesale market. 14 The Inquiry s final report stated: the Inquiry accepts the force of Professor Owen s 2007 report: namely that the best way of encouraging private investment in base load electricity generation in NSW is for the State to divest itself of its generators, either by sale or long term lease.

15 IPA Recommendations Government should develop a clear timeframe for the full privatisation of Hydro Tasmania. As a first step, it must assess the optimal disaggregation of Hydro Tasmania s assets in order to maximise competition, as well as sales proceeds. Government should also privatise Aurora s Tamar Valley Power Station (TVPS) to ensure it is placed on a more transparent and commercially sustainable footing. 3.3 Network Reform Across the NEM, network costs now account for around 50 per cent of a typical household electricity bill (see Figure 4) (EUAA, 2011). While network charges have been less of a price driver in Tasmania compared with other NEM states, their impact on a typical Tasmanian electricity bill remains significant; in and wholesale costs increases accounted for close to 40 per cent of the increase in retail prices (OTTER, 2011). Figure 4 Electricity costs and their contribution to current price rises in 2010 Source: EUAA, 2011 For the most part, this investment has been entirely necessary. High levels of network investment have been attributed to the need to replace ageing assets, electricity load growth and rising demand, as well as rising peak demand and changed standards in reliability and service requirements. However, this no way precludes the continued drive for more efficient network operation and improved network investment. While explicitly recognising the need for more efficient network operation, the reform options put forward by the Panel which centre on closer cooperation between Aurora Energy (distribution) and Transend promise to deliver only very modest efficiency gains. This is acknowledged in the Panel s report: The overall conclusions arising from this work suggest that the benefits from integrating the two network businesses are modest and are unlikely to be sufficient, compared to the potential commercial disruption and risks, to suggest implementation as a stand-alone reform initiative. 15

16 Accordingly, IPA urges the Government to look beyond a cooperation based approach to instead embrace the full privatisation of State owned network businesses; a proven reform pathway that has led to marked improvement in network operation where implemented in Australia and overseas. While State based regulatory frameworks in which network companies operate will clearly impact investment levels there is strong evidence to suggest network spending is lower, and quality of service higher where networks are privately owned and operated (ESAA, 2011). Analysis has also shown that Aurora s operating costs and capital expenditure per customer is significantly higher that privately owned and operated networks, including those businesses most comparable in structure (EUAA, 2011). These benefits were explicitly recognised by the 2011 Garnaut Review which stated: State government owners have an incentive to overinvest because of their low cost of borrowing and tax allowance arrangements. In addition, political concerns about reliability of the network, and about the ramifications of any failures, reinforce these incentives. This has been subsequently supported by the 2011 NSW Special Commission of Inquiry into the electricity transactions, which stated: evidence before the Inquiry tends to support the view that privatisation of the network businesses would lead to efficiency gains over time. IPA Recommendations Government should develop a clear timeframe for the full privatisation of State owned network businesses, Aurora Energy (distribution) and Transend (transmission). 16

17 APPENDIX A A1 Estimated Sales Proceeds Distribution and transmission Full privatisation of poles and wires could realise between $3.1 billion and $3.6 billion for Tasmanian taxpayers. The range reflects relevant recent trading and transaction multiples. Distribution RAB 1 Low value (A$b) High value (A$b) 2 Aurora Distribution Transmission Transend TOTAL RAB values for Aurora as at 1 July 2011 (based on information from the Review of the Financial Position of the State owned Electricity Businesses) and Transend as at July 2011 (based on Tasmanian Electricity Pricing Trends ) 2 The low and high multiple values (1.1x to 1.3x) are consistent with relevant trading and transaction comparables. A snapshot of recent network company trading and transaction values is provided below. Regulated Assets - Trading Description EV ($m) RABx DUET Gas transmission and distribution, electricity distribution 5, x Envestra Gas distribution 3, x Spark Infrastructure Electricity distribution 4, x SP AusNet Electricity transmission and distribution, gas distribution 7, x Average 1.19x Regulated Assets - Transaction Year EV ($m) RABx Northumbrian Water (UK) , x WA Gas Networks , x Multinet Gas x NSW Gas Networks x Average 1.19x 17

18 Generation Full privatisation of Hydro Tasmania could realise between $3.2 billion and $3.97 billion for Tasmanian taxpayers (see below). The wide range in potential sales proceeds reflects relevant recent trading and transaction multiples. EBITDA ($m) Low ($bn) High ($bn) Metric Hydro Tasmania x EBITDA 1 Sourced from Hydro Tasmania 2011 Annual Report A breakdown of Hydro Tasmania s generation capacity is as follows: Power Station Total Area Capacity (MW) 1 Type Bass Strait Islands Diesel, Wind, Solar Derwent 520 Hydro Gordon - Pedder 432 Hydro Great Lake - South Esk Hydro King - Yolande Hydro Pieman 484 Hydro Mersey - Forth Hydro Bluff Point 65 Wind Studland Bay 75 Wind Total Hydro (as % share) of total 94% 1 Hydro Tasmania website accessed March 2012 A snapshot of recent generation enterprise transaction values has been provided below. Generators - Transaction Year EV (A$m) EBITDAx Infigen ,800 12x Mighty River Power (NZ) Mighty River Power is an electricity generating company, with North Island hydro-electric schemes and geothermal generation plants. It also retails electricity and gas under the Mercury Energy and Bosco brands to about 400,000 customers. The NZ Government has committed to sell a 49 per cent stake in the company. As a similarly positioned enterprise, with considerable hydro capacity, Mighty River Power s expected sales value provides a useful indicator for Hydro Tasmania. Estimation by: Dated: EV Value (NZ$ millions) EBITDA Multiple First NZ Capital 1 October 2010 $4, x First NZ Capital 2 October 2011 $4, x

19 Retail Full privatisation of State owned retail assets could realise between $ million and $326.1 million for Tasmanian taxpayers (see below). Customer Base $ per customer Low Value ($ 000) High Value ($k 000) Aurora (Retail) 271,750 1,000-1, , ,100 Transactions Sale Value ($m) 1 Customers ($ value per customer) 2011 Country Energy 1, ,000 1, EnergyAustralia 1,486 1,400,000 1, Integral 1, ,767 1,154 Average 1,280 1 Sales values are for retail businesses only (sourced from Tamberlin Inquiry Report) A2 Shifted Future Investment Aurora s forecast capital expenditure ( to ): Source: AER, 2011 i Transend s determined capital expenditure ( to ): Source: AER, 2010 ii i %20Revised%20Regulatory%20Proposal%202012%20-% pdf ii %20Transend%20transmission%20determination% %20to% %20(28%20April%202009).pdf 19

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