In a few months, the snow on the Snowy Mountains will melt, as it has every Spring for tens of thousands of years. Until recently, the water surged into the Snowy River, which runs south-east to the sea at Marlo in eastern Victoria.
That all changed in 1974 when the last of the Snowy hydro-electric power stations came into service. The Snowy River was dammed and just below Jindabyne its natural flow was reduced to 1 per cent of what it had been.
It would be a mistake to assume that this was all about electricity generation. It was just as much about water diversion as electricity.
What to do with the water from the Snowy Mountains’ snow-melt was debated for 120 years. The debate rages again today with the decision by the NSW, Victorian and Federal Governments to sell their shares in the company that operates the Snowy Scheme. Predictably, this has aroused popular opposition because the public sees the Snowy Scheme as a symbol of our nationhood. There are good reasons however, to support the sale.
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Australia has always been short of water. Most of our rivers run from coastal areas to the sea and inland Australia has often eyed them enviously thirsty for the most essential ingredient of agriculture.
As far back as the 1880s, there were proposals to divert the Snowy River for the use of inland farmers. That’s where politics came in. The Victorians and South Australians were keen to ensure the health of the Murray River and the transport and irrigation interests associated with it. They also saw the possibilities of electricity generation.
NSW, on the other hand, was not interested in hydro-electricity and wanted the water diverted into the Murrumbidgee for the sole use of irrigators. The debate continued for the next 60 years but no agreement was reached despite a series of inquiries and Royal Commissions.
In the early 1940s, the wartime Labor Federal Government became concerned about the vulnerability of its coastal power stations and reviewed the proposals. In 1949, Prime Minister Ben Chifley bit the bullet and used the defence power under the Constitution to implement a compromise scheme. The new plan involved 16 dams, seven power stations and 225 kilometres of tunnels and aqueducts. The main objective was hydro-electricity but the water used by the power stations was to be supplied free for irrigation purposes into the Murray and Murrumbidgee Rivers.
The scheme made a fundamental error in one respect: allowing the waters to be diverted into the Murray and Murrumbidgee free of charge encouraged wasteful and excessive use of a very scarce resource, which together with over-allocation of water licences to farmers along the Murray, has resulted in a massive soil salinity problem in the Murray-Darling Basin, greatly damaging Australia’s greatest river.
The government-owned hydro-electric scheme operated quietly for many years and then, four years ago, the scheme was corporatised and an unlisted public company, Snowy Hydro Limited, was set up to run it owned 58 per cent by the NSW Government, 29 per cent by the Victorian Government and 13 per cent by the Federal Government.
For simple economic reasons, the power generating activities of the Snowy Scheme have become a secondary part of the new company. With the plentiful availability of cheap electricity from coal-fired power stations, Snowy Hydro currently makes most of its profits from providing insurance hedging and similar services to the rest of the power industry rather than from power generation, which has been running at only 13 per cent capacity. This is partly due to the regulated water releases the company is obliged to undertake back into the Snowy River, which don’t pass through electricity turbines and occur at the expense of the company’s generating capacity.
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For whatever reasons, Snowy Hydro’s generating business has been earning profits far below expectations. The best estimate of the current value of the company is $3.1 billion and last year it earned approximately $150 million. The dividend paid of $110 million amounted to a 3.5 per cent return (probably less than 1 per cent on the generating assets), which could be bettered by investing the money in a term deposit.
Not surprisingly, NSW and (to a lesser extent) Victoria which have a long-term revenue problem because of the unfair distribution of GST funds through the Commonwealth Grants Commission process want access to the substantial funds locked up in this under-performing asset. The two Governments’ need for infrastructure capital must be given greater priority over keeping a power-generating business that provides a meagre return to its taxpayer shareholders.
The political problem arises from the iconic status of the scheme and people’s natural desire for it to remain in public hands.
Irrigators and environmentalists fear that if Snowy Hydro is sold, the flows of water back into river systems will be restricted. This fear is illusory because the water is owned by the NSW Government and only licensed to Snowy Hydro. The water releases for the irrigators have been agreed for the next 72 years and can only be changed by legislation. This is hardly likely to change given the sensitivities of the various stakeholders.
The proposed share sale will be by public float which will initially impose a limit of 10 per cent on shareholdings (with a permanent 15 per cent on foreign holdings) to ensure that the company will be broadly held rather than taken over by a single competitor, at least in the next few years.
Although criticised by the financial community, the shareholder cap seems politically sensible and is likely to take some of the heat out of the argument. (However, making the foreign cap permanent raises questions about whether xenophobia is the real motive for the restriction.)
The sale of Snowy Hydro should also increase competition in power generation because the NSW Government already owns a significant part of the generating capacity of the now-national electricity market. Further, the sale will in no way affect the generating capacity of the Snowy Scheme. The physical assets will stay, and in the long term, as solutions are sought to the problem of global warming, the competitiveness of this sleeping giant will likely improve.
Those who fear for the future under a privatised Snowy, can rest assured that the NSW Government will maintain control of the scheme through its water licence, without which no electricity can be generated. Should Snowy Hydro fail to adhere to its obligations, they can be enforced and, if necessary, further conditions could be imposed on the company by State Parliament.
The snows will melt again on the Snowy Mountains this year. The melt will remain regulated by both agreement and legislation and there is no better guarantee than that.
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