The lease of Ausgrid and Rebuilding NSW
The Ausgrid lease
As part of a wider set of fiscal measures laid out in June 2014, the
Premier of NSW, the Hon. Mike Baird MP, announced that the NSW Government would
seek to lease 49 per cent of the state's electricity network for a period of 99
The NSW Government also announced that leasing the three largest providers in
the state-owned electricity distribution network – Transgrid, Ausgrid and
Endeavour Energy – would allow it to fund 'once-in-a-generation' investments in
significant areas of state infrastructure.
According to the NSW Government, leasing 49 per cent of the state's
electricity distributions network will provide the capital funding necessary to
implement the investment plans outlined in Rebuilding NSW, one of the
Government's major strategic policy documents.
In particular, the strategy outlined in Rebuilding NSW calls for a total
government investment in the NSW economy of approximately $20 billion,
including a significant proportion on a range of state infrastructure projects,
such as $4.1 billion on improving regional transport and $1 billion for
enhancements to water security, among other major investment measures.
In June 2014, the NSW Government announced that the overall cost of its
infrastructure strategy would be met through a differentiated approach to
leasing 49 per cent of the state's electricity network. The entirety of
Transgrid would be offered for a lease period of 99 years, while only 50.4 per
cent of Ausgrid and Endeavour Energy would be offered to potential investors.
Essential Energy, which provides services to many parts of rural NSW, is not
included in the NSW Government's leasing plans and will remain wholly
After securing the passage of the Electricity Network Assets
(Authorised Transactions) Act 2015, the legislation that enabled the lease
process, the NSW Government formally launched the process of soliciting bids
for the 99-year lease of Transgrid.
On 25 November 2015, the NSW Government announced that a newly-formed
consortium, NSW Electricity Networks, had been successful in its bid for Transgrid.
The consortium is reported to have paid the NSW Government $10.285 billion for
the right to lease and operate Transgrid for a period of 99 years.
While NSW Electricity Networks is majority owned by foreign interests,
including state-owned investment vehicles from Kuwait and Abu Dhabi, the
consortium also includes two major Australian companies, Spark Infrastructure
and Hastings, which together have a 35.03 per cent stake in the 99 year lease
According to the NSW Government, the gross proceeds from the lease
transaction will be used to fund parts of the infrastructure strategy outlined
in Rebuilding NSW.
The NSW Government also announced that, as a direct consequence of the lease, it
would be eligible for a payment of $1 billion from the Commonwealth Government,
on the basis of provisions contained in the National Partnership Agreement on
Asset Recycling. 
On 24 November 2015,
the day before the announcement that NSW Electricity Networks had won the right
to lease Transgrid for 99 years, the NSW Government opened the Expression of
Interest (EOI) process for the lease of 50.4 per cent of Ausgrid on the basis of
a Trade Sale.
One of the largest
electricity providers in Australia, Ausgrid's network encompasses almost 50,000
kilometres of above and below ground cables, servicing a total of approximately
1.7 million customers in Sydney, the Hunter Valley and the Central Coast. According to
media reports, Ausgrid's regulated asset base was approximately $15.5 billion
as of June 2015, which could make a 50.4 per cent lease of the company worth approximately
$9.4 billion to $10.4 billion, including the company's debt liability.
At the time of writing, the NSW Government has not announced the outcome
of the Ausgrid lease, nor has it provided any public updates on the current
status of the process. According to information made available by the government,
the EOI process for the lease of 50.4 per cent of Endeavour Energy, the final stage
of the NSW Government's leasing arrangements, will begin in the course of 2016.
The Ausgrid lease and Rebuilding NSW
In the lead up to the March 2015 state election, the NSW Government
committed itself to a large-scale investment plan, aimed at upgrading major
parts of the state's infrastructure and providing an investment-driven boost to
the NSW economy.
According to a report by Deloitte Access Economics, published in November 2014,
the NSW Government's plans are likely to see an overall injection into the
state's economy of $300 billion over approximately 20 years. Job creation is
forecast to be approximately 100,000 new jobs by 2035–36.
According to the NSW Government, its plan to invest $20 billion in major
state infrastructure is dependent on releasing the capital that is 'locked up'
in major state assets, including the state-owned companies, such as Ausgrid,
that operate large parts of the state's electricity distribution network.
Additionally, the NSW Government's investment plans, as outlined in Rebuilding
NSW, are required to remain in conformity with the state's Fiscal
Responsibility Act 2012.
This requires that the Government acts to protect the state's AAA credit
rating. Significant debt financing is thereby largely ruled out.
In addition to the projected release of approximately $20 billion in
capital currently embedded in the state's electricity distribution network, the
NSW Government has announced that, once the full lease process has been
completed, it will be eligible for a $2 billion contribution from the
Commonwealth Government, pursuant to the National Partnership Agreement on
The capital generated by the full lease process, including Commonwealth
Government contributions, will fund a number of major state infrastructure
An additional $1.1 billion to invest in the northern and southern
extensions to WestConnex, along with the Western Harbour Tunnel.
An extra $7 billion for Sydney Metro, to fully fund a second
harbour rail crossing.
$2 billion in additional education and health funding.
$4.1 billion for regional transport.
$1 billion for regional water security.
$300 million for regional tourism and the environment.
More funds to Sports and Cultural infrastructure, up from $500
million to $1.2 billion.
According to the NSW Government, leasing 49 per cent of the state's
electricity distribution infrastructure will have a dual benefit. Firstly,
leasing 49 per cent of the state's electricity distribution network will
produce the primary benefit of freeing up scarce state resources for
infrastructure investments that would otherwise be beyond the Government's
fiscal capacity. Secondly, as a consequence of private sector involvement,
there is likely to be an increase the efficiency of, and the rate of capital investment
in, the leased entities.
The Ausgrid Lease and the Australian Energy Regulator
Recent media reports have suggested that the NSW Government's plan to
lease 50.4 per cent of both Ausgrid might be affected, to the detriment of the
final lease price, by a recent decision of the Australian Energy Regulator
(AER). The AER's determination covers the regulatory period from 1 July 2014 to
30 June 2019, and could therefore affect the overall attractiveness of Ausgrid
to potential private sector investors.
After reviewing the distribution charges that electricity networks are entitled
to charge consumers, AER ruled that the three state-owned electricity
distributors – Ausgrid, Endeavour Energy and Essential Energy – must reduce the
charges that they levy on consumers.
According to the Australian Financial Review, AER's decision could have the
effect of reducing the operating revenue of Networks NSW – the state-owned company
that currently owns Ausgrid, Endeavour Energy and Essential Energy – by up to
According to Networks NSW, the AER's determination in relation to
distribution charges is likely to have a damaging effect on the lease process,
since a potential investor could be forced to commit new and significant funds
to a company that could, well into the foreseeable future, generate low or even
negative equity returns.
While the investment strategies of private sector companies and consortiums are
difficult to predict, Networks NSW maintained that a continued high level of
regulatory uncertainty, especially over the longer term, will have the effect
of lowering the value of Ausgrid for potential investors, both domestic and
In February 2016, however, the Australian Competition Tribunal (ACT)
ruled that AER committed a number of errors in arriving at its determination.
On the basis of that ruling, the tribunal set aside AER's revised network charges.
As a consequence of the ACT’s decision – which has led AER, in turn, to seek a
judicial review in the Federal Court – the overall regulatory environment in
respect of network distribution charges remains comparatively unclear.
It remains possible that this degree of regulatory uncertainty, which
might not be resolved in the near term, could negatively affect the price that
potential bidders are willing to offer for Ausgrid. In turn, this could have an
equally negative effect on the $20 billion that the NSW Government, as outlined
in its Rebuilding NSW policy, expects to raise from leasing 49 per cent
of the state's electricity distribution network.
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