Stand by for another Snowy Hydro scheme rip-off

The sums of money involved could make the proceeds of this week's great bank robbery look like a pittance. Buried in the budget speech was some nation-building rhetoric from Scott Morrison about the Commonwealth hoping to buy back from NSW and Victoria their "share" of Snowy Hydro. If it goes for what these states will claim, that should cost about $5.5 billion, and make inevitable that it will be the Commonwealth that will need to find the extra $2 billion of reinvestment in the scheme it says it's now planning.

Victoria and NSW were given their shares in Snowy Hydro – for nothing – about 30 years ago. NSW owns 58 per cent, Victoria 29 per cent. The Commonwealth holds the remaining 13 per cent. It originally pretended, before ACT self-government, to hold this on behalf of Canberrans, but it long ago decided we did not deserve this share and kept it to itself.

While controlling this corporation into which they put no money, NSW and Victoria have taken hundreds of millions of dollars in dividends, as well as running things primarily for their own convenience and profit rather than in the best interests of the nation, the environment or the energy market. Snowy Hydro has always provided some power to the ACT, and now feeds power into South Australia, Queensland and, notionally at least, Tasmania, via the national grid. But while each benefits from its availability, none of these profit from the provision of energy at a cost well below what can be charged. To be fair, consumers in NSW and Victoria get no discounts either, though they benefit from the spending of the unearned income making its way into the state treasuries.

Eleven years ago, a cash-strapped Labor NSW government decided it would sell off its share of Snowy Hydro to the private sector and, for a while, it looked as if Victoria and the Commonwealth would follow. Mercifully, there was a national outcry about the sale of this national icon and John Howard intervened to stop it.

Now, however, a sale is on the table again, although, this time, the Commonwealth is thinking of spending billions of dollars just to get back what it so foolishly gave away 30 years ago, as part of an incentive to get the states to corporatise and privatise its electricity generation, reticulation and retail assets, and to put the cost of power on a business-like basis.

But the national largesse to NSW and Victoria did not begin then or there. The two states have been ripping off taxpayers from other states from the beginning of the scheme more than 60 years ago. The effectively secret appropriation of federal funds to these two states would amount to scores of billions of dollars over 60 years.

NSW and Victoria opposed the Snowy scheme at its inception as a postwar Chifley government dream, and threatened High Court action to stop its being built, saying it was beyond the Commonwealth's power. The Commonwealth then mined its constitutional heads of power to argue that it was building it to provide Canberrans with a power supply and to develop a defence manufacturing industry.

It was built by loans raised by the Commonwealth, with the governments of NSW and Victoria explicitly refusing to contribute to its costs. Once the electricity scheme became operational in the late 1950s, the Commonwealth got into a brawl with NSW and Victoria about the price that could be charged for the premium power it produced. Put bluntly, NSW and Victoria didn't want to pay any sort of premium at all, or even pay for at the notional wholesale rates that its own coal-fired power generators charged its distribution systems.

Eventually, nearly 60 years ago, Robert Menzies made perhaps the worst financial deal of his years in power. He agreed that the scheme would provide power to NSW and Victoria at a massive discount. Every year, the recurrent costs of running the electricity scheme would be totted up, and the state government (and the ACT) would pay a share according to the percentage of the power they took. The recurrent costs were the annual interest bills on the loan (though not on any repayment of principal), and the cost of running the power systems. The recurrent costs included neither depreciation nor the continuing work on developing the scheme.

In those days, of course, state electricity authorities were fully government-owned. NSW and Victoria, and the ACT Electricity Authority, as it then was, got hydro power at a fraction of its real value. Naturally, they charged consumers as much as they could get away with. They were thus profiting handsomely from the start, without any share of the profit going to citizens of other states. But even if NSW and Victorian consumers were paying full freight, they were also benefiting from the effective subsidy provided by electricity authority profits.

Citizens of other states were not doing so nicely, and, for a long time, neither getting access to the power nor its special value as peak demand power available, as it were, from a battery. Hydro power is clean, and recyclable, in the sense that baseload generators can, in the early hours of the morning when demand is low, pump hydro water upstream.

But Victoria and NSW also benefited from sums in the billions of dollars by another rip-off arrangement. The Commonwealth agreed with Victoria and NSW that it would regard the Snowy River water turned westward into the Murray and Murrumbidgee rivers as a bonus by-product, available for irrigation or town water at no charge from the authority or the Commonwealth. Even South Australians benefit from this deal, although probably not as much as they ought.

NSW and Victorian farmers, or shire councils along the rivers, would no doubt indignantly deny that they get this water "free". They would point to expensive volume licences, and per-litre charges. But the sums they pay go to the cost of local reticulation systems, not the engineering, tunnels and dams of the Snowy scheme, and, in any event, the money has been paid to the state governments, not to the Commonwealth or the hydro scheme. The ACT might say it has been extra virtuous in that it has not drawn water from the Murrumbidgee, but only from tributary streams downstream of the scheme.

Forty years into the scheme, many of the ground rules changed. But the Commonwealth could hardly have been more perverse about its own interests when the rules were being charged. First, it had given away free water and highly subsidised power, on which NSW and Victoria were making big profits. When it decided that power should be priced at value rather than a ridiculous formula, it decided the states should still be allowed to have the surplus value. Profits of (presently) about $200 million a year have been there for divvying up mostly by NSW and Victoria for 30 years. All too little had been reinvested.

When the idea of corporatising Snowy Hydro began, NSW and Victoria argued they should be allocated shares on the basis of their share of consumption of the power generated. They had contributed no capital over the years, and had paid very little, even as consumers. They had had full benefit, at no costs, to the extra water going into irrigation.

I remarked at the time that the moral right of the states to such shares was about as good as a Sydney motorist saying she was entitled to a share of the value of the Sydney Harbour Bridge on the basis she had paid tolls every time she crossed.

The Commonwealth did not lack for good advice, including from then Snowy boss Charles Halton, father of Jane. But good policy seemed secondary both to pushing macroeconomic reform on the states via incentives, and the politics of Commonwealth-state relations. The amazing thing is that premiers and chief ministers in other states did not kick up a fuss, either for similar largesse or for some sort of recompense for the billions of dollars contributed by their citizens now being hijacked by the two biggest, most powerful and populous states. Even the ACT had a right, of sorts, to complain, given the Commonwealth had appropriated to itself Canberra's share of the unearned booty.

All of this occurred, of course, before much of an active politic of climate change, concern about renewable energy, concern over gas supplies, or the social and economic costs of coal pollution. Even leaving aside the ripping-off of non-south-eastern taxpayers, the policy and political give-away decisions of the past 30 years, by Labor and Liberal governments, have been mostly financial disasters for the Commonwealth. It must be recorded that one cannot only blame ideologues and quick-money grabs by the politicians. Serious misjudgments by asset-sales "specialists" in the central federal bureaucracy have also been at fault, if never called to account.

One hardly needs add that private bankers, financial consultants and other rent seekers have also extracted millions of dollars from the taxpayer as they have, at various times, advised governments about privatisation and packaging things up for market. Naturally, sale of the Commonwealth's share of the scheme was recommended by the Tony Shephard-led commission of audit. Perhaps he could, under another hat, foresee its potential for an oval, flat and retail-centre development.

Malcolm Turnbull, who has been involved as a minister one way or another in the future of the Snowy scheme for more than a decade, now recognises how important the scheme is for meeting future energy needs, particularly as our capacity (and desire) to depend on coal generation declines. He would have far fewer options were the scheme in private hands. He is discovering that his ambitions to increase the hydro capacity of the scheme could fail for want of willingness from Victoria and NSW to make any contribution. Consistent to the last.

On Tuesday night, Scott Morrison described the Snowy scheme as "the benchmark for nation-building infrastructure". One wishes one could say that about the Commonwealth's stewardship of its assets and the public interest.

"The Prime Minister has announced our intention to further develop the Snowy Hydro with Snowy 2.0," Morrison said. "Tonight we announce our intention to go further. The Commonwealth is open to acquiring a larger share or outright ownership of Snowy Hydro, from the NSW and Victorian state governments, subject to some sensible conditions.

"First, all funds received by the states would need to be reinvested in priority infrastructure projects.

"Second, Snowy Hydro's obligations under its water licence would be reaffirmed and we would commit to work together to expedite and streamline environmental and planning processes associated with Snowy 2.0, without compromising any standards or controls.

"Third, Snowy Hydro would have to remain in public hands. We have already begun discussions with NSW and invited similar discussions with Victoria."

My guess is that, in these discussions, the states will say the scheme is worth up to $7 billion, and that their great sacrifice in surrendering their share of this asset should be handsomely rewarded.

If history is any guide, the political colour of the state government concerned will not matter much. One should never stand between a premier and money. But when politicians from these two states agree, it is time to secure your purse and your wallet, and, probably, your privy parts.

And if the federal politicians concerned are alert for the public purse and the public interest, that would be for the first time, at least as far as the Snowy scheme has been involved, for more than 60 years.

Jack Waterford is a former Canberra Times editor. jwaterfordcanberra@gmail.com