The Federal Government has plans to acquire and privatise the Snowy Mountains scheme's electricity supply to attract $800million in private investment.
A former Snowy Hydro chief engineer has warned that this will expose the Rudd Government to millions of dollars in compensation claims from private investors if water is diverted from energy generation during drought.
The prospect of a federal take-over and privatisation of Snowy Hydro was investigated by the federal Labor opposition before last November's election.
This was despite Labor's election promise to the Eden-Monaro electorate that Snowy Hydro would not be privatised under a Rudd Government.
Labor's election pledge to maintain public ownership followed vehement public opposition across the marginal electorate in 2006 (then held by Liberal Gary Nairn) to the proposed $3billion sale of Snowy Hydro.
The sale, supported by state Labor governments in NSW and Victoria, collapsed after the Howard government refused to sell its 13 per cent stake in the Snowy scheme.
The Rudd Government's takeover plans are now on hold until conflict over NSW plans to privatise the state's electricity industry is resolved.
The Member for Eden-Monaro, and parliamentary secretary for defence, Mike Kelly, said Labor would revisit the question of privatisation after seeing how the situation in NSW played out.
A federal takeover of Snowy Hydro ''with subsequent leasing to private industry'' was being assessed but the Rudd Government ''remains opposed to outright privatisation as such''.
The possibility of privatising the Snowy scheme and Tasmania's hydroelectricity assets was flagged last week in the draft Garnaut review of climate change.
The 500-plus-page report stated that ownership of the Snowy scheme by three governments NSW, Victoria and the Commonwealth could restrict future development and competitiveness in the national electricity market.
It said hydroelectricity could play a key commercial role in ''supporting the intermittent nature of solar and wind'' as a way of meeting growth in future peak demand for electricity.
The Rudd Government's renewed push to privatise Snowy Hydro is certain to draw strong opposition from communities in the Snowy Mountains.
A former chief engineer with Snowy Hydro, Max Talbot, wrote to the Prime Minister earlier this year after hearing that privatisation was being considered.
His letter expresses concern that Snowy Hydro could be privatised ''whilst the scheme and its assets remain in public ownership but leased to a privatised Snowy Hydro Ltd, thus 'getting around' the communities' concerns relating to scheme privatisation''.
Mr Talbot said Snowy Hydro was ''worthless as a business'' without its water licence.
''The licence is weighted towards the use of water for electricity production and trading rather than optimisation of the use of the water as an invaluable resource for irrigation, communities and the environment.
''It does not adequately regulate Snowy Hydro and contains compensation clauses that would result in the payment of hundreds of millions of dollars by governments to private owners should the licence need to be amended during its 75-year term.''
Alpine Riverkeepers spokeswoman Acacia Rose said the Garnaut report's comments on privatising Snowy Hydro failed to recognise its importance as a water manager.
''The Snowy scheme is vital for water security and must be re-positioned for water storage and management despite the recommendations of Garnaut that focus primarily on energy generation,'' she said.
With diminishing rainfall for south-eastern Australia there will be less water available for energy generation.''