Cabinet has assigned responsibility for the reform and disposal of the State’s electricity assets to the Treasurer. For this purpose, and to assist in the management of the reform and disposal process, the Electricity Reform and Sales Unit (ERSU) was established as a division of the Department of Treasury and Finance. ERSU is headed by two Executive Directors with one being responsible for market and regulatory reform and the other for commercial and sale. The objectives of ERSU are to:
establish an efficient, competitive electricity industry in South Australia in the context of the National Electricity and Competition Policy;
establish an appropriate regulatory regime, which encourages competitive outcomes, protection for consumers and certainty for investors;
advise on the appropriate restructuring of the electricity supply industry to maximise market efficiency and sale/lease value;
organise the disposal process to ensure an orderly disposal of the State’s electricity assets subject to the passage of the necessary legislation;
continue monitoring the financial and market positions of the electricity entities until their respective disposal.
The Electricity Corporation (Restructuring and Disposal) Act 1999 (the Act) was assented to on 1 July 1999. Section 13 of the Act provides for the disposal of the State’s major electricity assets, places limitations on the method of their disposal and permits the Government to proceed with the long term leasing of those assets. There is no restriction in the legislation as to the term of any such lease nor is there any requirement for Parliamentary approval of any extension of such a lease.
A Special Deposit Account entitled, ‘Electricity Reform and Sales Operating Account’ was established in a previous year under section 8 of the Public Finance and Audit Act 1987. The current purpose of the account is:
… to record all the financial transactions of the Electricity Reform and Sales Unit, recurrent and capital expenditure on disposal of assets, revenue from various activities, injections of funds provided from the Consolidated Account, to make payments to the Electricity Sale/Lease Proceeds Account and to apply net or gross proceeds from a sale/lease agreement, sale or lease to repay the Government’s indebtedness or for other approved purposes.
Transactions relating to the operations of ERSU are processed through this Special Deposit Account. For the 1999-2000 financial year, ERSU operations were financed on a cash flow basis from part lease/sale proceeds received from the disposal of electricity assets. As a result, there was no need to make an appropriation from the Consolidated Account. In the previous financial year, operations were partly funded by a $15 million appropriation from the Consolidated Account.
Transactions reflected in Special Deposit Accounts are processed by the Corporate Services Branch of the Department of Treasury and Finance. Commentary on the general financial controls and the computer information systems environment are detailed under the Department of Treasury and Finance section of this Report and are relevant to the overall operations of ERSU.
During the financial year, the Treasurer approved the creation of a new Special Deposit Account entitled the ‘Electricity Sale/Lease Proceeds Account’. The purpose of the account is:
… to receive proceeds of a sale/lease agreement, sale or lease under the Electricity Corporations (Restructuring and Disposal) Act 1999 and other funds as approved by the Treasurer, and to receive interest payments from other interest bearing accounts in which sale/lease agreement proceeds are placed, and to invest those monies and to apply those monies, and income from their investment, towards the retirement of State debt.
Although the Electricity Sale/Lease Proceeds Account is not directly controlled by ERSU, it is related to the electricity assets disposal process as ERSU is responsible for the management of the disposal process and the Treasurer determines the dissection of the proceeds between the two Special Deposit Accounts. ERSU receives part of the disposal proceeds which it uses to finance disposal costs and the operation of its Special Deposit Account and the Proceeds Account is used to receive the majority of the proceeds which are used exclusively to retire State debt.
Subsection 31(1)(a) of the Public Finance and Audit Act 1987 (the Act) provides for the Auditor-General to audit the public accounts in respect of each financial year and under the Act, special deposit accounts are included as part of the public accounts.
The audit program covered all major financial systems relevant to ERSU in its capacity as a division of the Department of Treasury and Finance and was directed primarily towards obtaining sufficient evidence to enable an audit opinion to be formed with respect to the financial statements and internal control.
During 1999-2000 specific areas of audit attention included:
proceeds from the lease/sale of electricity assets and related transactions
income from the investment of funds of the two Special Deposit Accounts
payments made towards the retirement of State debt
disposal costs
payments to consultants and administration expenditure.
The Auditor-General also has responsibilities in relation to reporting on the processes leading up to the making of long term leases for electricity assets. These matters will be separately reported to Parliament.
Further commentary on the electricity asset disposals is also provided in Part A of this Report in the section entitled ‘Electricity Assets Disposals and the State’s Finances’.
During the year, a letter was sent to the Under-Treasurer concerning the purpose definition of the Electricity Reform and Sales Operating Account and income from the investment of the account. At that time, the purpose definition of the account only covered the recording of sale and not lease proceeds and the account was not interest bearing. The Electricity Corporations (Restructuring and Disposal) Act 1999 requires that lease/sale proceeds be paid into accounts at the Treasury and in particular subsection 21 (2) of that Act requires that any income from investment of monies paid into accounts at the Treasury must be applied for the purposes of retiring State debt.
A reply was received to the matters raised and appropriate action was taken which involved the changing of the purpose of the account and the creation of the new Electricity Sale/Lease Proceeds Account which is interest bearing. The ERSU Operating Account became interest bearing from the date of receipt of lease/sale proceeds and interest earned by that account is credited to the Proceeds Account and all interest earned from the investment of funds is used to retire State debt.
The review of the internal control structure of ERSU concluded that an adequate system of internal control was in place and that transactions processed were subject to internal check, were duly authorised by an appropriate officer and that major financial transactions were supported by duly executed contracts or agreements. All lease/sale transactions that occurred were approved by Cabinet.
As required by subsection 36(1)(a)(iii) of the Public Finance and Audit Act 1987, the audit of the Electricity Reform and Sales Unit included an assessment of the controls exercised in relation to the receipt, expenditure and investment of money, the acquisition and disposal of property and the incurring of liabilities. The assessment also considered whether those controls were consistent with the prescribed elements of the Financial Management Framework as required by Treasurer’s Instruction 2 ‘Financial Management Policies’.
Audit formed the opinion that the controls exercised by the Electricity Reform and Sales Unit in relation to the receipt, expenditure and investment of money; the acquisition and disposal of property; and the incurring of liabilities, were sufficient to provide reasonable assurance that the financial transactions of the organisation were conducted properly and in accordance with the law.
Operating expenses amounted to $85.3 million and included expenditure for consultants on an accruals basis of $55.2 million (35.6 million). The following table sets out a summary of the consultancy services provided over two years:
Consultancy Service |
|
1999-2000 |
1998-99 |
Total |
|
|
$’000 |
$’000 |
$’000 |
Legal |
|
29 692 |
17 162 |
46 854 |
Lead |
|
12 805 |
6 937 |
19 742 |
Accounting |
|
6 948 |
5 525 |
12 473 |
Other |
|
5 785 |
5 947 |
11 732 |
|
|
55 230 |
35 571 |
90 801 |
The most significant of the expenditure for consultants was for legal work which included work on due diligence, data room management, disaggregation, Australian Competition and Consumer Commission (ACCC) issues, regulatory issues, vesting contracts, electricity pricing orders, codes and licences, legislative changes, contract negotiations, transaction documents, information memorandums, probity/bid evaluations, presentation to bidders, and legal advice. In addition, expenditure on consultants included a success fee paid to the lead and accounting consultants.
Disposal costs totalled $22.2 million. Disposal costs included costs incurred by ERSU in the disposal of the assets with the main item of expenditure being the purchase of the fleet vehicles. Under the Business Sale Agreements, the Treasurer was obliged to purchase the fleet vehicles from the State vehicle lessor (Commonwealth Bank) and then transfer them to the respective new lessee/purchaser of the disposed electricity assets. In addition, disposal costs included the following:
$8.4 million on settlement of a claim in relation to the Vesting Compensation Deed;
$1 million for EDS contract break costs to enable the Government to ‘break’ from the existing EDS agreement and allow the new Electricity Utilities to enter into agreements with EDS.
Operating revenues includes distributions from residual electricity entities of $79.6 million. Revenues associated with lease/sale proceeds belong to the residual electricity entities with the two Special Deposit Accounts merely holding the cash. When the residual electricity entities earn revenue, they account for revenue earned and distributions made. Such distribution are subsequently recorded in ERSU’s accounts.
There is a timing difference between the receipt of the lease/sale proceeds and when distributions are brought to account. As a consequence, this Report has focused on cash proceeds received.
For an explanation of the net cash proceeds received from assets leases refer to the table under the heading, ‘Further Commentary on Operations’, ‘Asset Leases/Sales’.
Due to the operating revenues associated with net part lease proceeds received, and the fact that expenditure on consultants fees includes a non-cash creditor component, this resulted in a substantial cash balance in the ERSU Operating Account which at 30 June 2000 stood at $47.1 million. This represents the major asset that ERSU has and is committed to the settlement of creditors and the completion of the disposal process.
Net increase in cash was $23.5 million. The increase resulted as inflows from receipts of $22.2 million plus cash flows from investing activities which included part lease proceeds of $79.6 million were greater than total payments of $77.6 million. The most significant of the payments was for consultants fees of $48.2 million.
As discussed in the previous year’s Report, the State’s electricity businesses have been disaggregated into the following seven separate physical operating entities, the businesses of which or shares in which are subject to disposal:
ETSA Power Pty Ltd - Retailing
ETSA Utilities Pty Ltd - Distribution
Optima Energy Pty Ltd - Torrens Island Power Station
Synergen Pty Ltd - Port Lincoln, Snuggery, Dry Creek and Mintaro Power Stations
Terra Gas Trader Pty Ltd - A gas trader
Flinders Power Pty Ltd - Leigh Creek Coal Mine, Northern and Playford Power Stations
ETSA Transmission Corporation trading as ElectraNet SA - Transmission.
The status of the disposal of the above assets is as follows:
Completed:
ETSA Power Pty Ltd — Lease/sale agreements executed and proceeds settled
ETSA Utilities Pty Ltd — Lease/sale agreements executed and proceeds settled
Optima Energy Pty Ltd — Lease /sale agreements executed and proceeds settled
Synergen Pty Ltd — Lease /sale agreements executed and proceeds settled.
In Progress:
Flinders Power Pty Ltd — Disposal decision announced by the Treasurer in August 2000. The cash consideration is $313 million and is to be settled in September 2000.
Terra Gas Trader Pty Ltd — Final bids received and assessed, with no final disposal decision made.
ElectraNet SA — At the final bid stage.
The following table summarises the cash proceeds received for the lease/sale of electricity assets transacted through the two Special Deposit Accounts established to process disposal of electricity assets.
Asset |
|
Electricity |
|
|
ERSU |
Sale/Lease |
|
|
Operating |
Proceeds |
Overall |
|
Account |
Account |
Position |
|
$’000 |
$’000 |
$’000 |
ETSA Power and ETSA Utilities - Cash proceeds |
280 463 |
3 150 000 |
3 430 463 |
Costs/Transfer: |
|
|
|
(Less) Add: Stamp duty |
(103 880) |
- |
- |
(Less) Add: Transfer |
(97 900) |
97 900 |
- |
|
(201 780) |
97 900 |
- |
(Less): Retained by ERSU to cover disposal and operating costs |
(78 683) |
- |
(78 683) |
|
- |
3 247 900 |
3 351 780 |
|
|
|
|
Optima Pty Ltd - Cash proceeds |
6 693 |
288 307 |
295 000 |
(Less): Retained by ERSU to cover disposal costs |
(6 693) |
- |
(6 693) |
|
- |
288 307 |
288 307 |
|
|
|
|
Synergen Pty Ltd - Cash proceeds |
2 457 |
33 143 |
35 600 |
(Less): Retained by ERSU to cover disposal costs |
(2 457) |
- |
(2 457) |
|
- |
33 143 |
33 143 |
Sub Total |
- |
3 569 350 |
3 673 230 |
Add: Appropriation equivalent to stamp duty |
- |
103 880 |
- |
Total Net Cash Proceeds |
- |
3 673 230 |
3 673 230 |
As previously explained, under the purpose definitions of the two Special Deposit Accounts established to process the disposal of the State’s electricity assets, the ERSU Operating Account receives part lease/sale proceeds which are used to finance disposal costs and the cost of operating the ERSU Special Deposit Account. The Electricity Sale/Lease Proceeds Account receives the major portion of the proceeds and uses those proceeds for debt retirement purposes. The Proceeds Account is not authorised to make payments other than debt retirement payments and that is why the ERSU Operating Account is used to settle disposal costs. Any funds remaining in the ERSU Operating Account after the completion of the disposal process are to be paid to the Electricity Sale/Lease Proceeds Account and used to retire State debt.
Stamp duty of $103.9 million relating to the disposal of ETSA Utilities and ETSA Power was paid to the Consolidated Account and is therefore netted from the part proceeds received by the ERSU Operating Account. The Treasurer subsequently approved that $103.9 million being equal to the stamp duty revenue, be appropriated from the Consolidated Account to the Electricity Sale/Lease Proceeds Account keeping that part of the gross cash proceeds intact. This enabled those funds to be used to retire State debt.
Amounts retained in the ERSU Operating Account relating to Optima and Synergen disposals, include estimates for stamp duty that had not been assessed at 30 June 2000.
In accordance with the purpose definition of the ERSU Operating Account, the Treasurer approved that $97.9 million be transferred from part proceeds received, to the Electricity Sale/Lease Proceeds Account to be used to retire State debt.
In analysing the above table and to assist in its interpretation, from the overall position of the State, it can be said that the cash proceeds received for the lease/sale of:
ETSA Power and ETSA Utilities were $3 430.5 million and after deducting proceeds retained by the ERSU Operating Account to finance operating and disposal costs an amount of $3 351.8 million (which included the adjustment for stamp duty) was available in the Electricity Sale/Lease Proceeds Account to retire debt;
Optima Pty Ltd were $295 million and after deducting proceeds retained by the ERSU Operating Account to finance disposal costs an amount of $288.3 million was available in the Electricity Sale/Lease Proceeds Account to retire debt;
Synergen Pty Ltd were $35.6 million and after deducting proceeds retained by the ERSU Operating Account to finance disposal costs an amount of $33.1 million was available in the Electricity Sale/Lease Proceeds Account to retire debt.
The cash proceeds for the lease/sale of electricity assets after deducting proceeds retained by the ERSU Operating Account were ETSA Power and ETSA Utilities $3 247.9 million, appropriation equivalent to stamp duty for ETSA Power and ETSA Utilities of $103.9 million, Optima Pty Ltd $288.3 million and Synergen Pty Ltd $33.1 million making a total of $3 673.2 million available for State debt retirement purposes.
Interest income was $40.2 million.
State debt reduction payments were $2 410.2 million and the cash balance available in the Special Deposit Account to make further debt reduction payments was $1 295 million.
In accordance with the purpose definition of the Electricity Sale/Lease Proceeds Account, all proceeds received in the Account from the sale or lease of the electricity assets and investment of funds are to be used to retire State debt. For the 1999-2000 financial year, a total of $2 410.2 million was paid to the South Australian Government Financing Authority towards State debt retirement purposes.
For an explanation of the proceeds from the lease/sale of electricity assets refer to the previous table under the heading ‘Further Commentary on Operations’ and Note 4 of the financial statements.
The major balance consists of the cash balance of the Special Deposit Account which at 30 June 2000 stood at $1 295 million and is available for future State debt retirement purposes.