Chapter 3
The Ausgrid lease and critical infrastructure
The NSW Government's case for leasing Ausgrid
3.1
In addition to using the capital currently 'locked up' in both Ausgrid
and Endeavour Energy to finance significant state infrastructure projects, the
NSW Government maintained that the strategy contained in Rebuilding NSW,
which is largely dependent on the finalisation of the lease process, will
produce additional economic and social benefits. In particular, the NSW
Government argued that the proceeds from the lease process, which are projected
to reach $20 billion, will place it in a stronger position to address the challenge
of continued population growth and the consequent need for an increase in
economic activity to support a larger population base. The NSW Government further
observed:
The investment in infrastructure made possible by the Rebuilding
NSW Plan will allow NSW to better manage the increase in population and
economic activity that will occur over the coming decades. Rebuilding NSW will
increase NSW’s Gross State Product (GSP) by $30.9 billion by 2035‐36 (measured in 2013
prices); this is a real increase of 3.6 per cent above the level of GSP that
would occur without the Rebuilding NSW plan. The increase in GSP comes
from both a more efficient electricity network and also from the reinvestment
of funds from the partial lease of electricity network assets into productive
infrastructure.[1]
3.2
In addition to a network price guarantee, which will commit the
successful bidder to ensuring that total network charges will be lower in the
financial year 2018-2019 than they were at 30 June 2014, the NSW Government
also announced that the current requirements in relation to safety and
reliability, which are mandated by state legislation, will continue to apply
once the lease process is finalised.[2]
3.3
Apart from the wider benefits of 'unlocking' the capital contained in
NSW's electricity distribution network – while simultaneously maintaining state
ownership of critical state infrastructure at 51 per cent – the NSW Government
argued that current consumer protections will be maintained or even enhanced. In
particular, for example, a number of major protective mechanisms will be either
newly enacted or increased in scope:
-
Electricity Price Commissioner: The NSW Government
appointed Professor Allan Fels, a former Chairman of the Australian Competition
and Consumer Commission (ACCC), to the position of Electricity Price
Commissioner. In that new role, Professor Fels will report to the Government on
each transaction to confirm that these will not put upward pressure on network
charges in the short, medium and long term. He will also be responsible for reviewing
annual price guarantee statements, and will have the authority to refer any
concerns or inconsistencies to either the AER or ACCC.
-
Continued Price Regulation: AER, as the national
regulator, will continue to determine network charges for all of NSW's
electricity network businesses, and will continue to have the authority to enforce
compliance with its determinations.
-
Reliability Standards: The leased network businesses will
continue to have a range of legislated obligations in respect of the safety and
reliability of their distribution networks. These legislated obligations will
remain in place irrespective of ownership.
-
Terms of the lease: As an additional safeguard, the lease
can be terminated for a number of substantive reasons, including the following:
failing to operate or maintain the network in accordance with the regulatory regime
and good operating practice; the network ceases to be used as an electricity
network; the insolvency of the lessee; the revocation of a major authorisation,
such as National Electricity Market (NEM) registration or the NSW operating
licence. The NSW Government's consent is also required in the event that there
is a change in the control of the lessee.
-
Independent Safety and Reliability Regulator: An
Independent Pricing and Regulatory Tribunal (IPART) will be appointed to ensure
the operator's compliance with licence conditions, along with the continued
maintenance of the mandated safety and reliability standards. IPART will
receive regular reports in relation to reliability and customer service
standards. In addition, it will require annual independent audits of
reliability and customer service standards, and IPART will have the authority
to appoint inspectors to assess electrical installations and equipment. IPART's
inspectors will also possess the authority to investigate serious electricity
accidents.
-
Step in Rights: The NSW Government, through the Energy
Minister, will have the authority to trigger new 'step in rights' if a breach
of licence or regulatory obligation threaten the safety, security or
reliability of the state's electricity supply. Under this power, IPART will take
on the role of network administrator and will appoint a 'step in operator'
until the Minister determines that these interim measures can be dispensed with.[3]
3.4
On the basis of these regulatory safeguards, some of which go beyond the
current safety, reliability and consumer protection requirements, the NSW
Government maintained that the lease of 49 per cent of the state's electricity
network will achieve dual aims: maintaining an efficient, safe and reliable
electricity distribution network while also ensuring that government services,
both now and into the future, can meet the various needs of the state's growing
population.
The Ausgrid lease and critical infrastructure protection
3.5
Since the NSW Government announced the formal commencement of the
Ausgrid lease process in November 2015, some media reports, so far unconfirmed
by the NSW Government, have suggested that a number of foreign energy and
investment companies have expressed their interest in acquiring 50.4 per cent
of the electricity distributor. In particular, some recent reports have
suggested that, along with other major foreign companies and consortiums, two
of the frontrunners in the lease process are State Grid, a Chinese state-owned
energy supplier, and Cheung Kong Infrastructure, a Hong King-based investment
vehicle and infrastructure operator.[4]
3.6
In has been reported that State Grid submitted one of the unsuccessful
bids for the 99 year lease of Transgrid, with some commentators suggesting that
its ultimate failure to secure the transaction was the direct result of
significant national security concerns. The majority of these concerns reportedly
relate to the importance of Transgrid as an element of Australia's critical
infrastructure and the fact that State Grid is a Chinese State-owned Enterprise
(SOE).[5]
3.7
In the course of its inquiry, the committee heard evidence, including
from the Australian Strategic Policy Institute (ASPI), that Australia's
critical infrastructure assets, including major electricity distributors like Transgrid
and Ausgrid, are particularly vulnerable to a variety of forms of interference
and sabotage, including through foreign cyber intrusion. ASPI expressed its
concern that any sale or lease of these assets, especially to foreign SOEs like
State Grid, could lead to potentially significant national security risks, many
of which are not adequately addressed though the current foreign investment
review process.[6]
3.8
In addition to the general risks associated with allowing foreign-owned
companies or consortiums to own and operate critical infrastructure, ASPI
highlighted the fact that the majority of Chinese SOEs, including State Grid,
maintain very close links with the ruling Communist Party of China (CPC). This
could have the effect of turning these entities from purely corporate actors into
little more than strategic instruments of the CPC, even though they continue to
operate in the global free market.[7]
ASPI suggested that the close and ambiguous relationship between the CPC and
SOEs does not appear to be sufficiently or effectively captured in the
Australian Government's foreign investment review and assessment processes.[8]
3.9
ASPI also observed that, while all online systems are vulnerable to
cyber-attack and intrusion, which can launched from almost any part of the
world, physical access to critical systems is likely to provide a malicious
actor with a number of significant advantages, especially if the aim is to destroy
or degrade a piece of critical infrastructure. Mr Peter Jennings, Executive
Director of ASPI, pointed out that direct access can be an important
facilitator of cyber intrusion and terrorism:
Complex networked systems by definition are linked and present
a variety of interfaces that can potentially be accessed by aggressors seeing
to damage those systems. Even systems that are completely air gapped -- that
is, are physically isolated from the Internet -- still require some form of
interface from which to be programmed and/or controlled. These systems can
still potentially be attacked by malicious cyber actors, for example via thumb
drives or direct programming through access to a control interface... As a
developed country and a close defence and intelligence ally of the United
States Australian critical infrastructure is also likely to be of high interest
to potential cyber aggressors. All of this points to the importance of sales or
leasing of critical infrastructure to be carefully assessed from the perspective
of the vulnerability of the infrastructure in question to cyber -attack.[9]
3.10
In addition, ASPI also gave evidence to the committee that the NSW
electricity distribution network, of which Ausgrid is a major part, constitutes
a major component of national critical infrastructure, and is therefore not
merely a matter of state government concern.[10] In particular, ASPI suggested
that:
The Committee should
note that the NSW 'poles and wires' network is as vulnerable to cyber-attack as
the US electricity distribution network or the networks of other countries.
Moreover there is increasing interest on the part of malicious cyber actors to
explore how to damage the critical infrastructure of potential opponents.
Australia cannot isolate itself from these international developments...NSW's
electrical transmission and distribution system is an element of critical
infrastructure on which significant parts of the Federal Government, Defence
and Intelligence community relies. We cannot afford to be casual about the
security of this critical infrastructure.[11]
3.11
While the committee recognises that the NSW Government has put in place
a range of protections, both in relation to network reliability and consumer
protection, in order to ensure that the lease process does not produce adverse
effects, the question of the risks posed by foreign control of critical
infrastructure does not appear to have been directly or adequately addressed.
3.12
The flaws in the foreign investment review process that the committee
identified in its substantive report, especially in relation to the
transparency and consistency of the assessment process itself, mean that it is
unclear whether the full implications of leasing 49 per cent of the state's
electricity distribution network, possibly to foreign domiciled and controlled
companies, has received sufficient critical assessment.
Committee view
3.13
The committee recognises that foreign investment proposals are often complex
and sensitive, especially if the proposed investment is in a major national
asset, such as Ausgrid or S. Kidman and Co. Nonetheless, much of the evidence
provided to the committee during its inquiry suggests that the foreign
investment review framework suffers from a lack of clearly defined processes.
In particular, the national interest test is seemingly ad hoc and
inconsistently applied.
3.14
The committee takes the view that the lease of Ausgrid and the sale of
S. Kidman and Co. together serve as a case in point. In both cases, the
assessment process appears to have been conducted in a seemingly arbitrary
manner and without a clear presentation of a national interest argument.
3.15
The committee recognises that both the lease of Ausgrid and the sale of
S. Kidman and Co. might be in the national interest. However, the lack of
procedural clarity in relation to assessment criteria and the national interest
test, which the committee noted in its substantive report, again strongly suggests
that the Australian public cannot have full confidence that these investment
proposals have been subjected to a rigorous, transparent and consistent
assessment process. As the committee made clear in its substantive report,
these inconsistencies weaken the overall effectiveness of Australia's foreign
investment review framework, not only in the eyes of the Australian people, but
also for potential foreign investors.
Senator Chris Ketter
Chair
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