"The Australian government views the sale of its minority 13% share as being in the interests of Australian taxpayers, and consistent with our strong support for the privatisation of government-owned electricity generators and increased competition in the electricity market, particularly in NSW," Senator Minchin said.

This move follows the NSW government’s decision last December to sell its 58% equity in the scheme.

NSW plans to sell its majority stake in Snowy Hydro Ltd through a sharemarket float and spend the money paying down debt.

Based on recent sell-offs of hydroelectic assets, NSW’s equity in the scheme is probably worth almost $2 billion, while the federal government's stake could be worth about $375 million.

While NSW and the federal governments are selling out, the Victorian government has yet to decide what to do with its 29% stake, which could fetch almost $1 billion.

Victoria has said it would want reassurances that its water rights would be safeguarded before it agreed to sell its stake.

But it can do little to protect these rights while holding less than a third of the project. Whether Snowy Hydro is privatised or in public hands, the 58% now held by NSW confers control of the scheme.

Last week, Victorian Premier Steve Bracks appealed to the NSW government to reverse a decision on water flow to the Snowy River.

The scheme has began diverting water which had been flowing down the Mowamba River into the Snowy.

The water will now flow through a aqueduct into the Jindabyne dam from where they will be released into the Snowy.

Bracks said the flows were crucial to the Snowy's health and he wanted the water still flowing naturally from the Mowamba into the Snowy until further environmental studies had been completed.

But Minchin tried to allay concerns, saying the federal government would discuss issues relating to irrigation water users with the NSW Government and Snowy Hydro.

Rules on the water rights of downstream users, regulating and securing water flows, were drawn up in 2002 when the Snowy Hydro scheme became a corporation.

"These obligations will not be altered by privatisation and will continue to offer security for irrigators in the Murray and Murrumbidgee river systems, and for environmental flows in the Murray, Snowy and other rivers," Minchin said.

"A change of ownership will not affect these obligations or the rights of downstream water users in NSW, Victoria or South Australia."