Home > Economic policy > NSW electricity privatisation – a quick look

NSW electricity privatisation – a quick look

December 12th, 2007

There’s nowhere near enough evidence in the public domain for a proper evaluation of the announced privatisation of NSW electricity, but there’s enough to do a quick retrospective evaluation of the last such proposal, under the Carr government in 1996 and 1997. At the time, estimates of the sale price for the whole industry (generation, distribution and retail) were “up to” $22 billion (an overoptimistic figure based on extrapolation from Victoria). If entirely used to repay debt (unlikely, this is NSW after all!) that would have saved the government around $1.5 billion per year. Instead the government got dividends of around $1 billion a year, and also extracted at least $5 billion in special capital repayments. So, the total stream of payments was about the same, and the present value was, if anything, a bit higher since the capital repayments came early.

Coming forward to 2007, the government looks set to get more than $15 billion for generation and retail alone, even with a range of restrictions that would reduce the sale price substantially. In general, distribution accounts for at least half the value in the industry, implying a value upwards of $30 billion.

Short analysis: By not selling in 1997, the public lost nothing in terms of cash flow, and accrued at least $8 billion in capital gains.

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  1. Spiros
    December 12th, 2007 at 07:45 | #1

    “By not selling in 1997, the public lost nothing in terms of cash flow, and accrued at least $8 billion in capital gains.”

    Well, yes, that’s the way it turned out after the fact, but it could have gone the other way. Owning a business is not without risk.

    The question facing Iemma today is, looking to the future as best they can, is is better for them to have their money invested in electricity or railway assets?

  2. Ikonoclast
    December 12th, 2007 at 07:50 | #2

    Major infrastructure should remain in public ownership. There are several reasons other than the one JQ mentioned above. The reasons are;

    1. They are often natural monopolies. It is more equitable for the state (and thus the public) to benefit from a natural monopoly than for business to do so.

    2. Other equity issues, namely access to services for the poor (medicine, education, dentistry etc)

    3. National development and national security. Public management of logistic, communication infrastructure allows for more coordinataed management and development.

    4. Maintainenance of full employment by using public employement as a pool to be expanded and contracted based on the activity of the private sector. (The 80% – 20% approx. private – public model.)

    Now if people want to start complaining about distorting the economy well… What about negative gearing, trusts, salary sacrificing, tax holidays for big business, provision of cheap infrastructure and power for big business, special tax treatment for the aged, subsidies for fossil fuels etc. etc.? These have a far worse distorting effect on our economy but it’s funny how the moneyed class (who claim to never take a dollar from the government) love to take the free billions that these policies represent.

  3. observa
    December 12th, 2007 at 14:08 | #3

    Here’s another analysis on the privatisation by Terry McCrann
    http://www.news.com.au/heraldsun/story/0,21985,22901987-36281,00.html
    And like the unions Ikonoclast, you’re wasting your breath because Kyoto cap and trade means rising power bills and Iemma wants to pass the buck to a convenient Labor whipping boy.

  4. observa
    December 12th, 2007 at 14:26 | #4

    When it was first mooted by Prof Owen back in Sept here’s Iemmaspeak-

    “All around the world, prices are rising as the result of actions that governments are taking on climate change,” Mr Iemma said.

    “What we are going to do is to take action to ensure the prices are as low as possible. The best way … to ensure that happens is a big dose of baseload of electricity.”

    A big dose of something alright!

    http://www.news.com.au/heraldsun/story/0,21985,22399137-31037,00.html

  5. Ikonoclast
    December 12th, 2007 at 14:26 | #5

    I agree that (a) I am likely wasting my breath and (b) carbon caps probably will mean higher power bills. Neither of those constitute an argument against my numbered points.

  6. observa
    December 12th, 2007 at 14:32 | #6

    Nice theory Ikon. You should take it to the NSW Opposition. Always remember- Howard lies but Labor Slys. If you’re a skeptic, check out Bali.

  7. observa
    December 12th, 2007 at 14:51 | #7

    I think we’ll have to coin the new word ‘Slies’ for Labor now. Short for ‘Sorta lies’ and ‘slys’, when they’re doing exactly the same thing as Howard openly stated, but wearing their bright, shiny moral badges so they’re not really lying like he was.

  8. December 12th, 2007 at 16:47 | #8

    Ikonoclast,
    Unfortunately for us all, you are wrong on all four.

    1. They are often natural monopolies.
    Wrong. The only thing that comes close to a natural monopoly is the actual poles and wires – generation is not. In fact, if anything it benefits from a diversity of sources, rather than the great big coal plants that governments (and unions) love. Poles and wires businesses, if necessary, can be regulated to produce similar, if not better, outcomes than a utility run, ultimately, for the benefit of politicians can.

    2. Other equity issues, namely access to services for the poor (medicine, education, dentistry etc)
    Again, wrong. If society wants to subsidise these it should be explicit and separate so that it can be monitored adequately.

    3. National development and national security. Public management of logistic, communication infrastructure allows for more coordinataed management and development.
    There is little, if any, evidence that this happens in real life. If anything (and the recent Federal campaign showed this in spades), subjecting infrastructure spending to political, rather than business, imperatives does not produce steady, predictable growth. Quite the opposite.

    4. Maintainenance of full employment by using public employement as a pool to be expanded and contracted based on the activity of the private sector. (The 80% – 20% approx. private – public model.)
    Again – wrong. Private sector swings in growth tend to be increased, rather than reduced, by schemes of this sort. Government hiring (and firing) is a very slow process – firing almost never happens. By the time any significant downswing is noticed typically it is too late to start government action before it serves to make things difficult during the upswing.

    Trusting our development to governments has never really worked, Ikonoclast – given the choice between a governmetn leading, following or getting out of the way, I would heavily tend towards the third.

  9. Bruce M
    December 12th, 2007 at 17:04 | #9

    Come on John, this is plan misleading. How can you forget the time value of money? What about the capital expenditure on these businesses between 1996 and now. You need to look at the net position not the enterprise value. Also, who says they will get $15bn this time?

  10. jquiggin
    December 12th, 2007 at 18:05 | #10

    Bruce, I suggest you reread the post.
    (1)Time value of money (aka present value) is discussed. Feel free to do a more detailed calculation yourself.
    (2)As noted there was no capital input by the NSW government, rather $5 billion in capital was taken out.
    (3) On your final question, the Iemma government says this.

  11. Ikonoclast
    December 12th, 2007 at 20:14 | #11

    Andrew, none of your counters to my points hold up to scrutiny.

    However, I want to take issue with your statement “Trusting our development to governments has never really worked… given the choice between a government leading, following or getting out of the way, I would heavily tend towards the third.”

    You indicate no qualification or limit on how much you want government to get out of the way. Do you mean we should have no government? That is the logical extreme of your statement. Or do you mean we should have a minimalist government as advocated by the Neocons? This would entail the Fisc (Treasury & Finance), The Courts (& police) and the Military. In other words this is essentially just the coercive apparatus and the means to pay for it.

    How much do you want the state to guarantee? Merely that it can maintain a monopoly on violence and uphold criminal and contract law? Or do you want the state to do more than that? If you want the state to do more than that in any way then ipso facto you are in favour of the state being involved in development. Because any more will involve physical infrastructures and/or social programs of some kind.

    I find it passing strange that government involvement in developing and running certain utilities and national infrastructures is considered apparently to be worse than useless. Yet things that public enterprise built such as the PMG (Later split into Aust Post and Telecom), the Commonwealth Bank and CSL turned out to be so valuable that private interests slavered over and finally succeeded in gorging themselves to their tonsils upon these apparently worthless achievements of public enterprise.

    Is the state and therefore the government to have some role in directing our development or not? It turns out that in crucial emergencies like major wars (WW2 is a good example) that the state and only the state can take what is almost a full command role of economy and society to direct a nation’s efforts to one end namely survival.

    When an excessive portion of war and reconstruction effort is turned over to private armies, private contractors and neocon administrators like Paul Bremer you get… IRAQ! Enough said?

    When life is salad days and past nation building is a legacy endowment we are drawing down and all that seems important is holidays, indy cars, footy, plastic toys and plasma TVs then its fine (for a while) to tell the state to get out of the way.

    But wait for the next national, international or global emergency and we will need our nation state, our national government and its public service apparatus and infrastucture to direct responses and development according to a logical and sustainable national plan. We cannot blindly rely on the invisible guiding hand. There are too many glaring examples of severe market failure for that to ever be considered… especially in these portentous times.

  12. SJ
    December 12th, 2007 at 21:13 | #12

    Andrew Reynolds Says:

    1. They are often natural monopolies.

    Wrong. The only thing that comes close to a natural monopoly is the actual poles and wires – generation is not.

    This was the position adopted in the early 90s, and has become accepted wisdom. However, the evidence to support the claim has not been forthcoming.

    Let’s start with the Wikipedia definition of natural monopoly:

    An industry is said to be a natural monopoly if one firm can produce a desired output at a lower social cost than two or more firms—that is, there are economies of scale in social costs.

    Note that it’s not necessary that there literally be “one firm” as in one producer in a natural monopoly situation. A central licensing authority or similar is sufficient.

    Since the national electricity market started, in 1996 (the first incarnation), the only baseload power stations that have been constructed have been in Queensland, where the government has underwritten them.

    Baseload power stations have high fixed costs, but low marginal costs. Over a long period, like 20 years or so, such power stations have a lower total cost than non-baseload power stations like open-cycle gas turbines.

    Outside of Queensland, there’s been plenty of plant construction, but it’s all been low capital cost, high fuel cost plant (apart from a tiny amount of “green” plant). This suggests that the market is delivering non-optimum outcomes.

    There are two possible, rational responses to the situation:

    a) change the market design to encourage longer term efficiency, rather than just instantaneous efficiency. This might be in the “too hard” basket.

    b) accept the market design as it is, and work around it, as Queensland has been doing.

    The NSW, Victorian and South Australian response has not been in the best interest of those states’ economies. Victoria and South Australia have seen the electricity price to consumers skyrocket, and NSW seems to be set to follow them down the same path. Note that “consumers” in this case doesn’t just mean the average mums and dads who Andrew seems to despise, it also means every business in the state apart from the generators.

  13. Tom N.
    December 12th, 2007 at 21:14 | #13

    Andrew, none of your counters to my points hold up to scrutiny. However, I want to…

    Well, that’s convincing! In fact, Ikon, Andrew’s brief responses generally get to the key aspects of the matters; its your “arguments” that are the threadbare ones here.

  14. Tom N.
    December 12th, 2007 at 21:15 | #14

    Andrew, none of your counters to my points hold up to scrutiny. However, I want to…

    Well, that’s convincing! In fact, Ikon, Andrew’s brief responses generally get to the key aspects of the matters; its your “arguments” that are the threadbare ones here.

  15. jack Strocchi
    December 12th, 2007 at 21:33 | #15

    Pr Q says:


    Short analysis: By not selling in 1997, the public lost nothing in terms of cash flow, and accrued at least $8 billion in capital gains.

    So we dodged a bullet that would have cost $8 billion, mainly thanks to the stout resistance of the power unions. God bless the workers.

    As Kinsley says, “in every political scandal the real scandal isn’t what’s illegal: it’s what’s legal”.

  16. Ikonoclast
    December 12th, 2007 at 22:19 | #16

    I seems to me that SJ in answer 12 effectively KO-ed AR’s “they are not natural monopolies except for the wires” argument.

    With respect to equity, providing free or low cost services directly can be made dependent on the possession of a LIC (Low Income Card) if you want to means test it. Subsidies can serve other purposes as well. Subsidising public transport will move people away from cars. One person per one car in most cars is an extremely inefficient way to move people around and proof of either market failure or of excessive subsidies of private transport (eg free roads). Mind you I hate tolls and think they are damned inefficent too. Better to put a road toll impost on the fuel.

    I thought I essentially answered 3 in my admittedly overblown tirade.

    With my point 4, I’ll be honest I am wavering on the detail of that one and am open to being convinced either way. But if you accept you need a public sector as I do then it’s going to employ 15% and 20% of the workforce anyway.

  17. observa
    December 12th, 2007 at 22:58 | #17

    “Victoria and South Australia have seen the electricity price to consumers skyrocket, and NSW seems to be set to follow them down the same path.”

    Now that’s really a huge simplification mouthful which hides a lot of different flavours. As I recall in the 80s the States cottoned on to dodgy lease deals particularly with power generation that allowed the generators to effectively shirk Federal company tax until Treasurer Keating shut it all down. NSW in particular ended up with a big power overcapacity as a result, which it has been luxuriating in until now. Basically, unless a new power station is built right now, they’ll have blackouts in 5 yrs time. Hence Iemma’s move with the double edged (carbon caps also)Sword of Damocles hanging over his head. That’s the rub with long tailed investments. Govts often live off past cheap capital investments, but when the current replacement costs(true depreciation) rear their ugly head, the game is up. Also NSW has had the benefit of hydro to store off peak power at night, which we don’t have and neither do you now with the drought. We are experiencing the same with water and a newly announced desal plant comes with a promise of 13% pa water price increases for the next 5 yrs to pay for it. Wait til the punters work out what compound interest means? I don’t think that penny has dropped yet.

    Now when SA privatised, the immediate and indeed intended result was a rise of around 20% for retail users and a concomitant reduction for wholesale users, as Keating’s competition policy gun demanded. Then the rises began as we were already pressing on our current capacity, mainly in peak summer, where we have the peakiest demand in Oz with summer aircons. Something like 25% of generating/transmission capacity is idle but for about 4 weeks of the year nowadays. Anyway new power stations like Pelican Point cost new money and hence the recent price hikes, just like NSW faces now and that’s without the carbon taxing to come. It’s simply a perennial problem of 3-4 yr term govts and 20-30 yr power stations and similar infrastructure, where the temptation to live off the capital is just too great. Hence you outsource the whipping boy these days, when it’s whipping time.

  18. observa
    December 12th, 2007 at 23:18 | #18

    And you leftys are constantly to blame for this state of affairs. If you demanded Govts account for real depreciation of all publicly owned assets, then that would force them to stop pissing them up against the wall of recurrent empire building, or else raise taxes to do so. Private investment has no such luxury in living off its capital for short run smoke and mirrors balance sheet purposes.

  19. Ernestine Gross
    December 13th, 2007 at 08:04 | #19

    Observa, your ‘lefty-righty’ classification ruins your otherwise reasonable argument. Moreover, your argument could be strengthened by noting that there are also ‘private sector’ empire builders.

  20. December 13th, 2007 at 08:46 | #20

    If you want to cut CO2 emissions in the power sector you need innovation in generation. It seems to me that the private sector is better positioned to do this given the risks. I really see no argument for government ownership of generation although if you are going to sell an assett you should work to get the best price.

  21. December 13th, 2007 at 12:10 | #21

    The arguments about only the private sector being better able to innovate are self-serving rubbish based on the moronic premise of neo-liberalist dogma that people only innovate if there exists a profit motive within a free-market unrestrained by meddlesome government.

    I wonder then How Fred Hollows managed to do such brilliant work making cataract surgery available for millions in the Third World.

    Australia innovated brilliantly prior to the Second World War thanks largely to Government owned factories and became one of the most techologically advanced societies in the world. This has been shown Andrew Ross’s excellent “Armed and Ready – The Industrial Development and Defence of Australia 1900-1945″ of 1995 and “National Insecurity” of 2007 by Weiss, Thurbon and Mathews.

    Naomi Klein’s excellent “The Shock Doctrine” (RRP AU$32.95 – see http://www.naomiklein.org/shock-doctrine http://www.naomiklein.org/shock-doctrine/reviews http://webdiary.com.au/cms/?q=node/2204 monday-message-board-93) has shown conclusively that the motivation for privatisation is simply outright theft of commonly owned wealth. This privatisation will be no less a disaster than all previous electricity privatisations in this country.

    Iemma and Costa know it, but couldn’t care less, because they are not the servants of those on whose behalf they are supposedly governing.

  22. December 13th, 2007 at 12:50 | #22

    I though the Aboriginal Health Service was the vehicle through which Fred Hollows did a lot of his good deeds and that it was setup by private parties not the government. In fact it was as I understand it a case of civil society filling a need. Why does this prove anything about governments being able to innovate?

    And since when did the non-government sector include only private for profit businesses. The first national parks were non-government entities as were the first hospitals, fire brigades, police services, welfare agencies, currencies, phone exchanges, power stations and just about everything we value in civilised society. Why assume that things that don’t make a profit must be government run?

    On a separate note I find it amusing that opponents of economic liberalism call it neo-liberalism whilst the proponents call it classical liberalism. It seems to be a case of new is bad but old is good.

  23. December 13th, 2007 at 12:59 | #23

    p.s. From what I have seen and read by Naomi Klein she is a twit when it comes to economics. She is not high on my reading list.

  24. Tom Davies
    December 13th, 2007 at 13:00 | #24

    Here’s another review of The Shock Doctrine which Naomi Klein’s web site has unaccountably missed: http://www.nysun.com/article/63867

  25. observa
    December 13th, 2007 at 13:24 | #25

    “Observa, your ‘lefty-righty’ classification ruins your otherwise reasonable argument.”

    Ernestine, I’m referring to the gaggle of usual suspects that continually fuel the conspiracy theorist lynch mobs to get pollies like Rudd to promise more taxeaters with clipboards running around Coles and Woolies and the servos checking prices for no reason whatsoever. Not to mention another current ACCC enquiry into petrol pricing. I’ve lost count of how many taxeating, company timewasting exercises we’ve had over the years. I’ll include the quasi public service types in the NRMAs and RAAs here too. None of these tossers produce or distribute a lick of the products they’re so expert about pricing on, yet they fuel the irrational lynch mob from their cossetted and protected oligopolies themselves. As a result of the constant wailing and hand wringing of these featherbedded pissants, not one politician is game to stand up and tell it like it really is. Basically Australians, if you think there’s super profits in retailing or the supply and distribution of petrol, feel free to get off your fat behinds and get stuck into them. Failing that, belt up and leave it to the ABS to measure the inevitable outcomes of our illustrious Reserve Bankers hocus pocus, not to mention the Kyoto kick in the pants coming real soon.

  26. observa
    December 13th, 2007 at 13:48 | #26

    And just for once in my life, when that grinning Cheshire cat, who currently leads the lynch mob, starts prattling on about the need for a petrol price commisioner and staff, I’d like one of our MSM flunkies to stick the microphone under his nose and ask him to please explain why the big bad nasty gouging Oilcos have so often dropped the price of petrol. Are they nuts or something PM?

  27. Bingo Bango Boingo
    December 13th, 2007 at 13:53 | #27

    “…based on the moronic premise of neo-liberalist dogma that people only innovate if there exists a profit motive within a free-market unrestrained by meddlesome government.”

    Has anyone ever actually said this? There isn’t a sane neo-liberal out there who believes that. Anyone can see that innovation springs from not-for-profit organisations (whether government run or funded, or neither). Christ, university researchers innovate every day. Are you saying that neo-liberals are ignorant of the academy? The neo-liberal (or classical liberal, if you prefer) simply believes that innovation is more likely within a free market or, at the very least, that innovation within a free market, spurred by the profit motive, will tend to be more aligned to actual human wants and needs, as opposed to the wants of politicians, special interests groups, the fashionable, etc. There is more than enough room within this view for government involvement in, for example, basic research. All your comment demonstrates is that you haven’t really read much written by actual neo-liberals, or if you have, you’re nonetheless happy to spout blatant canards.

    BBB

  28. Fred Argy
    December 13th, 2007 at 14:22 | #28

    For a critical but overall agnostic viewpoint, I set out below the text of a letter of mine published in The Australian on 12 December. My aim was to refute some myths about privatization but not reject the whole proposal.

    Letter follows

    The proposed privatization of retail electricity assets (“Iemma pledges to sweeten power sale�, The Australian 11/12/07) has been greeted with applause. Some of that applause may be justified. Provided future governments ensure there are many competing suppliers and/or strong price regulation, it may well lead to better prices and services for electricity users.

    But two other arguments being put forward for the privatization are complete furphies! The first is that privatization will improve the government’s balance sheet and hence its credit rating. However, if the assets are sold for an amount equal to the risk-adjusted present value of expected future earnings, it will leave government net worth unchanged.

    The second furphy is that privatization will allow the government to spend more on other badly needed infrastructure such as a metro rail system and road upgrades. However all privatization does is transfer spending from the public to the private sector without adding anything to the overall productive capacity of the NSW economy e.g. it does not release scarce skilled tradespersons for other uses. So governments will not be able to step up spending on other infrastructure without adding to inflationary risks – which is exactly the situation we are in now.

  29. December 13th, 2007 at 14:23 | #29

    Tom Davies, I don’t think that Naomi Klein has much to fear from the New Your Sun review. It mostly consists of setting and knocking over straw men and fails to challenge any of the substantive facts presented in the Shock Doctrine. Please feel free to challenge the facts yourself.

    (However, for the record, I think there is one weakness in the Shock Doctrine, that is its implicit and self-contradictory support for immigration, which is disastrous for many countries, including our own, but apart from that one significant flaw, it cannot be praised too highly.)

    Terje,

    You have responded (inadequately in my opinion) to one of my points and ignored another.

    My point about Hollows is that he was clearly not motivated by profit. If it was true for him than it can be true for others including those who work for Government. Power generation should not need the chill wind of the free market in order for its workforce to be innovative. As I pointed out before, Andrew Ross has proven that not to be the case.

    Given the disastrous past record of privatisation there is simply no case for it to be done with NSW power generation. That is why it is opposed by the unions and by every opinion poll I am aware of.

    To privatise in the face of such strong opposition with no mandate is morally no better than theft.

  30. observa
    December 13th, 2007 at 14:53 | #30

    Now I ask you! Have a listen to this typical metoo claqueophony- http://www.news.com.au/adelaidenow/story/0,22606,22918235-5006368,00.html

    “AUSTRALIA’S telecommunications infrastructure needs an overhaul from the ground up, a national professional engineers’ group says”

    What, not from the satellite down Mr Peter Taylor? Sheesh!

  31. observa
    December 13th, 2007 at 15:47 | #31

    If you don’t believe the enormity of what I’m banging on about, cop a load of the massive contradictions in this report here
    http://www.news.com.au/story/0,10117,22918790-401,00.html?from=public_rss

    In particular (and bearing in mind Iemma wants to give NSW consumers a great big load of extra coal power) cop the attitudes of the punters Ruddy and Co have stirred up-

    “In an address to the major session of the United Nations’ climate change conference in Bali, Mr Rudd said Australia would make tough decisions to ease carbon pollution.

    “We must not be distracted by the day-to-day domestic political challenge that we lose our long-term perspective,” he said.

    “Action to tackle climate change will not be easy.

    “It will require tough choices. And some of these will come at a political price.”

    But not just yet. The Prime Minister will wait until mid-next year for a detailed report from economist Ross Garnaut on the economics of reducing emissions and a Treasury paper on the issue before settling on targets for cuts.

    However, an exclusive Newspoll survey has found many Australians want the Government to act immediately to phase out coal-fired electricity stations.

    Some 86 per cent of Australians want action on emissions within the next three years according to the Newspoll commissioned by Greenpeace.

    It found 77 per cent wanted coal-fired power stations phased out by 2010. And 73 per cent wanted coal exports capped or reduced in the same period.”

    The moral badge wearers are about to live in very interesting times it seems and Honest John must be wetting himself at their predicament now.

  32. observa
    December 13th, 2007 at 16:23 | #32

    Meanwhile, Media Mike, deep in the bowels of the nerve centre of the Saudi Arabia of Uranium chokes on the poll that ‘found 77 per cent wanted coal-fired power stations phased out by 2010.’ and turns to his minders and snaps ‘Get me deCrespigny, Walker or Morgan on the phone and be quick about it and show me those desal plans again’

  33. LuxuryYacht
    December 13th, 2007 at 20:16 | #33

    How is power generation a natural monopoly? Sure, transmission is, and it’s better to have a public monopoly than a private one, but generation is easily the least natural-monopoly-like sector of the power generation industry.

  34. December 13th, 2007 at 20:48 | #34

    Given the disastrous past record of privatisation there is simply no case for it to be done with NSW power generation.

    What disasters? Qantas planes still stay in the air more often than not, Telephones still ring, the Commonwealth Bank has not gone broke? Where are these disasters?

  35. observa
    December 13th, 2007 at 21:31 | #35

    You don’t understand Terje. When you live in the Adelaide Hills for the lifestyle and commute to work and use the bosses/govts fast broadband, you want to be able to go home and enjoy the exactly same service, at exactly the same price. That’s why you vote for Kevin and he’ll see to it.

  36. observa
    December 13th, 2007 at 21:35 | #36

    As well 10yr old little black girls will be able to look up the word rape on one of Kevin’s free laptops and understand what’s happening.

  37. SJ
    December 13th, 2007 at 22:19 | #37

    Terje Says:

    What disasters? Qantas planes still stay in the air more often than not, Telephones still ring, the Commonwealth Bank has not gone broke? Where are these disasters?

    Near enough is good enough? Well, I guess it’s unreasonable to expect a libertarian to recognise an economic disaster, particularly one who still lusts after anarchy and gold.

    It would be more interesting, Terje, if you responded to daggett’s point about theft and the absence of consent.

  38. SJ
    December 13th, 2007 at 22:33 | #38

    Throat-warbler Mangrove Says:

    How is power generation a natural monopoly? Sure, transmission is, and it’s better to have a public monopoly than a private one, but generation is easily the least natural-monopoly-like sector of the power generation industry.

    Refer to comment #12 above. You seem to be in the wrong sketch. An argument is a connected series of statements intended to establish a proposition. It’s not just saying “No it isn’t”.

  39. Bobalot
    December 13th, 2007 at 22:36 | #39

    The idea that private enterprise will invest and “innovate more” than the public sector is frankly a load of rubbish.

    A Engineer/Businessman lecturer pointed a few facts out last semester which I found startling.

    Australia has one of the highest rates of government investment into research and design.
    Australia also has one of the lowest rates of private R&D in the OCED despite having enormous tax breaks for investing in research and design(I think its the 2nd or 3rd highest).

    Private Industry despite enormous incentives simply does not invest in R&D. Many university/private company combined projects are incredibly one sided. The University does all the research and the private company gets all the profits. Still universities are desperate for partners. I know my university has dozens of projects waiting on the shelf ready to go.

    For a variety of reasons R&D by private industry in Australia is horrible. It is the government sector which is holding things together. Australia would be stuffed without its Unis doing R&D, the CSIRO etc.

  40. cs
    December 14th, 2007 at 00:24 | #40

    $8 billion in capital gains to NSW! I reckon Prof Q deserves at least a 10 per cent bonus from the public for his sustained critique over this period!

    Can we keep the carpetbaggers out for another round?

  41. December 14th, 2007 at 07:13 | #41

    Observa – ten year old black girls are not getting raped because of Kevins laptop policy.

    SJ – experience has taught me that engaging with you leads nowhere useful. You are merely here to sledge people.

    Bobalot – your post is indicative of what is wrong with so much government intitiative. It seeks to measure the initiative by virtue of the cost. It seems that the more it costs the better it must be. Even if the technology never gets commercialised or put into use it seems you think high levels of government funded R&D are terrific. I think its a waste of taxpayers money.

  42. December 14th, 2007 at 07:44 | #42

    The problem with comment #12 is that it somewhat ignores the circumstances in which the generating companies sell power. Their customers are regional network operators. It is the regional network operators that have an interest in minimising outages for their retail customers and so it is these operators that should be seeking long term supply contracts for base load power or seeking to build such supplies themselves. If there is a failure to provide baseload it lies with the imposed market structure and with the regional operators.

    Personally I think the “base load” cost of electricity supply (ie the fixed part of the monthly bill) needs to be a lot higher and the variable cost (ie the unit cost of electricity) needs to fall. There is in my view a serious underestimate in the price placed on availability. For the vast majority of consumers the unit cost of electricity is a second order issue compared to knowing that supply is available when they want it. And availabilty is not just about keeping the wires up (avoiding blackouts) but also about ensuring that there is a capacity to meet or regulate demand (avoiding brown outs).

    However this pricing problem is not caused by private generation companies but has more to do with price regulation, government control of regional suppliers and an imposed market structure. It would make more sense to hand the regional operators (wires and all) back to local government and to then remove the price controls entirely. Local government can sort out if privatisation of the regional operators makes sense.

    Price regulation always creates supply problems. Whether it is the regulation of food prices, petrol prices, labor prices or electricity prices.

  43. Bobalot
    December 14th, 2007 at 08:19 | #43

    R&D is never a waste of money. There have been many technologies that were pioneered at universities that only took off years later. Specially Medical research.

    The internet itself developed from the APRA network which was developed by the US defense department. The very thing loony libertarians hold up as the pinacle of the free market had its origins in government investment.

    An enormous amount of technologies even developed in Australia has to go overseas to find investors. It seems private investors in Australia seem solely happy with real estate investment.

    Problem for univesties is they can’t only use foreign investors for their inventions. It be politically bad.

  44. December 14th, 2007 at 09:09 | #44

    I note that Terje has ignored SJ’s challenge to respond to my point:

    To privatise in the face of such strong opposition with no mandate is morally no better than theft.

    Instead, he attempts to lead us into a tortuous theoretical discussion about how a privatised electricity generation in some theoretical circumstances in which market forces can operate in ideally may work better than the current arrangements. (Incidentally, I think Terje’s point that ‘base load’ costs should be higher may have some merit, but that’s irrelevant to this discussion as there is no reason why such a policy could not be implemented by a publicly owned utility.)

    Unfortunately these ideal circumstances seem to have curiously eluded us in spite of Milton Friedman’s followers from the Chicago School of Economics having been given free rein to implement their policies in country after country, starting from Chile in 1973, whilst the people in those countries opposed to those policies have been murdered, tortured or imprisoned. This has been chronicled in Naomi Klein’s excellent aforementioned “The Shock Doctrine”. In all of those countries, without exception, these policies have been disastrous for the people of those countries.

    Terje wrote:

    blockquote>Price regulation always creates supply problems. Whether it is the regulation of food prices, petrol prices, labor prices or electricity prices.

    What has been shown conclusively by Naomi Klein to be far worse than price regulation in no price regulation. If circumstances in which price regulation does not create any problems could possibly exist, they would have been found by now.

    So why privatise natural monopolies? Wouldn’t it be simpler for the Government itself to supply the service and leave any third party out of it? Any problems would be far more easily dealt with public accountability and transparency.

    It is well past the time that politicians acted according to the wishes of their constituencies and worked towards making publicly owned utilities work properly, instead of handing them across to private investors so they can rip us off.

  45. December 14th, 2007 at 09:53 | #45

    So you advocate taxpayer funded R&D that mostly profits foreign companies? And you are suggesting that private voters are wiser than private investors when it comes to picking investments. That sounds kind of looney.

    Sure the Internet has a government network as its origin. So what? The telephone networks were founded by private parties. Even in Australia. There are a zillion ways the economics and technology might have converged to form the Internet and any number of rival protocols. The version in use by the government merely had more critical mass in the same way as VHS won over BETA because of critical mass.

  46. December 14th, 2007 at 12:33 | #46

    Terje wrote:

    The telephone networks were founded by private parties.

    In fact, the Post Master General (PMG) established its world technological lead as a publicly owned monopoly prior to WW2 which it maintained until brain-dead free-market policies were imposed upon it (as Telstra) from the late 1980′s. I learnt this from the aforementioned Andrew Ross’s “Armed and Ready – The Industrial Development and Defence of Australia 1900-1945″.

  47. December 14th, 2007 at 14:11 | #47

    Well actually the Post Master General acquired the monopoly on providing telephone services only after all the private operators were driven out of business by legislation. Australia actually had a very robust, innovative and competitive private sector in telephone service provision prior to the PMG. All of it shut down to suit the socialist straight jacket of government ownership. The public sector were followers and monopolisers. And innovations like PCM (pulse code modulation) which paved the way for digital data communications were pinoneered in the private sector US market. The Europeans followed the US lead and we followed the Europeans.

    And much of the technical innovation in Australia was actual done by Telstras private sector suppliers such as french owned Alcatel and it’s precursor (STC from memory).

  48. SJ
    December 14th, 2007 at 17:54 | #48

    Terje Says:

    The problem with comment #12 is that it somewhat ignores the circumstances in which the generating companies sell power.

    It’s readily apparent that you don’t understand those circumstances, even superficially, so forgive me if I take all the rest of your comments about the wonders of private enterprise with a grain of salt.

    For starters, the customers of the generators are not “regional network operators”, the customers of the generators are the electricity retailers, who just on-sell to end-users. In NSW, the regional network operators also run retailing businesses, but in Queensland and some parts of Victoria, those retailing businesses have been sold to third parties. You may recall that the NSW government is proposing to do this, because it’s the very subject of John’s post that you’re commenting on.

    You say:

    …these operators that should be seeking long term supply contracts for base load power or seeking to build such supplies themselves.

    This would make sense if the retailers had a captive market, i.e. if they were treated as a natural monopoly and were granted a captive market. That isn’t how the market has been set up. The companies that bought the Queensland retail businesses, for example, could lose all of their customers to a new retail entrant next year. They know that, and so they don’t build or contract twenty or thirty years of baseload plant.

    You say:

    Personally I think the “base load� cost of electricity supply (ie the fixed part of the monthly bill) needs to be a lot higher and the variable cost (ie the unit cost of electricity) needs to fall.

    The fixed part of your monthly bill is a “service availability” charge, related to the fixed cost of metering and part of the fixed cost of transmission and distribution. It has nothing whatsoever to do with generation, baseload or otherwise. I don’t know why you bring it up, except perhaps as a public display of ignorance.

    From there on your comment devolves into an incoherent ramble. For example, you say:

    It would make more sense to hand the regional operators (wires and all) back to local government and to then remove the price controls entirely.

    But the regional operators consist solely of the wires (usually referred to as “poles and wires”). Remove the price controls on what?

    Finally, you say

    SJ – experience has taught me that engaging with you leads nowhere useful. You are merely here to sledge people.

    Then why the hell did you find it necessary to spend a half an hour typing out a response to comment #12, and end up getting a well deserved sledging anyway?

  49. December 14th, 2007 at 18:53 | #49

    For starters, the customers of the generators are not “regional network operators�, the customers of the generators are the electricity retailers, who just on-sell to end-users. In NSW, the regional network operators also run retailing businesses

    In NSW the retailers and the regional network operators are in practice still part of the same entity. In any case separation was not material to my point that generators are not selling to retail customers and that they should not be expected to ensure that the regional networks have high levels of baseload capacity to call on. Their responsiblity is to provide electricity according to the requirements stipulated in contracts from the retailers. If the retailers get the contracts wrong that is their fault.

    This would make sense if the retailers had a captive market, i.e. if they were treated as a natural monopoly and were granted a captive market. That isn’t how the market has been set up.

    Yes I agree. There is a structural problem. I indicated earlier that the regional operators should essentially have a reasonably captive market and that ownership of these entities should in the first instance be returned to local councils. I don’t think a forced separation of retailers from the regional operators makes any sense at all. This does not mean that state owned transmission or generation should not be privatised.

    The fixed part of your monthly bill is a “service availability� charge, related to the fixed cost of metering and part of the fixed cost of transmission and distribution. It has nothing whatsoever to do with generation, baseload or otherwise.

    Which is why I put “base load” in quotation marks. I was using it as a turn of phrase to emphasise my view that the fixed part of the bill relating to availability needs to go beyond network availability and include capacity availability over the long term. Availability of the wires is useful in preventing black outs but insufficient to prevent brown outs. To prevent brown outs you need idle generating capacity or demand management tools. If brown outs are regarded as an availability issue (which they should be) then the “base load” of your bill (ie the constant cost output) probably needs to be higher.

    But the regional operators consist solely of the wires (usually referred to as “poles and wires�).

    To qualify it further. It would make sense to allow the regional operators to continue to own their retail divisions and to then transfer ownership of the regional operators back to local councils.

    Then why the hell did you find it necessary to spend a half an hour typing out a response to comment #12

    An oversight on my part. I did not notice that you wrote comment #12 (probably because I was editing my comments on a mobile phone with a small screen). However on this occasion you actually managed to respond without any significant sledging. So well done.

  50. SJ
    December 14th, 2007 at 19:53 | #50

    I indicated earlier that the regional operators should essentially have a reasonably captive market and that ownership of these entities should in the first instance be returned to local councils.

    Terje, what you’re saying here is that you think electricity retailing is a natural monopoly, and that it should be in public ownership.

  51. SJ
    December 14th, 2007 at 21:03 | #51

    BTW, Terje, I understand that you have a degree in electrical engineering. As with “baseload”, you should avoid using terms of art like “brown out”, when you don’t know what they mean.

    Brownout

    Where the voltage level is below the normal minimum level specified for the system.

    When you don’t have quite enough generation, you don’t get a total blackout or a brownout, you get a partial blackout caused by manual or automatic load shedding, or you get calls for voluntary load reductions (same result whichever way it’s done).

    So when you use terms like “state owned”, I haven’t got a clue whether you mean “owned by the state of NSW” or “publicly owned”, whether you understand the difference, or even whether you understand anything about what you’re commenting on. There’s a huge communication barrier here.

  52. Peter Wood
    December 14th, 2007 at 22:05 | #52

    The price of carbon has collapsed in the NSW GGAS baseline and credit emissions trading scheme which mainly covers the electricity generation sector. This is because the NSW government has stopped reducing the cap. Is it a coincidence that they have stopped reducing the cap just before privatisation? I doubt it.

  53. December 15th, 2007 at 10:19 | #53

    Terje wrote:

    Well actually the Post Master General acquired the monopoly on providing telephone services only after all the private operators were driven out of business by legislation.

    I am not able to comment on the detatils of this except to say that the arrangement clearly served Australia well up until the late 1980′s.

    Australia actually had a very robust, innovative and competitive private sector in telephone service provision prior to the PMG. All of it shut down to suit the socialist straight jacket of government ownership. The public sector were followers and monopolisers.

    If this was true of the PMG at the start of the process, it was not by the 1930′s. The PMG was amongst the world leaders in devlopment of radar and in the 1970′s Telecom laboratories were leading the world in optical fibre technology. They had plans to have all of Australia connected to fibre optical cable before 2000 – all thrown away for the idiocy of coporatisation, a contrived competitive market and privatisatation, so that a handful of selfish insatiably greedy people could profit at everyone else’s expense.

    And innovations like PCM (pulse code modulation) which paved the way for digital data communications were pinoneered in the private sector US market. The Europeans followed the US lead and we followed the Europeans.
    And much of the technical innovation in Australia was actual done by Telstras private sector suppliers such as french owned Alcatel and it’s precursor (STC from memory).

    A lot of world-leading innovation also came out of Telstra’s (or the PMG’s or Telecom’s) own laboratories which led the world.

    I am not denying that private companies can be innovative, but I do object to the pathological hostility that you and others on this forum display towards any involvement whatsoever by government in the economy. NSW’s power infrastructure was paid for by its customers and taxpayers. It has worked well in the past under government ownership and can be made to work well again, if the NSW government were to find the poliltical will to make it work.

    Also it should be pointed out the private investment banks to whom Iemma and Costa would hand across NSW power’s infrastructure are not interested in innovation as some private companies in the past may have been. Their primary goal, judging form past privatisations is simply to gouge every possible dollar it can by screwing its workforce and the paying public.

    BTW the private telecommunications manufacturing sector which once employed 10,000 Australians has been destroyed as a result of free market ‘reforms’.

  54. December 15th, 2007 at 19:22 | #54

    Hello your comment is funny.
    I like your diary..
    thank you again

  55. December 16th, 2007 at 23:43 | #55

    SJ,

    In terms of your question regarding brown outs I am probably being a bit too loose with my terminology so let me elaborate. If an electrical network (of fixed nominal voltage) is overloaded then it will suffer voltage sag. If the sag due to this problem of supply is excessive then the response by the network operator to correct this problem will in general be rolling blackouts as they shed demand by switching off sections of the network (there may be few other options). So frequently the result of brownouts is deliberate blackouts. This is different to typical non-deliberate blackouts that result from equipment failure or broken wires. As such I am using the term brownout as a descriptor for a particular sort of blackout.

    If the retailers and the regional network operators are completely separate entities then retailers who have previously put in place the relevant contracts to ensure supply to their customers may still find that their customers suffer an outage because the network operator dumps demand in a less than discrete fashion (ie they isolate entire sections of the network not particular consumers). In this way service availability is critically linked to having standby supply in excess of demand. Without reserve supply, network availability simply can not be assured. It is my view that many customers (probably most) care more about service availability than marginal savings on energy prices. Although this will not be true of all consumers.

    Of course if we had fast enough signalling and metering (currently true for some larger customers) that could shed power instantaneously by blacking out selected customers only (those whos retailer had not put in place the necessary supply contracts) then a separation of retailers and operators would become more viable. I personally think that such a day is still a way off because smart metering and signalling is not yet widespread.

    ~~~

    Terje, what you’re saying here is that you think electricity retailing is a natural monopoly, and that it should be in public ownership.

    YES to the first and a qualified NO to the second. In relation to the second issue I believe that local government ownership would be better than state (ie NSW government) ownership. I think a private mutual structure where customers were members (like the old NRMA) would probably be a better structure again. However I’d be happy to let local governments figure out that reform initiative independently. Also even if you privatised distribution/retail on a regionalise private for profit monopoly basis, that still does not mean that the price that they charged would be prohibitive. And the sale price should in any case reflect the monopoly status. So I’m not reflexively opposed to the private ownership of natural monopolies. For some applications there are in any case near substitutes (eg gas, oil or solar for heating water/rooms/food).

    With smart metering and signalling becoming more widespread over time I can also see the day where separation of retail and network operation becomes a much more viable option. That still leaves the question of ownership in relation to the network (wires and poles).

    However my real point was that at this stage in the game I see no significant argument in favour of government ownership of power generation plants. It is a function within the industry that is quite readily outsourced to the private sector.

    Regards,
    Terje.

  56. SJ
    December 17th, 2007 at 21:28 | #56

    Terje, I wasn’t asking you a question about brownouts, I was telling you that you were using the terminology incorrectly.

    Your paragraph about brownouts above is largely correct, but completely irrelevant. You had originally said:

    To prevent brown outs you need idle generating capacity or demand management tools.

    This simply isn’t correct. If the source impedance feeding the load is too high, you’ll get poor voltage regulation, i.e brownouts. This does not occur across an entire network, but only at particular locations on the network. Idle generating capacity will not help one bit. To fix a brownout situation, you need demand management at the particular location suffering the brownout, or increased transmission capacity to that location, or better power factor correction at the location.

    But as I said, this is irrelevant to the question of generation shortages.

    I’ll see if I can explain it to you. Let’s say we’ve got 10,000 MW of generating capacity, demand of 9,000 MW, and electrical losses of 500 MW. We’ll need to put 9,500 MW of mechanical energy in to supply the demand + losses. If the demand from one minute to the next goes up to 9,100 MW, what happens? We’re taking electrical energy out at a greater rate than we’re putting mechanical energy in. We’re putting in 9,500 MW and taking out 9,600 MW. Because of the principle of conservation of energy, the electrical energy and the mechanical energy have to match. Where does the extra mechanical energy come from? From the stored rotational kinetic energy of the turbines and alternators. That means that their rotational speed will fall, as will the overall system frequency. The turbine control systems (governors) will detect the fall in frequency, and open steam valves in a steam turbine, water valves in a water turbine, etc. to increase the mechanical power input.

    But what happens when the electrical demand rises to 9,600 MW? Total demand plus losses now equals 10,100 MW, but we’ve only got 10,000 MW of plant, so we’re only capable of putting 10,000 MW of mechanical energy in. There’s an excess demand of 100 MW, the governors have opened all the valves as far as they will go. We’re now sucking that 100 MW out of the rotational kinetic energy of the turbines and alternators and not replacing it. Without intervention, the generators will slow to a stop in a matter of seconds. That timescale is too rapid for manual intervention, so in practice automatic underfrequency load shedding relays are installed all over the network to progressively shed load. Normal system operating frequency is 50 Hz, corresponding to a rotational speed for most generators of 3000 rpm. The underfrequency relays are set so that control the reduction in system frequency. The first to activate might be set to say, 49.5 Hz, the next to 49.4 Hz and so on. If the load shed by the first is sufficient to arrest the decline in frequency, then the second one won’t activate, and so on.

    This is the situation we’re talking about, and it does not equal “brownout”, no matter what you might have half remembered from some subject you took years ago.

    However my real point was that at this stage in the game I see no significant argument in favour of government ownership of power generation plants. It is a function within the industry that is quite readily outsourced to the private sector.

    It looks like you aren’t capable of thinking through an argument. You recognise that there’s a natural monopoly somewhere. You think it’s in retailing, and that if the retail franchise was granted, then outsourcing of generation to the private sector is OK. Simultaneously, you recognise that no retail franchise has been granted, but you think that outsourcing of generation is still OK, and you give no thought to regulation in any of your desired scenarios.

    In turn, I’ll wish for free electricity and a pony.

  57. david booth
    January 6th, 2008 at 17:10 | #57

    To meet greenhouse gas reductions of at least 60% by 2050 the extra carbon output from a new coal fired power station (privately or publicly owned) would preclude achieving this target. No amount of fudging the figures can avoid this reality. Its a zero sum game where an increase anywhere means a larger reduction is required elsewhere if overall reduction is to be achieved.
    Translate this to 8 million tonnes per year of greenhouse gas emissions from a 1500 MW power station. This would stop NSW achieving targets of 20% reduction by 2020. At present the whole game is owned by the Government who are responsible for achieving energy delivery and greenhouse gas reduction.
    To privatise is an attempt to shift responsibility where the government should realise that with privatisation the risks never move to the private sector they remain with the government and the consumer. No market manipulation will avoid the necessity of reducing greenhouse gases.
    I am forced to the conclusion that Mr Iemma is putting up a straw man in the form of an ugly coal fired power station and hoping the federal government will buy him out.
    It is such an illogical decision he could not be that stupid, could he?

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