Home > Economic policy > Electricity privatisation in Australia: A record of failure (updated with link)

Electricity privatisation in Australia: A record of failure (updated with link)

February 20th, 2014

That’s the title of a report I’m releasing at Parliament House in Brisbane today, commissioned by the Victorian branch of the Electrical Trades Union. It’s essentially a synthesis of 20 years of work on this topic, going back to my book Great Expectations: Microeconomic Reform and Australia and including case studies of the various states where privatisation proposals have been put forward, with varying results. As well as privatisation, I look at the related market reform process which gave rise to the National Electricity Market. I view the reforms as having been fundamentally misconceived, relying on prices to perform a range of incompatible functions, while leaving retail prices largely unrelated to the actual cost of electricity generation and distribution.

Here’s a link to the report

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  1. Megan
    February 20th, 2014 at 11:59 | #1

    Privatisation of electricity has the side effect of making reduction of related GHGs much more difficult.

    If the State owns and controls FF fueled generation then it able to do things to reduce consumption/emissions which are anathema to a profit driven generator.

  2. rog
    February 20th, 2014 at 12:12 | #2

    One argument is that foreign buyers bring capital into the country, this is offset by dividends leaving the country. And then we have these clever dicks transferring $$ between various entities avoiding tax eg Newscorp.

    As I was <a href="@rog“>saying

  3. rog
    February 20th, 2014 at 12:12 | #3
  4. rog
    February 20th, 2014 at 12:14 | #4

    Try <a href="@rog “>again

  5. may
    February 20th, 2014 at 12:32 | #5

    but the closure of the alumina plant is being blamed on too expensive power prices.

    so it’s strictly the fault of labors carbon —tax—price.

    nothing to do at all with the huge stash the goldies were caught hoarding and told to get rid of .

    am i being too discursive here?

  6. Fran Barlow
    February 20th, 2014 at 14:22 | #6

    Rog

    The string argument is the value of the URL to which you are pointing, rather than the identifier — in this case: @rog.

  7. February 20th, 2014 at 14:26 | #7

    Predictably, a Qld govt spokesmouth has already impugned your integrity, Prof Q.

  8. Hermit
    February 20th, 2014 at 15:16 | #8

    The views of a former industry insider seem particularly damning
    http://www.adelaidenow.com.au/news/opinion/bruce-dinham-former-etsa-boss-says-were-all-being-ripped-off-on-electricity-prices/story-fni6unxq-1226676683356

    Without naming names I see that a former zealot for micro-economic reform in Canberra now heads a pricing tribunal in one of the states. That tribunal only seems to have the one big rubber stamp that says price rise approved. With 50C summer temperatures and pensioners living in 1960s built brick veneer homes affordable electricity supply is now a matter of life and death.

    As I’ve said before what so wrong with the vertically integrated Electricite de France model? There appear to be no featherbedding issues in EdF as invariably alleged for nationalised enterprises.

  9. Larry
    February 20th, 2014 at 15:44 | #9

    Hey John,

    Have you seen cake farts yet?

  10. Jim Rose
    February 20th, 2014 at 17:21 | #10

    a defining feature of the Left is its claim that it can tell a good monopoly from a bad monopoly.

  11. Wayne Mc
    February 20th, 2014 at 17:23 | #11

    Great to hear you have completed the report. Vital for Queenslanders and all Australians to know what the pitfalls are. I read your earlier book Great Expectations: Microeconomic Reform and Australia and was impressed. I also remember Rix and Johnston doing research in this area in the early 90′s.

  12. Ikonoclast
    February 20th, 2014 at 17:53 | #12

    @Jim Rose

    The business right also know what a “good monopoly” is. They try to set up and maintain monopolies for themselves whenever they can. This is the case whether the monopolies are natural or not.

    The left correctly identify that;

    1. The only monopolies that should exist are natural monopolies.
    2. Natural monopolies should belong to all the people.

  13. Fran Barlow
    February 20th, 2014 at 18:02 | #13

    Jim Rose

    a defining feature of the Left is its claim that it can tell a good monopoly from a bad monopoly.

    Given that this is in a topic where someone you’d regard as being of the left has simply compared and contrasted the performance of privatised and non privatised electricity entities using some fairly conventional criteria, your dogmatic hand-waving appears ludicrous. PrQ made no claims at all about how to distinguish good monopolies from bad ones. You simply made that up.

    Why not at least pretend to engage with the subject matter before returning to your happy place?

  14. DawnR
    February 20th, 2014 at 19:08 | #14

    Short-term governments, Short-sighted politicians, State rather than holistic vision …. no long term future planning … perhaps the usa will save the day!?!

  15. Will
    February 20th, 2014 at 23:58 | #15

    Disingenuous as usual Jim. Surely you must be aware of the fact that electricity distribution is a natural monopoly and is so particularly susceptible to rent-seeking.

  16. kevin1
    February 21st, 2014 at 06:40 | #16

    @may

    I heard a Lib adviser on the Drum recently saying The Great Big Tax was a cause of the SPCA problems, because of the high electricity cost of making “aluminium cans”. Is this an
    early sign of the relegation of industrial “things” to cultural ignorance, or just that Liberal views don’t come from knowledge? Tinplated steel ain’t aluminium, and milk comes from cows too.

    Actually the Drum seems to be too often a parade of ex-journos with big personalities but shallow thoughts, totally predictable party hacks like Kerry Chika and Peter Reith, or colourful celebs like Rhys Muldoon. Come on ABC, with better guests analysis can still be stimulating, leave the dinner party fun to Channel 10.

  17. February 21st, 2014 at 09:17 | #17

    Re – closure of Alcoa plant

    http://www.smh.com.au/national/alcoa-denies-carbon-tax-led-to-closures-job-shedding-20140218-32yfp.html

    “A company spokeswoman confirmed ”the carbon tax was not a factor in the decision to close Point Henry smelter or the rolled products business”.”

  18. Jim Birch
    February 21st, 2014 at 10:18 | #18

    @Jim Rose
    I’d be interested to hear your opinion on Ike’s statement:

    1. The only monopolies that should exist are natural monopolies.
    2. Natural monopolies should belong to all the people.

    This seems a bit of a no-brainer to me; does that make me a left winger?

  19. Hermit
    February 21st, 2014 at 12:50 | #19

    Alcoa say the Great Big New Tax was not a factor in their closure while the PM says it was. As with women’s reproductive issues he claims to know better than those actually affected. The fact is Alcoa was 94.5% exempted from carbon tax in fiscal 2012 and I think that was still about 90% in fiscal 2013. In addition there were Holden style cash handouts to the industry.

    While carbon tax seems stiff at $23/$24 the ways of avoiding it are legion. As with the RET the overall incidence was not that onerous. If emissions decline (stationary sector and overall) in the term of the Abbott government I suspect it will be because of industry closures, not emissions policy.

  20. February 21st, 2014 at 14:04 | #20

    Welcome to the World of Privatised Electricity and Canned Music by Bill Mitchell.

    This piece may or may not complement yours. I suspect it will.

  21. bjb
    February 21st, 2014 at 17:00 | #21

    JQ – can you post a link to your report.

    I hope you send a copy to Tim Nicholls, although it’s unlikely the LNP will allow facts to get in the way of ideology.

  22. February 21st, 2014 at 18:30 | #22

    @Hermit

    Wow! He didn’t pull any punches did he? I particularly liked his opinions on electricity retailers, whose sole role was to send the bill. I can just see someone thinking to themselves, “There is a niche here. I can send bills better than any of them.”

  23. Hermit
    February 21st, 2014 at 20:28 | #23

    A peculiar notion of the micro-economic reformers is that the more middle men the less the final consumer will pay. In reality the middle people ask for and get regulated prices that confer generous profit margins.

    It’s also odd that energy providers make more money by creating more pollution not less. With looming east coast gas exports from Gladstone long term domestic customers are about to get gouged. A major rethink is needed on just what the aims and rewards should be for the energy supply industry in a finite world.

  24. bjb
    February 22nd, 2014 at 17:31 | #24

    @bjb

    Found a link. Interesting reading. The only way anyone could propose any further privatisation of public assets would be on purely idealogical grounds, and as JQ points out, it’s rather ironic that the main owners of our once public assets are now the public of other countries. A great win for the free market.

    Interesting also Campbell Newman’s dismissive response to the report. It’s a bit rich him implying the ETU got what they paid for, when that’s exactly what he got with the Costello Commission of Audit, and I’m sure what Abbott and Hockey expect with their current inquiries.

  25. Fran Barlow
    February 23rd, 2014 at 06:30 | #25

    Interesting (albeit very small scale) proposed use of seaboard pumped storage plus wind with diesel as backup on Island off Coast of Spain.

    http://ow.ly/tMj0q

  26. Fran Barlow
    February 23rd, 2014 at 06:46 | #26

    Oops … Apologies …

    1. It’s not seaboard pumped storage. The lower reservoir is a volcanic crater
    2. The development is not proposed but nearly built. It should come online on El Hierro in the Canaries this year.

    Ikon and maybe even Hermit would love this. Apparently El Hierro started off with the idea of self-sufficiency — they import and burn a lot of dries to run their desal plants — but now they are going to cut this very sharply and aim for full energy self-sufficiency. Their fleet of vehicles will go electric and get charged from the near carbon-neutral grid and they are going the PVand solar water heating route.

  27. Ikonoclast
    February 23rd, 2014 at 08:56 | #27

    Yes, bravo for El Hierro. I would be a little afraid to live there. Too much earthquake and volcanic activity potential for me.

  28. Fran Barlow
    February 23rd, 2014 at 09:15 | #28

    Oops … Just noticed that autocorrect “corrected” diesel to “dries” … Kind of amusing really

  29. February 23rd, 2014 at 17:08 | #29

    The fact that taken from the start of this year, all up I am now paying just under 48 cents a kilowatt-hour certainly makes me think electricity privatisation hasn’t gone well in Australia. Forty-eight cents seems a bit steep, particularly given the low average wholesale price of eletricity here.

  30. Hermit
    February 23rd, 2014 at 17:23 | #30

    @Fran Barlow
    This may work for the Canary Islands because the alternative (diesel) is also expensive and there may be enough tourist income to pay for it. Just don’t ask what powered the ships and planes that got both people and equipment there. King Island in Bass Strait is hoping that wind, solar and batteries (replacements for the last lot) will cut their diesel generator bill to just $2m a year. No serious talk of EVs yet.

    Small rich populations can probably adapt to expensive energy better than poor heavily populated countries. Those populous countries are the same ones that want us to dig up the pristine Galilee Basin.

  31. February 23rd, 2014 at 18:45 | #31

    Pr Q said:


    As well as privatisation, I look at the related market reform process which gave rise to the National Electricity Market. I view the reforms as having been fundamentally misconceived, relying on prices to perform a range of incompatible functions, while leaving retail prices largely unrelated to the actual cost of electricity generation and distribution.

    Electricity privatisation has been a dogs breakfast hasn’t it? Surely the key issue with energy utilities should be how quickly and cheaply can the coal-powered generators can be retro-fitted to renewable energy sources in order to meet our obligations to control carbon emissions. With obvious important provisos for the installation of smart meters, the insulation of electricity lines in fire-prone areas and building up sufficient well-maintained capacity to cope with unexpected high demands. None of these requirements can be effectively, efficiently and equitably achieved using privately owned deregulated energy markets.

    The claim that public sector can’t afford to finance infrastructure spending yet the private sector can goes against basic economic logic. The public sector can borrow at the T-bond rate, several points lower than the private bond rate. And public authorities can now more or less hire and fire according to industry-standard EBA’s. So they are no longer hostage to “thuggish”, “feather-bedding” public sector trade unions.

    Yet our economic elites remain obsessed with privatisation-deregulation as a cure for all evils. The suspicion lurks that it is yet another dodge by the rent-seeking Big End of Town to get its hands on monopolistic industries with captive markets. We are supposedly in an age of entrepreneurship, yet the biggest growth industry is buying up aging state utilities!

    More generally on the subject of the L/NP’s economic program I referred to the current Treasurers deft re positioning Monday Message Board not two weeks back.

    Does anyone remember Hockey, in the lead up to the 2013 election, trumpeting his plans for a mass privatisation of federal and state public assets? No, me neither. I cant see any references to privatisation in the LPA election manifesto. I guess that the electorally disastrous experiences of the L/NP’s previous attempts to be honest with the citizenry – Fightback in 1993, GST in 1998 and Work Choices in 2007 – have taught the party to be more circumspect about any nasty surprises in the run up to the 2013 election. Obviously privatization is one of those zombie ideas that keep returning no matter how many times they have had stakes driven through their heart. Except nowadays zombies present in the cuddly form of adorable Joe Hockey. Say it aint so, Joe!

    Hockey, ever since cementing his position as L/NP treasurer, has been assiduously building up a reputation as a hard-headed economic statesman. No doubt this will stand him in good stead when he makes a run for the L/NP leadership/PM-ship in the distant future.

    Yet so far as I am aware the pillars of his economic management reputation have been built on opposition to Rudd-Swan’s Keynsian supposedly debt-saddling deficit stimulus and support for a renewal of the privatisation program, this time concentrating on the remaining public assets in the hands of the now L/NP controlled state governments. It should be obvious to regular readers of this blog that these theoretical ideas, at least within the context of post-Cold War economic development, have been thoroughly refuted by empirical evidence.

    Financial elites have comprehensively rorted the privatisation process, so much so that the term oligarch is now synonymous with the newly enriched owner of a formerly state-owned asset. And financial elites have also generated the boom-bust cycle of post-Cold War economic development which has revived the need for Keynsian deficit stimuli. Hockey’s other pillar, opposition to entitlement, seems to have a rather narrow focus on recipients of the welfare state. He no where mentions what I call the wealthfare state whose rolls are now bloated with the recipients of those entitled to unearned income from residential investment property holding family trusts.

    Although to be fair to Hockey, he did forfeit a chance at L/NP leadership, and probably a PM’s cap, by sticking to his guns on the importance of an emissions trading scheme. One cheer for Joe!

  32. john phillips
    February 24th, 2014 at 10:32 | #32

    At the risk of repeating myself
    I posted this previously) below is my dissertation on this topic
    This opinion does not infer any ideology or political bias.

    In the mid to late 1990s, the Qld State Govt restructured the electricity industry from a mostly single entity to several organisations. From the Qld Electricity Commission (QEC) to several Govt Owned Corporations (GOCs). The QEC generally covered much of the Qld population except for lower level distribution for which responsibility resided in local regional boards. At that time; we evolved to a state where only a fraction of the overall costs being incurred by the electricity customer was for the actual generation and distribution of electricity. That is the actual work and the systems required to supply power.

    This is supported by the fact that at the time the QEC was replaced by about 10 GOCs. Such as TEC, CS Energy, Stanwell Corp, Enertrade, Ergon, Group Energy Trader, Powerlink, Austa Energy (there were others)
    Upon formation, each one of these GOCs needed to have the following examples of departments. Administration, I.T., H.R., Purchasing, Legal, Finance, Planning (there are others). As a rough estimate I suppose we could look at about 10 of these existed previously within QEC. It then follows that we have gone from that number of 10 to say a quantity of almost 100 ? I am not claiming that the QEC was particularly efficient but as shown above it would have been quite lean compared to the situation today.

    The main issue is the burgeoning management resulting from these changes. Due to the multiplicity of GOCs, we not only have large replications in the number of similar functions repeated over these GOCs but also the creation of new roles. New roles that did not exist before such as; Boards of Directors, CEO, CFO, CIO, Trading, Risk Management, Business Development, Marketing, Sales and so forth. Salaries within upper management and to some degree within middle management are extremely high, not really supportable and a very high burden on users (the customers). Also what tends to occur is a sense of entitlement filters down through the ranks of these organisations resulting in upward pressure on wages meaning further burdens upon the consumer.
    Adding to these expenses were the costs of various infrastructures required to support the new GOCs. Examples are : the initial setting up and ongoing accommodation leasing of separate multiple office buildings for the staff. These offices did not exist before, were all of fairly large footprints and many within the CBD of Brisbane.

    An example in a different industry relates to AllConnex (water) which was disbanded due to the efforts of people power. At the time this was being formed it would have had all the management functions and issues similar to those I mentioned above (Boards, CEO Etc). If it had gone ahead there would have been all the costs involved in building a new Head Office edifice (I think it was on the Gold Coast). I seem to recall that certain dedicated local people caused the reversal of this decision thereby dodging an unnecessary and expensive ‘bullet’ for the residents of Redlands, Logan and the Gold Coast. I believe there was mention of about a thousand homes water bills just to pay for the CEO salary and related expenses.

    If one took yet another industry to compare; it would be Australian Telecommunications. When this industry was initially restructured in the 1980s; the “Rest of the World” was invited to enter and offer to compete. That is; compete against the single entity named Telecom Australia (as it was known as then). The result was the emergence of such Optus, AAPT, Vodafone etc. I think the overall population of Australia is about 5 times that of Queensland. It would have been a ludicrous situation to first break up Telecom Australia into multiple organisations as done with the QEC. If similar had been done as in the Queensland Electricity Industry break up there could have been almost 50 Telstra Corps. If there is no reason to break Telstra up into multiple entities there is even less reason to do the same with such as QEC which is a much smaller entity by a factor of many.

    One other issue to add relates to reduced leverage and loss of economies of scale for expense inputs from service providers and suppliers. An example is the supply of Telecommunications Voice and Data Services. The QEC had a much higher capability in this regard than several small corporations. During the 1990s these kinds of expenses were being driven down through negotiations and leverage available only to a larger entity. These sorts of savings also filter through to end users. Telecommunications providers took advantage of the electricity industry break up to target the new entities individually thus increasing their overall revenues .

    In relation to all the Electricity Retailers.
    One would also consider the above issues to be problematic. That is
    - burgeoning management due to multiplicity of similar functions
    - creation of new roles such as; Boards of Directors, CEO, CFO, CIO, Trading, Risk Management, Business Development, Marketing, Sales and so forth.
    - Salaries within upper management and middle management
    - sense of entitlement down through the ranks
    - costs of various infrastructures required to support and ongoing accommodation of separate multiple office buildings

  33. Fran Barlow
    February 24th, 2014 at 11:31 | #33

    @Hermit

    Just don’t ask what powered the ships and planes that got both people and equipment there.

    That’s germane whether the imports are low carbon intensity of high carbon intensity. If the equipment permits a sharp cut in the future diesel being used, then there’s a payback time, covered in the scope 1 emissions category.

    Small rich populations can probably adapt to expensive energy better than poor heavily populated countries.

    Almost certainly. That doesn’t mean that poor heavily populated countries aren’t also better served by clean energy. In some cases, the energy they are importing will also be expensive — not everyone has cheap access to coal or oil or gas, and even in those countries that do (e.g. Nigeria, Iran, Iraq, Sudan, Russia) it’s far from clear that those benefits are being settled more generously on the poor, or even if they are, that the whole package leaves the poor standing better. Sometimes, resources like that underwrite kleptocracy and worse, brutality to protect the kleptocracy or civil war. Apparently in Russia, the richest 150 have as much wealth as 150,000,000 other Russians. I’m not sure if they get their energy cheaply, but even if they do, the package cost is rather too high.

  34. February 25th, 2014 at 18:45 | #34

    I believe everything published made a lot of sense.
    But, think about this, what if you added a little content?
    I am not saying your information isn’t good, but suppose you added
    something that grabbed folk’s attention? I mean John Quiggin

  35. Megan
    February 25th, 2014 at 18:53 | #35

    @ขายถุงยางอนามัย

    Could you please explain how you, a spambot troll, are able to post such a vacuous comment while the rest of us longterm regulars here are unable to post links or in my case a link to my url with my name, without getting sent to eternal moderation?

  36. Fran Barlow
    February 25th, 2014 at 22:10 | #36

    @Megan

    Bots don’t answer questions Megan. ;-)

    It was careful not to post two links.

  37. Tim Macknay
    February 25th, 2014 at 22:37 | #37

    I can only assume that the latest spamming technology has cleverer ways of getting around filters than we mere humans.

  38. February 25th, 2014 at 22:43 | #38

    @Fran Barlow

    Yes, it was a rhetorical question.

    But just for fun – let’s see if I am allowed to put spambot’s url on my name.

    Yep, seems to work (hover over my, once again, blue name and see!) but I can’t use a real url which I have used here for ages and even still appears in blue on old comments of mine from long ago.

  39. February 26th, 2014 at 00:39 | #39

    Fake url works?

  40. February 26th, 2014 at 00:41 | #40

    Yep!

    That confirms it. My website has been specifically censored.

    I’m sort of flattered that I’m that much of a threat.

  41. TerjeP
    February 27th, 2014 at 06:13 | #41

    Sinclair Davidson has provided his perspective on John Quiggins paper:-

    http://catallaxyfiles.com/2014/02/24/electricity-privatisation/

    Some agreement but on the overall conclusion mostly not.

Comments are closed.