Electricity renationalisation: a response from the 1980s
Today’s Oz has a piece from Paul Kerin, responding to my proposal for a nationalized transmission grid. It’s a striking reflection of the way ideas that were novel in the 1980s and 1990s retain their grip on Australian policy debate, despite their obvious failure at a global level.
Kerin’s piece is headed with a quotation from Ronald Reagan
Government is not the solution to our problem. Government is the problem
Kerin (or perhaps the Oz opinion editor) may not have noticed, but Reagan left office in 1988, and the ensuing three decades have seen fairly miserable economic outcomes in the US. Reagan’s Republican successor, Donald Trump was over the top, as usual, in describing the state of the US economy as “carnage”, but the days when anyone could pretend that it has delivered prosperity to the mass of Americans are over. Citing Reagan as an authority is about as helpful as invoking Curtin and Chifley as guides to Australian public policy.
Kerin’s article implicitly admits the failure of the National Electricity Market, noting excessive rates of return and the failure to manage peaky electricity demand. He throws in the obligatory jibe at renewables, and tries to dodge the failure of retail competion.
Much of the piece is an argument by incredulity, of which this is a prime example
But seriously, why on earth would we want a government-owned national grid? Its RAB value would be about $100bn. That’s almost as big as BHP Billiton. Imagine the government running that!
Of course, we don’t have to imagine it. Governments built this grid in the 20th century and ran it very successfully. But such is the hold of 1980s/1990s thinking that Kerin can’t even imagine this as a possibility.
Finally, there’s an unintentionally revealing calculation.
What return would be required to repay the principal in a reasonable period of time (say 20 years)? Even if low real government bond yields (1.3 per cent) persist, borrowing $100 for 20 years requires an annual payment of $5.71. Therefore, the nationalised grid would need to earn a pre-tax rate of return of 5.71 per cent — a 4.4 percentage point premium over the government bond yield. That’s about the same as the current gap that Quiggin says is evidence of “excess profits”
Let’s turn this around. Kerin is saying that we could buy back the entire network, cover its costs, and repay the entire principal in 20 years, all with rates of return the same as, or lower than, those being offered at present.