Home > #Ozfail, Economic policy > Electricity renationalisation: a response from the 1980s

Electricity renationalisation: a response from the 1980s

March 13th, 2017

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.

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  1. john phillips
    March 13th, 2017 at 10:07 | #1

    A comment re electricity charges these days in Australia. It is a fact that the actual costs to generate, transmit and control electricity supply to the consumer is only a fraction of the overall cost to the consumer. Considering the parties involved along the chain, the administrations etc and associated practices those parties are involved in. So I am not sure as to what can be done about that.

  2. Newtownian
    March 13th, 2017 at 10:34 | #2

    “Citing Reagan as an authority is about as helpful as invoking Curtin and Chifley as guides to Australian public policy.”

    There is an important difference between citing Reagan now v. Chifley say around 1980.

    By 1980 the right had developed semi-coherent narrative/ideology/belief system from which they could challenge the older Keynesian system and were able to rationalise their alternative policy proposals. This narrative still holds sway thanks to much mantra muttering, quasi empirical validation and pseudo-Nobel prize awarding https://en.wikipedia.org/wiki/List_of_prizes_known_as_the_Nobel_of_a_field#Economics as well as ‘The Golden Rule’ i.e. them that has the gold makes the rules.

    Today though opponents of the mainstream do not seems to have yet developed an equivalent coherent progressive paradigm of comparable power from which they can argue that ‘renationalisation’ makes sense.

    Further what renationalization actually would mean and how it would be done is unclear to me – water renationalization I think would also be good but how far do you take this and how do balance demands and ‘rights’? How far would you take this renationalization? For example one has to ask would the old nationalised monster bureaucracy have been particularly patient of helpful with aiding household/decentralized PV and wind power or more pertinently would they have paid fair price for sustainably energy unlike our IPART friends.

    I dont mean this as a criticism of the concept – merely the need for replacing the existing system based on bigger coherent alternative.

    Beyond this there is the problem with so many journalists that while they may claim to be objective, rational and mathematically hard nosed in fact they become ideologues as surely as Andrew Bolt – embedded as it were from which position they adopt unconsciously the paper’s mission – realizing the thoughts of Chairman Murdoch implicitly if not explicitly. Thus your argument (I dont know how open minded Kerin is) may also be foundering because Kerin sees your proposals as part of the culture wars, not an exercise in working for ideal economics – something akin to the greatest good for the greatest number.

  3. LJS
    March 13th, 2017 at 12:37 | #3

    I guess it comes down to your view of how the world should work, but my immediate response to Kerin’s “But seriously, why on earth would we want a government-owned national grid?” is, why on earth would we want a privatised grid? Poles and wires just sit there transmitting power, they enable but do not produce, any return is necessarily pure rent. Nice gig if you can get it but ultimately a drag on society. Maybe that’s why I don’t have any large accounts in tax havens.

  4. may
    March 13th, 2017 at 15:39 | #4

    tesla sez “100 days or your money back”

    carnegie has horned in and sez “we’re local pick us”

    it’s getting interesting, carno has got the Albany hub deal by the looks of it

    and Saturdays west oz result has not got people jumping up and down, it’s more a quietly satisfied

    “done and dusted”

  5. GrueBleen
    March 13th, 2017 at 15:46 | #5

    Citing Reagan as an authority is about as helpful as invoking Curtin and Chifley as guides to Australian public policy.

    And very much more’s the pity, too. Add Andrew Fisher and you have the whole set of ‘nation builders’

  6. GrueBleen
    March 13th, 2017 at 15:53 | #6

    @john phillips

    So I am not sure as to what can be done about that.

    Renationalise !

  7. Mandas
    March 13th, 2017 at 15:57 | #7

    So is Kerin suggesting that its not economical for the government to own and operate the elecricity network, but that somehow it IS economical for private corporations to do so?

    Ummm – please explain!

  8. Joe
    March 13th, 2017 at 17:18 | #8

    Reagan said “Government is not the solution to our problem. Government is the problem” to which any sane person would reply, Reagan was an idiot. If government is the problem, you get rid of the problem by getting rid of the support of government, the military and police. But that never happens.
    Indeed, the Torytariat are very fond of their authority figures who spouted stuff that was obvious nonsense when they were alive and is absurd now.

  9. March 13th, 2017 at 22:04 | #9

    Why should you want to repay the principal? The grid will in all probability be needed forever, as distributed generators will always need backup. In the steady state, the equipment will need replacing on a standard schedule, say 5% of it a year. There is nothing wrong with keeping eternal debt on the books for an eternal asset.

  10. Greg McKenzie
    March 14th, 2017 at 06:20 | #10

    Super normal profits should be taxed and subsidies given to those who cannot afford electricity price rises.

  11. Collin Street
    March 14th, 2017 at 11:11 | #11

    Super normal profits should be taxed and subsidies given to those who cannot afford electricity price rises.

    See, a “normal” rate of profit is actually negative: it’s not actually possible to make money in a competitive market, so if you’re making any money at all there’s some sort of competition barrier thing going on.

    [competition drives prices to marginal cost plus a percentage, with the percentage being lower the more competition there is. Two points:
    + marginal cost doesn’t cover fixed costs, so if the percentage is low enough, if there’s enough competition, your fixed costs sink you.
    + there’s… nothing actually forcing the percentage to be positive. In a sufficiently-competitive economic sector you’re guaranteed to be competing against crazy self-destructive people [uber] and they, not you, will set the prices, losing on every sale and making up for it in volume.]

    If we want people to make money we need to set up the economy so this is possible: this involves engineering in competition barriers… at which point we may as well go the whole hog full-communist for a lot of things.

  12. HED PE
    March 14th, 2017 at 22:23 | #12

    Can State Governments expropriate the grid and electricity assets? The states have the advantage of not being bound by the “just terms” in s51 of the Australian Constitution. Of course it would be unreasonable and harmful to private sector investment to simply confiscate property for nothing but if the federal government has to do it, the capitalists will hire the best lawyers and squeeze the taxpayer for every single penny. I’m guessing that will include an allowance for loss of the currently excessive rate of return.

  13. john phillips
    March 15th, 2017 at 10:14 | #13

    @may
    As Gruebleen said – Renationalise I suppose is an answer. However from what I have observed is that has inherent inefficencies, bureaucracy, uncompetitive labour force etc. So is it a catch22 situation we have with no way out ? Its just that I do know the actual costs involved that I mentioned are a fraction of the overall prices charged to the consumer. On top of the necessary production and delivery costs are the multiples and various levels of management, such as administrations, marketing, sales activities, advertising, risk control, directorships and so it goes on etc

  14. Peter T
    March 15th, 2017 at 14:21 | #14

    @john phillips

    that has inherent inefficencies, bureaucracy, uncompetitive labour force etc. Yet the administrative costs of large government-administered schemes (social security, tax, medicare etc) are at par with or below comparable private-sector schemes. Both are bureaucracies, one pays lower-level workers better and upper level ones less, government schemes in the day had better training and often technical outcomes. The private sector is demonstrably better at small retail, demonstrably worse at large-scale universal provision. Electricity is the latter.

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