The failure of electricity market reform

As many readers will be aware, The Guardian now has an Australian edition, and I’ve just published an opinion piece in their Comment is Free section, looking at What lies behind the power price increases in Australia?. While there are plenty of factors, they are tied together by the misconceived reform of the industry undertaken in the early 1990s. Concluding paras

he free market assumptions of the reformers were simply inapplicable to a network industry like electricity, where every participant interact with one another through a distribution and transmission system that has all the characteristics of a natural monopoly. The assumption that a combination of profit-driven investment and regulation in the public interest could resolve these contradictions has proved unfounded.

Equally importantly, even though the COAG reforms coincided with the emergence of global concerns about climate change, the reform process took no account of the possibility of carbon pricing, and made no provision for renewable energy. In particular, the assumption that households could be regarded purely as consumers failed to consider the possibility of solar rooftops, or of any interactions between households and energy suppliers to promote energy conservation.

Fixing this mess will take many years. But the first step is to admit that electricity reform has been a failure, and to re-examine the whole system without any ideological preconceptions.

I’m hoping to write more on how to fix the system soon, perhaps even making a submission to the Newman government’s inquiry on the subject.

58 thoughts on “The failure of electricity market reform

  1. There is an irreconcilable clash between the supply of largely carbon based energy and the need to conserve while creating generous dividends for the owners of that service. That applies not only to domestic gas and electricity but fossil fuel exports as well. Next year I believe Queensland will the the only state to export both LNG (via Gladstone) and coal via several current and planned ports. The more carbon that is burned somewhere the bigger the profit.

    If energy supply to homes and small businesses is a public good then it needs to be regulated, some would say government owned. Check the website of Electricite de France or EDF group and see their strong social commitment. EDF is 85% owned by the French government and is not only the world’s biggest electricity supplier but also has one of the lowest carbon intensities. They are getting big in the UK as well. Presumably they give troublesome customers plenty of chances before disconnecting. Their management culture evidently upholds efficiency in the absence of profit maximisation. So what is wrong with the EDF model?

  2. One minor positive from privatisation was that in Victoria, Kennett and Stockdale got lucky, really lucky, selling the four generators for IIRC $32bn. Solved our enormous debt issue in one stroke.

    But more generally, every time they have to create this highly artificial pseudo-market where there is a natural monopoly, I am suspicious.

    An interesting factoid of the sale of the SECV was that the mass sackings, which caused enormous social upheaval and have still left Moe and Morwell seriously disadvantaged, happened during corporatisation, before privatisation (in order to make them more attractive). More than half the ‘workers’ lost their jobs (which does make you wonder what they were doing at their jobs in the first place). But atrociously handled.

  3. ‘… re-examine the whole system without any ideological preconceptions …’

    I admire you John. Despite everything, you manage to retain a spark of optimism that rational discussion might have a role to play in public policy. Much like Rudd, in a way.

    Sadly, I believe both you and he are destined to be endlessly disappointed. Ideological models have gradually become embedded into the learned social identities of the various political class members, and they are not about to unlearn it. Their instinctive support or opposition to anything will reflect the script that goes with their learned social role, not on any objective analysis of evidence.

    They are like actors in a play, to put it another way. Reciting the lines correctly takes precedence over parsing what the words mean in practice.

  4. A large slice of the privatised British electricity system is now owned by Electricite de France. Though floated by the French government in 2005, the French government retained almost 85% ownership of Electricite de Franceas of the end of 2008. Privatise your energy system or any other natural monopoly national asset and a smarter country’s national government agency will buy it.

    “The assumption that a combination of profit-driven investment and regulation in the public interest could resolve these contradictions has proved unfounded.” We can make a much stronger statement than that. Try;

    “Those who understood the economics of natural monopoly predicted this mess, predicted the price rises and predicted the bulk of the public would be worse off. These predictions have been proved 100% right.”

    Of course, the neocons don’t care they were wrong. When have bandits who have made off with ill-gotten gains ever cared that they wrong in takijg the loot? The neocons don’t care. They are jubilant that they have conned the people yet again. This is really why they are called neocons. They keep coming up with new cons all the time.

  5. Your claim that “costs declined slowly but steadily in real terms” before market reform needs some evidence. It also needs to engage with the fact that government ownership meant subsidies. If the cost of actual electricity is lowering, but government is increasingly subsidising is there any benefit to consumers? I say no.

    There is also no separation of the charges for the network, and the charges for supplying electricity. Network prices have gone up substantially, the price of electricity less so. There are genuine technical reasons for the increase in network charges, which you hint at as flaws in the original move to privatisation, but with no suggestion of how public ownership would address them. If the government owned the electricity network would they invent a new way to power air conditioners?

    Discussion of electricity industry reforms need to separate the three very separate components of the industry; distribution, generation and retail. There is very good evidence that “availability” (up-time) went through the roof once the generators were sold; private enterprise found better ways of maintaining their plants and made them work more frequently. You also don’t talk about plant efficiency, which is pretty critical given earlier comments about how the market ignores carbon. In a publicly owned generator the incentive to make the plant operate efficiently is diminished because returns are guaranteed. This is demonstrated through plants like Hazelwood, a publicly owned asset (until recently) which is literally the worst plant operating in the world.

    There is definitely one area of the market that could do with a look; the way network owners charge for capital upgrades is a little bit open to being gamed. Network owners have the right to charge for their capital costs. Most of them are regulated and they make a case based on their analysis, something like an estimate of how much they’ll have to spend on the network in the next 5 years. How do you decide how big the network should be? Particularly given the growth in demand in the last decade. Very few analysts had predicted the drop in annual demand of the last 3-years.

    This is the cost of prioritising reliability. Future demand is unknown to some degree, particularly at a very local level. For a house to stay connected reliably every single component between it and the generator needs to be larger than the maximum demand it experiences. Every time you find out where the limit is you get a blackout. So they make predictions about where demand will go based on previous years. A huge part of the cost of upgrading equipment is actually going there, so they make them big. Residential demand has increased, it is pretty reasonable to expect the network price to increase too.

    Petrol was cheaper in the ’80s too. Maybe it’s taken us that long to figure out how much it was really costing.

  6. he free market assumptions of the reformers were simply inapplicable to a network industry like electricity, where every participant interact with one another through a distribution and transmission system that has all the characteristics of a natural monopoly.

    a so called natural monopoly is not a case for public ownership.

    the leading contributors to the law and economics of network industries include richard epstein and judges frank easterbrook and richard posner.

    who developed price caps and access pricing for network industries? what motivated them to do so?

    these decades old literatures one day will come to the attention of the guardian’s op-ed writers.

  7. But the first step is to admit that electricity reform has been a failure, and to re-examine the whole system without any ideological preconceptions.

    The first step is an ideological preconception.

  8. Such an exemplar of everything that is rotten in the self absorbed, Hobbbesian and zany world of the Economics of Excess.

  9. Did electricity prices rise or fall after the electricity ‘reforms’? Did the ‘reformers’ promise massive price increases or price reductions? If anyone had known when the ‘reforms’ were introduced that prices would not only increase but fall disproportionately on the consumer would the ‘reforms’ have been thought good or bad? Have the advocates of these failed ‘reforms’ anything to offer but neoliberal nostrums to assure us that it will all be marvellous in the long run?

  10. @evcricket

    You’re commenting on a blog, not refereeing a paper, so saying that a checkable factual claim “needs evidence” isn’t the way to go. You’re supposed to produce the contrary evidence. But just this once, I’ll point you in the right direction as regards the fall in real electricity prices under public ownership. See

    Click to access electricity_in_australia.pdf

    Figure 4.

    As I already said in the article, there was no public subsidy. The electricity authorities were self-funding, so your hypothetical basis for “I say no” doesn’t stand up.

    Hazelwood was not publicly owned “until recently”, at least in the terms of this discussion. It was privatized in 1996, at the beginning of the reform period, IIRC, the SECV had planned to shut it down, but the reforms made it profitable.

    Given the number of errors I’ve identified in a short time, I suggest you may want to undertake a thorough re-examination of your position before commenting further.

  11. @TerjeP

    Prof. J. Q. means the “first step” after examining the empirical evidence of outcomes. Imagine someone has designed a plane that repeatedly crashes and burns under what should be standard operating conditions. The designer continues to say, “This design works!” or even “This design should work!”.

    For this person, clearly his first step is to admit his overall design is a failure or has at least one crucial flaw somewhere. He can make no progress until he escapes from denial of the empirical facts and re-evaluates designs and theories in the light of these empirical facts.

    The privatised electricity market is flawed and based on flawed premises. The facts of the outcomes prove this to all except to blind faith-reasoners like yourself who are in denial of the empirical evidence of outcomes. Prices are rising much faster than they did before privatisation.

    The general argument that a larger network will lead to rising costs is flawed. All other factors being equal, a larger network should lead to falling costs due to economies of scale. The specific argument that air-conditioners (in particular) are leading to higher peak loads and consequently increasing network and generation costs does perhaps hold true. However, analyses suggest that the bulk of increased costs are due to the inefficiencies of splitting natural monopolies into competing oligopolies and the overheads of advertising, private management and private price-gouging profit taking.

    Of course, I know TerjP that offering evidence to you is pointless. You are a faith-reasoner incapable of absorbing real evidence which conflicts with your blind beliefs. However, as often as you post nonsense I will tell you it’s nonsense.

  12. @John Quiggin
    Don’t worry John, I was never under the impression that this was a journal piece.

    That graph stops in 1996. It also doesn’t describe how it was calculated. Does that include network prices? That’s pretty important. This graph from Garnaut suggests that prices did drop after privatization, then climbed later. But, again this suffers from the same problems. Does it include network costs?

    And I am sorry for my lazy language. Hazelwood was owned publicly until *relatively* recently. It was built in the 1960s. This however is a distraction from my and your main points which you failed to engage with; government do not magically make the costs of making electricity lower.

    Let’s only talk about wholesale electricity prices, because you fail to mention that there are other components of electricity pricing I assume you are not across them.

    The cost of making electricity in Australia is driven by the cost of mining and supplying coal, maintenance and regulation charges like pollution and the carbon price. Which of these gets lower under government ownership? My major point is that if the price of electricity goes down under public ownership that is because those costs are being born elsewhere. Like in NSW currently; state owned mines sell coal to state owned powerstations at a reduced rate. This allows them to make cheap electricity, but the mine is forgoing revenue in the order of $2b per annum. Would tax payers be better off with cheap electricity or money in consolidated revenue? You can read more about this mechanism here:

    There are other subsidies that probably don’t show up in regular analysis either. When the generator was built did they buy the land? Do they pay for the coal? What about the network connection? Power purchase agreement? All of these free kicks make it harder for new entrants, which are principally renewables these days, to enter the market. While you may not consider these to be subsidies they are making it harder to get clean energy onto the grid and I don’t see how making the existing generators public fixes that. Unless you are advocating government grant these same free kicks to renewables? I agree with parts of that.

    Anyway, I just want to know one thing; how does public ownership of generation assets lower the costs of making electricity? How does it lower the costs of building and maintaining an electricity network? I don’t think it does.

  13. Let’s only talk about wholesale electricity prices, because you fail to mention that there are other components of electricity pricing I assume you are not across them.

    How about not making this kind of patronising assumption? If you care to check, you’ll see that, as a member of the QCA, I was involved in regulating distribution charges for about 10 years. When I say that reform has failed, I am speaking from first-hand experience.

  14. I think you invited a rude response with your surprising first reply John. There is an opportunity for good, polite debate here that has been missed, which is a shame. If your intent on putting up this post was to make a point without discussing it, then maybe turn comments off?

  15. Maybe so, Steve. I thought the first comment invited the response it got, but it was early in the morning and maybe my judgement was off. If so, I apologize.

  16. That appears to be an appeal to authority.

    I’ll blink first. I apologise for not looking up your history and making assumptions about your knowledge.

    Now, do you want to talk about electricity market reform or feelings?

  17. Where something like an electricity network is a natural monopoly the proponent for privatisation surely needs to make a very good case, better than any I’ve seen or can imagine at the moment in Australia.

    To respond to evcricket: firstly one accepts science as a major economic factor or one doesn’t. Supposing one does then climate science has a message for us today regarding economically intelligent futures for electricity generation. Let’s suppose the major reason for rising power prices in Oz has been network amplification largely driven by increasing use of airconditioning and volume driven profit pursuit by suppliers – could public control have produced a better outcome for low to moderate power consumers in this country? Well …. where is the error in JQ’s quoted three paragraphs above which speak directly to that question, with two answers (carbon taxes and distributed rooftop solar)?

  18. @evcricket

    “The cost of making electricity in Australia is driven by the cost of mining and supplying coal, maintenance and regulation charges like pollution and the carbon price. Which of these gets lower under government ownership?” – evcricket.

    I would answer it this way. Privatisation pushes up prices in the electricity industry because;

    (1) The advantages of natural monopoly are lost;
    (2) In the artificial competing oligopolies market new overheads appear especially those related to advertising and management. (These overheads are massive, wasteful and totally non-productive).
    (3) Private entities want to profit-take or to term it much more correctly price-gouge and engage in cartel behaviour.

    These are the reasons why prices have skyrocketed in almost every privatised industry. Privatisation assists only the rich who get a new income source by buying government assets at knock-down prices (set by their neoconservative mates in government). They then lobby, politically donate and manipulate their way to higher profits by price-gouging, cartel behaviour and their own monopoly/oligopoly power. These who deny these facts are either blind to the real world results, proven over and over again practice, or are gaining private wealth from this process and so are not interested in the truth but merely interested in transferring wealth from the many to the few.

  19. The advantages of natural monopoly are lost;

    I don’t see how ownership has any influence on whether a market displays chararactistics typical of a natural monopoly or not.

    Could you explain your thinking here?

  20. @tgs

    The advantages of natural monopoly are lost when authorities artificially create a “competitive market” by splitting natural monopoly situations (national or regional) into competing oligopolies. Competing oligopolies must then duplicate infrastructure and/or capital equipment and/or suffer dis-economies of (lack of) scale. Further dis-economies are created by advertising budgets, sales staffs and poaching and churning of each others’ customers.

    Natural monopolies situations are best handled by retaining the business in state hands (state or national ownership). Granting private monopolies or creating artificial “competitive markets” with competing oligopolies, with or without attendant regulation, are both inferior outcomes in efficiency and equity terms and provably so from much accumulated evidence. Proponents of privatisation in these cases are disingenuous sectional interests with private gain in mind and not the public good.

  21. As I mention in the article, the big change was from statutory authorities to corporate entities. In addition, as Ikonoklast mentions, there was a lot of breaking up of natural units in the futile hope of promoting competion. The issue of public vs private ownership is important in terms of fiscal outcomes, but as regards prices and consumer service, private firms and corporatised GBEs are very similar.

  22. @evcricket

    You wrote: “Discussion of electricity industry reforms need to separate the three very separate components of the industry; distribution, generation and retail.”

    Indeed, the current fad of separating ‘generation’ from ‘distribution’ and from ‘retail’ needs discussion because this fad is non-sensical in a very fundamental way.

    From a ‘consumer’s’ point of view (household or business), it is impossible to ‘consume’ electricity without a distribution technology. Whether or not a distinction between wholesale and retail is ‘needed’ depends.

    The underlying economic concept to my point is related to the well known concept of ‘joint production’. Generation (ie production) and distribution (another production technology) are joint if actual sales are intended. (These production processes are not linearly separable in consumption and therefore the introductory textbook micro-models don’t hold with respect to Pareto efficiency – the overriding idea of efficient resource allocation.)

    I understand separating joint production processes provides a few more jobs for ‘top’ (of the income scale) managers.

    Competition in the retail ‘market’ ignores the time used up by people to shop around. There is also the problem of lack of flexibility with so-called plans. No wonder productivity – however defined – is declining. A lot of the work is done by consumers and their time doesn’t enter the cost of production.

    Hope I am assisting in your call for a discussion.

  23. A more southerly example illustrates the problem of separation of functions. Tas Hydro has a retail arm Momentum Energy (see website) that among other things sponsors a race at the Melbourne Cup carnival. Tas Hydro has dams and a couple of gas fired plants but does not own the high voltage transmission nor the underwater Basslink cable. Yet mainland customers like to think their appliances are powered by ‘clean’ electrons unsullied by coal burning.

    In reality much of the short response electromotive force for say Victorian customers can probably be attributed to brown coal burning but the megawatt-hours are balanced out in the wash. There are several players in the mix beside Tas Hydro including the operators of different segments of transmission and some coal burners. Some of the rent from TH’s internal pricing must be frittered away to middle men. What happens if a super-drought or cable malfunction means there is no actual hydro involved? Problem solved if a single entity owns the lot if only the problem of featherbedding due to lack of competition can be avoided.

  24. @Ikonoclast

    Thanks John. That’s more the sort of response I expected from you. I will ponder this further. At the moment I don’t necessarily agree, but I’ll think on it.

  25. It’s interesting that the problem of “featherbedding” is mentioned in relation to a monopoly, probably meaning a government monopoly. There is also the issue of “gold-plating”. It’s arguable that both of these phenomena happen even more in an artificial private oligopolisitic situation (created by decree and regulation) than in a GBE monopolistic situation.

    First, let us seek definitions for the terms and their likely applications.

    “Featherbedding is the practice of hiring more workers than are needed to perform a given job, or to adopt work procedures which appear pointless, complex and time-consuming merely to employ additional workers.[1] The term “make-work” is sometimes used as a synonym for featherbedding.

    The term “featherbedding” is usually used by management to describe behaviors and rules sought by workers.[2] The term may equally apply to mid- and upper-level management, particularly in regard to top-heavy and “bloated” levels of middle- and upper-level management.[3] Featherbedding has also been occasionally used to describe rent-seeking behavior by corporations in response to economic regulation.” – Wikipedia.

    Gold-plate: “to incorporate costly features, refinements, redundancy or over-engineering into a project unnecessarily. Example: The engineers were accused of gold-plating the construction project.”

    It is arguable that both feather-bedding and gold-plating has increased in frequency and intensity in the privatised environment. Most feather-bedding related now to sales, advertising and upper managment. Gold-plating has been encouraged (inadvertantly) by the new regulatory regime. Consumers ultimately pay the costs of feather-bedding and gold-plating.

    Feather-bedding and gold-plating are not always all bad. Gold-plating the network at least builds in extra resiliency and capacity for growth. It could prove a bit of a waste or it could prove to be a timely expansion or a buffer against natural disasters. Prof. J.Q. would know better than I in this field but a degree of gold-plating to reduce certain risks might actually be a better bet than seeking to engineer too close to minimum foreseeable requirements.

    I would also prefer to see some feather-bedding of real productive or potentially productive workers (as a hedge against being short-staffed in emergencies and natural disasters) as against feather-bedding of sales people and managers. Again some apparent feather-bedding may be more efficient long term than having staff numbers being driven up or down at every exigency or failing to restore customers in a reasonable time after blackouts.

    And of course, we know that Shell management cut corners in its Gulf of Mexico rigs probably to avoid “adopting work procedures and checks which appeared pointless, complex, time-consuming and costly”. We know how well that worked out for them. That sort of mess always happens when mangerialist managers think they know more than the key professions employed in the enterprise in their (the key professions) areas of expertise.

  26. In the olden days electricity was generated by the government. In Brisbane, for example, the now funky ‘powerhouse’ in New Farm was where the electricity came from. It stunk and polluted but kept one or two incandescent bulbs burning in every house along with a socket or two for the wireless and maybe even the electric range – in houses not on the gas.

    If the coal mines were still strictly controlled by the government, the electricity generation still owned by the government and public transport still owned and controlled by the government – then reducing emissions wouldn’t even be a topic of discussion.

    We would have free public transport, electricity and coal conservation and massive rollout of tax-funded renewables.

    Instead we have the ridiculous spectacle of the free-market pretzel trying to pretend that it can deliver public good through the profit motive.

  27. It’s fascinating to me that the advocates of privatisation, after many, many comments, have still offered no explanation for the price rises beyond their apparently faith-based commitment to privatisation.

  28. @Alan From memory one of the reasons for privatisation was the need for further badly needed investment, something govts seem reluctant to enter into.

  29. @rog

    Since money is notional value and not real value, lack of money (investment) cannot really prevent anything happening that could happen if real quantities (resources and labour) were physically available and applied to the tasks in question. Only real values (real resources and real physical and mental labour) are real limits. Insofar as we allow notional value transactions to limit what we do to less than that which the real limits would permit then that is the political part of political economy.

    What governments have been reluctant to do under neoliberal ideology is to do things they were perfectly capable of doing in other eras; that is initiate public works and national projects. A government can always fund itself via taxation rises and deficits. There are limits to these processes too; complex limits that are a compound of real (material) and political limits. However, in the neoliberal era governments have operated well below these limits, wasting a vast amount of potential capacity in the system and transferring ownership and income streams from public ownership to private ownership.

    In other words, great wealth has been transferred from the many to the few. This was the object of the whole exercise organised as it was by wealthy interests. In the process, the pie was made smaller than it could have been but a much larger slice (in relative and absolute terms) went to the rich. Again, this was the object of the whole exercise.

    It’s about time all the 99% realised how the 1% have played them for fools.

  30. @Alan

    In the last few years electricity consumption has fallen. This was pretty unexpected, and network investment decisions were based on electricity consumption continuing to rise as it has always done, and you certainly don’t return the poles and wires you’ve invested in for a full refund

    Consumption down + investment constant or up = price increases.

    Also international energy prices have been going up, which I would think would have some impact on Australian prices.

  31. Would people regard nbn co as a test of what the alternative might look like for other distribution networks? No vertical issues, competitive protections, national scale. It is way too early to judge but it does need to be accepted that principal agent issues are abound and the governance of that business needs to be more transparent if it is to be a model door the renationalisation of other businesses.

  32. Ikonoclast,

    It is arguable that both feather-bedding and gold-plating has increased in frequency and intensity in the privatised environment.

    see Thomas J. Holmes & James A. Schmitz, 2010. “Competition and Productivity: A Review of Evidence,” Annual Review of Economics, Annual Reviews, vol. 2(1), pages 619-642 at showing that in nearly all the studies, increased competition led to large productivity gains at the surviving plants.

    most of all, if there is to be more feather-bedding, why do workers and unions oppose privatisation using slogans about job cuts. why does John Q. write about privatisation in similar terms such as requiring greater work intensities of the surving labour force?

  33. whoopsy I mean ,a href= “”IN unless you love econometrics!

  34. #JimR To restate the point spelt out in the article, post-reform featherbedding takes the form of bloated senior management.

    BTW, the article you cite makes the same point I usually do. Competitive entry enables management to impose new work practices on their existing staff. That’s where the increased productivity comes from.

  35. Certain services and industries are strategic. Broadly, this means general economic activity and social amenity depend on them in a connected way. Water supply, electricity supply, communications, rail and road networks are examples of strategic services and industries which also happen to be natural monopolies (regionally or nationally). Sometimes large heavy manufacturing industries (like auto making in the US) or primary production (mining in Australia) are considered strategic where they form a key part of the economy.

    What happens when a strategic industry (or a large section of it) collapses? If a major owner of generator power in Australia goes bust, declares bankruptcy and want to mothball, sell or dismantle all its plants what happens? If it cannot pay its workers what happens. Would say, Melbourne, be permitted to be plunged into permanent balckout? No, of course not. But who would rescue the situation? I have an answer for all these doctrinaire free market advocates. The state (meaning State and/or Federeal Govt) would rescue the situation. Emergency funds would be made available, the state would take over ownership and running of the plant. The plant would be nationalised, lights would stay on and all other business would keep running.

    If people want a US situation, just google sewerage Birmingham Alabama or Jefferson County sewer construction and bond swap controversy. It’s interesting that some county officials have been prosecuted for taking bribes but J.P. Morgan have escaped prosecution. Corporate crime is protected in the U.S. The U.S. is in the end stage of advanced capitalism, totally corrupt and totally unsustainable in every sense. A totally free (unregulated market) ends with a bribed political system, corporate and oligarchic power in charge, democracy inoperative and massive corruption taking over and sinking the whole society. The U.S. is there and collapsing under the weight of its own corruption.

    Capitalism is working, in any case, to transfer industry to the BRICs. China, in particular, understands this process and understands the end game once it possesses the major share of the world’s manufacturing capacity (particularly strategic industries like heavy manufacturing and electronics). The end game is to permit capitalism to operate by its own logic until this transfer is substanially complete. Then China would unilaterally end the capitalist game.

    The left field problem is limits to growth. Whether or not the Chinese realise it there are not enough resources left globally to complete China’s transition. This doesn’t change the basic game of transferring as much manufacturing capacity as possible to China; the largest portion of a shrinking pie is still relatively more than the losers will get.

    The real wild card is how will the US behave both internally and externally in the face of these developments? That is another post but there are no prizes for guessing. Hint…

  36. @John Quiggin must be a lot of bloated senior management in an industry that is capital intensive in its cost structures.

    Holmes & Schmitz looked at the end of rent sharing and shirking mostly because deregulation or increased foreign competition which made union job insecure.

    these increases in competition lowered the cost of switching over to new arrangements because there is less likely to be union resistence and strikes.

    their 2012 paper on switching costs and the incentive to innovate is very good at deflating the myth of X-inefficiency.

  37. @Jim Rose

    When wage rates in the West and Japan are pushed down to third world rates, which is where we are headed, where will the spending come from to maintain aggregate demand? Don’t forget every dollar spent out of a good wage means business, work and income for someone else. Every dollar not spent, because it can’t be spent out of a depressed wage, means a further contraction of the economy and more unemployment.

    The model you advocate was implemented in Russia (Russia collapsed), in the PIGS (the PIGS collapsed). Now Italy, France (soon) and the USA (a bit later) are due to collapse. The system you support is devoling to a second great depression. I hope your money is in government bonds of a stable, fiat currency issuing government. Alternativey, I hope your money is in land, bricks and mortar and enterprises that produce essentials and all this in a stable country. Otherwise you will soon lose much of it. PS, the US is not stable.

  38. Well, I’m swimming against the stream here, but you get that.

    I do not accept that any statement to the effect of “overheads are higher in private enterprise” has any value, nor do I think it is even remotely true.

    At a basic level, and supported by my experience, the transaction cost of doing anything in government is far higher than private enterprise. Why? The checks and balances of spending and managing money on behalf of the public. And I don’t want to suggest this is improper, but public servants, government and the enterprises they own are held accountable by the broader public and as such need a huge component of admin. Private companies are only beholden to to a board and sometimes not even that.

    I also don’t think the platitudes about oligarchies and the other rules of thumb really add much to the conversation. Why not consider the electricity industry? Find examples of these phenomena you think are occurring.

    For example, electricity generators don’t spend any money on advertising or marketing. Why would they? Their market is not influenced by advertising, it is purely a reflection of who can offer the cheapest electricity when it is needed. If you disagree, please find one example of an electricity generator advertising their product. And no gentailers don’t count.

    I also don’t buy the notion that electricity generation is a natural monopoly. Transmission and distribution is, there is little value in building parallel networks and in general I support state ownership of networks. But definitely not for generators. As it stands there are 40 odd generation companies all competing to provide the cheapest electricity. This is a good outcome for competition. It means a suite of technologies can try their hand, that renewables can have a go and that consumers end up with the cheapest possible electricity prices. If you can produce cheaper electricity at a certain anyone is welcome to try.

    State ownership of generators is problematic, particularly with respect to climate change. How many jurisdictions are going to legislate down the value of their assets? Find me just one example of a state government that owns generators taking steps to price carbon. Even worse we have had the opposite, with Victoria legislating wind power out of the state, and crippling expansion plans in SA because they won’t upgrade the interconnect. State ownership of generation assets leads to requlatory perversion.

    In any case, if you want to determine whether state ownership leads to lower electricity prices the data is all available. The generators in Qld are still state owned, so start by establishing a baseline of their prices over the last 30 years. Then compare all the generators that were privatised to this baseline and see if their prices rose faster than the Queensland generators. Let me know how you go.

  39. @evcricket

    Some thoughts with respect to overheads.

    An extract from a recent Australia Institute paper, FYI.

    …The cost of electricity increased by 170 per cent from 1995 to 2012, an increase four times higher than the rise in the consumer price index (CPI).

    …This increase has occurred despite the industry being subjected to privatisation and corporatisation for the past two decades, a process that promised to increase efficiency and lower prices.

    …Output per worker has fallen markedly in electricity while it has increased in the rest of the economy. Over the period June 1995 to the present, productivity across all workers increased by 33.6 per cent, while in the electricity sector it declined by 24.9 per cent.

    One explanation for this dramatic fall in output per worker is the rapid increase in staff numbers in occupations that do not have a direct role in actually generating electricity. For example, the number of managers in the sector has grown from 6,000 to 19,000 from 1997 to 2012, a rise of 217 per cent. This has seen the ratio of managers to workers change from one manager to every 13 workers in 1997 to one manager for every nine workers in 2012.

    In contrast to this, there was a much smaller increase in the group of people who are directly involved in producing electricity. It is likely that this change in the sector’s employment structure is a consequence of privatisation and the split of electricity entities into much smaller units, each requiring its own management and administration team. The cost of this investment in individual teams has likely been recovered from consumers through higher electricity prices.

    This paper also examines the increased capital costs associated with privatisation. Private buyers tend to pay more than the value of an electricity plant is worth because of the potential for profits. In order to achieve profitability these businesses are required to increase prices to achieve a competitive return. In this way further costs are passed onto consumers.

    The ABS stats are clear. Management personnel ratios are much higher in the privatised system. The duplication of managers and Boards across multiple ‘providers’ is a large extra overhead, compared to the previous situation.

    There is also the cost of acquisition. This financial overhead is passed on to consumers.

  40. @David Jago
    Thanks David, that is very interesting.

    I wonder if they included the Queensland coal generators in this study, or compared them? There might be broader management increases in the sector? Hard to pick it out.

    But yes, that is a genuine and factually supported reason why privatized power is/could be more expensive.

  41. @David Jago

    Woah, David, having read that report I am less certain. It’s a pretty political document, obviously designed to support public ownership. I find some of the data presentation bizarre and sometimes key points are just ignored.

    Like page 7 of the pdf, there’s a graph of electricity prices and CPI. They travel in lockstep until about 2007, then electricity departs wildly. There is no mention of it in the text. For the ten years after privatization they are parallel, then it changes. No explanation or even mention of it.

    There is also no acknowledgment of the difference in network and energy costs. A pretty significant omission.

    Then the dismissal of the Productivity Commission’s report is astounding. He Richardson dismisses the work as ideologically driven, then proceeds to inform us that more managers it the reason. That is pretty ironic rhetoric. It also ignores a genuinely well considered list of technically accurate reasons power could be more expensive.

    It’s not much of an analysis.

  42. Find me just one example of a state government that owns generators taking steps to price carbon.

    Well, NSW did, with the GGas scheme.

    Even worse we have had the opposite, with Victoria legislating wind power out of the state, and crippling expansion plans in SA because they won’t upgrade the interconnect. State ownership of generation assets leads to requlatory perversion.

    Er, except the Victorian government doesn’t own any generation assets because it privatised them during the 1990’s. The Victorian government’s restrictions on wind power are clearly ideologically motivated, not structural. The previous government didn’t have any trouble with wind farms.

    I don’t actually have a strong opinion on whether generation assets should be in public or private hands. But your arguments seem to be based on false premises.

  43. @evcricket

    Do you have any actual objections to the report, or do you just not like it? The fact that a graph reporting well known facts (the real price of electricity stopped falling after reform and rose rapidly after 2007) is not discussedin the text is scarcely a major flaw.

    And you seem to be stuck on the idea that no one understands the difference between generation and distribution. As i said last time, you’d be better off working on the assumption that this is so well known as not to require explicit mention except where it is relevant.

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