Why we should pull the plug on privatising electricity
Surging power prices are having savage consequences for
household discretionary incomes. Some would blame the government’s
carbon tax, but the real culprit is price gouging. Judging from the
pronouncements of government and industry — including mainstream
economists — privatisation is the practical solution to achieve low
prices. Indeed, Australian state governments have embarked upon
privatisation programs to varying degrees since the 1990s.
There is only one small problem with privatisation: the long-term
history of the electricity industry has shown it almost always leads to
disaster. University of Wollongong professor, Sharon Beder, has provided
the evidence in the book Power Play: The Fight to Control the World’s Electricity.
It supplies much needed historical context to the battle between public
and private ownership played out over more than one hundred years in
the United States and Britain, and the last couple of decades in
Australia, Brazil and India.
Beder shows throughout this history, industry practised the modern
art of propaganda, conducting public relations blitzes to convince
consumers private ownership was superior, despite public anger with poor
service and unjust pricing. Although industry attempted to equate
public ownership of electricity monopolies with communism, they had no
principled dispute with monopolies as long as ownership, control,
profits and decision-making were private.
Australian governments once wholly owned the four sectors comprising
the electricity industry: generation, transmission (large networks),
distribution (local networks), and retailers. These sectors have been
split into competing firms and spun off.
The natural monopoly character of the electricity industry makes
designing competition difficult. Generators have large fixed capital
costs, meaning oligopolistic competition will feature. In transmission
and distribution, duplicative infrastructure is wasteful and precludes
competition. Retailers tend to follow the same oligopolistic pattern as
generators (TRUEnergy, AGL and Origin Energy).
The National Electricity Market (NEM) was instituted to increase
competition, but is beset with problems. For instance, the transmission
losses over the interconnectors range from 40 to 90% and a powerful
oligopolistic industry still dominates the market.
A primary argument for privatisation is the issue of moral hazard
under public ownership. While this is certainly true, history has shown
something rather interesting: privatisation instead enhances moral
hazard. Firms will leverage their market dominance to often blackmail
the government with bankruptcy and blackouts if regulators do not raise
prices, thereby risking the wider economy.
Other times, firms will teeter on the brink of insolvency because of
ill-informed decisions, usually over long-term capital investments that
have never become profitable. Accordingly, firms pressure regulators to
increase prices to cover sunk costs. An astounding fact revealed by
Beder is that the electricity industry is one of the most bailed-out in
history, perhaps second only to the banking sector.
These bailouts, however, do not generate the publicity that surrounds
banking bailouts. It is often done on the sly, with regulators
approving substantial price increases and governments providing massive
taxpayer-funded subsidies and below market rate loans. Typically, years
elapse before the public discovers the truth.
As Beder documents, privatisation almost always results in escalating electricity prices, even at times when total demand is falling.
Rolling blackouts may also occur as rising prices don’t provide a
market signal to increase generating capacity; firms instead turn off
generators to ensure prices skyrocket, creating a positive feedback
While raising prices in the short-term is indeed profitable for
industry, in the long-term it has the potential to backfire. The reason
is the emerging alternative electricity source for households: solar
power. This has grown exponentially
in recent years, as the cost of solar panels fell by an impressive 42%
in 2011. Grid parity may be achieved soon when the cost of solar panels
equals purchasing electricity from the grid.
The solar panel revolution threatens both the generating and network
firms whose revenues and profits depend upon supplying increasing
amounts of electricity. They are fighting back by making it difficult
and costly to connect the solar panels to the grid as an anti-competitive strategy, which is probably the single most important issue regarding the installation of solar panels.
Publicly owned electricity systems are beset with their own problems.
Cost-plus accounting is a “spend more, earn more” incentive, resulting
(over-investment) in the network infrastructure, which obliges higher
prices. Prices also increased ahead of privatisation so the government
receives a higher return and ensures privatisation cannot be blamed for
the inevitable rises. Pricing formulas based upon asset values ensure
that the remaining publicly-owned systems act as private ones,
increasing asset values and hence profits, regardless of whether it is
necessary, again raising prices.
Unlike privatised firms, however, price gouging by public firms can
return the profits (indirectly) to the taxpayer rather than to owners
and managers. With public ownership, customers as citizens can influence
the public policy process; privatisation neuters this lever.
The electricity industry has been purposely reshaped via neoliberal
ideology from a system of public subsidy, public profit into public
subsidy, private profit where risks and costs are socialised but profits
and power are privatised. Industry today is like a restaurant menu:
there are multiple retailers, offering a variety of plans and prices
that appears to offer consumer choice.
Unfortunately, none of the options available include inexpensive
electricity. Citizens and customers have no influence over how the menu
is constructed; instead, they are offered the illusion of choice. The business model that retailers operate under is inefficient and does not serve consumers well. Also, industry works to silence those who speak out against it.
Much like the privatisation and deregulation of the financial sector
that promised choice and efficiency according to pseudo-scientific
economic models, it has instead resulted in endless financial disasters,
coming after a period of apparent tranquillity. The costs to
governments vastly exceed all the costs and problems of public
Economist Steve Keen has shown that the models used by economists to
prove that electricity privatisation functions more efficiently are
lacking due to three issues: a monopolistic industry structure may be more welfare enhancing
than a competitive one, spot markets are subject to speculative
volatility, and enforcing marginal cost pricing can potentially bankrupt
firms. Neoclassical theory is biased towards market outcomes, but only
due to the numerous nonsensical assumptions needed to make models “work”
while ignoring the large body of empirical literature that show these models are false and misleading.
Economists advocating and devising privatisation programs are
themselves beset with conflicts of interest. Many are employed by,
consult for, manage, and/or own organisations with a direct interest in
profiting from privatisation. Listening to the pronouncements of
conflicted persons and organisations is similar to letting Big Tobacco
determine the direction and outcomes of medical science.
When privatisation results in diametrically opposite outcomes to
those claimed, supporters - governments, industry, think-tanks and the
corporate media - offer an ad infinitum argument: the problems were
caused by too little privatisation. It is only when the predations of
industry become obscene, as with California’s energy crisis, will
governments step in to deal with the problem.
Given the historical trends documented by Beder, it is likely that
Australia’s privatised electricity industry will follow in the same
direction as its historical counterparts. As Mark Twain observed,
history does not repeat itself, but it does rhyme.