Privatising Electricity
The NSW government has announced that it will move to privatise the retail sections of the Electricity sector. On the face of it this is a good thing although retail is hardly the section of the industry that stands the most to gain from a competitive market framework. And it seems unclear to me why the government will lease existing power stations to private operators instead of simply selling them. Generation would seem like the most competitive section of the electricity market with transmission and distribution being less so.
How does the consumer in Australia benefit by their government owning and leasing electrical power plants?
Comment by a Duoist | December 11, 2007
As state governments begin what is called “privatisation” in different industries, some of the benefits have been slow to develop and some problems have remained.
I’d rather not get into too many details, but when people in Victoria blame “privatisation” of public transport for late / cancelled / over-crowded trains.
But public transport is still one of the most heavily regulated industries around, with the rails and stations being state owned, and the ticket prices, and timetables that the operators have to maintain, are set by bureaucrats.
So at the moment, we have a half-pregnant situation in many industries.
Comment by jono78 | December 11, 2007
The NSW Labor government is not thinking of privatising ferries and electricty for ideological reasons. They’re doing it in spite of their socialist beliefs, because the state can’t afford it, because the state can’t do it efficiently.
So this is some consolation in the face of so much statism everywhere. Socialism is ultimately unsustainable. Society is in the process of washing out the erroneous socialist experiments of the twentieth century. Once these services are privatised, I can’t see them going back to being nationalised.
Comment by Justin | December 11, 2007
I agree Justin. However I personally think that state ownership of utilities and the like is less of a problem than high rates of taxation. And whilst we have seen the state retreat in terms of ownership we have not yet seen any retreat in terms of taxation.
British privatisation of rail was a disaster essentially because it was along the lines that Jono78 outlined. Japanese rail privatisation by comparison was hugely successful because they did not lumber the operators with structural rules and regulations.
Comment by Terje Petersen | December 11, 2007
We should privatise Government owned entities by first corporatising the entities, and then gifting them in equal alottments of shares to the citizens of that State/Nation.
MOST privatisation leads to lower consumer prices.
Nevertheless, whether or not prices go up or down, the revenue of the firm goes towards infrastructure - so there is long term benefits in term of prices and secure supply.
Comment by Mark Hill | December 11, 2007
Is there the slight, perhaps even remote chance that we could privatise the NSW state government? I am sure there’s an outfit in China that could slash the cost of running the state.
Comment by Melvyn | December 12, 2007
Its a very bad sign when you are seeing a good sale price. Because when you see a good sale price what that means is that the resultant industry will not be rigged up to deliver dynamism and quickly falling prices.
There is too much focus with selling the old stuff. Whereas with privatisation the main point is that you would want to do it in such a way so that much new stuff gets built.
If new stuff isn’t getting built before or along with the sale of the old stuff than there is reason to suspect that they have screwed it up and that they won’t produce a functioning market.
Comment by graemebird | December 12, 2007
There is also this bad business about everything getting sold in one hit. That also is against the interests of evolving a powerful market. Though in the long run its not necessary to worry about how many players there are, still it remains the case that big business ought to evolve out of small business success.
The way we have been privatising is condusive to the replacement of socialism with cronyism. They have neglected the hard yards of sorting out clarity in property rights for infrastrucutural goods.
Comment by graemebird | December 12, 2007
We ought to distance ourselves as much as possible from this sort of privatisation or indeed the sort described by Mark.
Its not free-enterprise. Its crony-socialism. Marks always talking about corporatising and gifting. But thats ignoring the problems and letting his eyes glaze over. If you cannot get property rights so good such that you imagine individuals handling things then you have allowed your eyes to glaze over.
The Australian trained neoclassical economist is like the Douglas Adams description of the Kakapo. A fat parrot that has forgotten how to fly. But he’s forgotten that he’s forgotten how to fly. So he climbs these trees and leaps off hopefully into space. Always landing with a thud.
I don’t know why Mark keeps clutching onto these terrible thief-economics versions of privatisation. But the rest of us should realize that this cronyism is unethical, bad economics and electoral poison.
Comment by graemebird | December 13, 2007
So what do you really think of the idea, Graemebird?
In an ideal world, private companies would offer services to local counties, competing on prices: OR individuals would buy their own electric generating devices (Solar panels, or wood-burning generators, or gas-burning, or have giant electric batteries that they recharge from varied sources.) The county offers electricity as part of a range of service options to all people who are near a road, or public land. I would still have public utilities, but they should compete fairly with private companies.
Comment by nicholas gray | December 13, 2007
I’d want as many things privatised as possible. But its the WAY we currently go about it that I object to. They don’t establish the framework that would make building the new stuff easy before selling off the old stuff. But privatisation ought to be primarily about the creation of new stuff.
Comment by graemebird | December 14, 2007
You are way behind the times Graeme. National Competition Policy was introduced during the Keating PMship. What other forms of socialistic tinkering with the electricity market do you support to subsidise ’sole traders’?
Comment by Jason Soon | December 14, 2007
No I’m not way behind the times. The fact is the way that the neoclassicals are privatising is very bad and heaping all sorts of discredit on the policies.
Its because of their total non-understanding of what a functioning market is and what it needs to make it that way.
We’ve talked about this before AT FILIBUSTER LENGHT and so we both know you are lying in your implication that I’m against privatisation. You’ve just been busted attempting to deceive third parties.
Comment by graemebird | December 14, 2007
The problem is two-fold.
1. The natural tendency of governments and big business to want to tie up the markets for their own benefit.
2. The crude static-equilibrium models of the neoclassical consultants that plan these privatisations and their near total non-understanding of real-world markets.
Comment by graemebird | December 14, 2007
“We ought to distance ourselves as much as possible from this sort of privatisation or indeed the sort described by Mark.
Its not free-enterprise. Its crony-socialism. Marks always talking about corporatising and gifting. But thats ignoring the problems and letting his eyes glaze over. If you cannot get property rights so good such that you imagine individuals handling things then you have allowed your eyes to glaze over.
The Australian trained neoclassical economist is like the Douglas Adams description of the Kakapo. A fat parrot that has forgotten how to fly. But he’s forgotten that he’s forgotten how to fly. So he climbs these trees and leaps off hopefully into space. Always landing with a thud.
I don’t know why Mark keeps clutching onto these terrible thief-economics versions of privatisation. But the rest of us should realize that this cronyism is unethical, bad economics and electoral poison.”
You are an idiot Graeme. What is unethical about it you clownshoe? You’re not even a libertarian. I am sure as hell that a giveaway is more palatable than homesteading each inch of copper Telstra owns.
Comment by Mark Hill | December 14, 2007
Douglas Adams description of the Kakapo.
I am a great fan of the guy, and have not come across this, where did you find it.
Comment by Jim Fryar | December 14, 2007
How do you think the privatisation of electriciy in NSW should be done Graeme?
Comment by Justin | December 15, 2007
Why are we even debating privatisation anymore…as I highlighted, even Fidel got onboard this wagon in’94…
http://www.crikey.com.au/Business/20071206-NSW-Electricity-privatisation-will-Luddite-economics-rule-in-NSW.html
Comment by Matt | December 15, 2007
Do pay attention MATT. There isn’t a whole lot of people on this thread against privatisation.
Justin, I don’t think its an easy thing.
We want to get to what I would call a “functioning market”. Which I’d define partly as and industry which automatically delivers better value-for-money every year. But instead the taxeaters are delivering for us these quid-pro-quo markets, spending the capital keeping themselves employed, and putting us in debt.
The outcome you are after is one where NEW THINGS are being built without any tendering or central direction. Not one where you are locking up the old stuff for already rich folks. If your scheme for privatisation isn’t based around new stuff then its only a marginal improvement and it amounts to giving some oligarchic group of overpaid managers an insurmountable moat such that no-one can possibly outcompete them because even to try is to get yourself bogged down in blood-sucker-local.
Two things we need to set aside for a decade or two in this field. One is the idea that we can get by without some rules. You need clarification of how to go about building stuff and charging for it once its built or you are dependent on local councils FOR ACTUAL INITIATIVE. Whereas at this point you want them for only rule-setting.
The other thing is its very unwise to expect that everything you do in infrastructure has to be total freehold from day one.
Thats not really going to be possible until you know exactly what you are doing or until you can see that new stuff is being built in an organic way.
To me the whole deal for infrastructure privatisation ought to come with government cutting taxes then profiteering out of peak-time charging. That would be the pre-requisite to any sell-off. So profiteering on peak-time electricity, profiteering on peak-time congestion charging, and on water provision where the rivers are low. Getting the pricing right.
The more carbon taxes, diesel excises, payroll taxes and so forth that you can get rid of the more you could profiteer during peak-time road use, electricity-use and so forth. And from there the more viable is the situation for the private sector builing infrastructural properties.
From that point you have the financial incentive for the private sector to start building the new stuff. Because they know they can at least get a fantastic price during the peak times according to whatever charging rules you have going. Like it will become possible to infer that a tunnel here, a bridge there, can be made to pay for itself on the basis of the charges that are in place.
The rules for this sort of thing are no easy deal and will take some iteration to get right because it isn’t the stretch of road that is blocked that necessarily you ought to be charging but the roads feeding into it.
Once you have that charging scheme if someone wants to dig up the local council road and start homesteading underground properties (cables, pipes, walkways, tunnels, roads) then you have a basis for fair charging from the council and the basis upon which to convince the councils to take a margin on the revenues lost and not otherwise get in the way.
Now city-wide infrastructural pricing of stuff may seem socialist to people trying to pull the leftist-reversal. But I see it as simply a way of guiding things to where you can have a functioning market.
Comment by graemebird | December 15, 2007
Here’s two threads where we thrashed out some of these arguments. With characteristic deaf, dumb and blindness from our neoclassicals:
http://catallaxyfiles.com/?p=3059
http://catallaxyfiles.com/?p=3025#comment-45674
Comment by graemebird | December 15, 2007
JIM I heard Douglas Adams talking about this fat parrot on the ABC radio.
Comment by graemebird | December 15, 2007
Graeme wants to create a “perfect market” - trade occurs because of differences and the chance for mutual arbitrage.
Your proposal Graeme is utterly pointless. Gifting shares would not be nepotistic, cronyist, inequitable and would be just as efficient as a sale.
Comment by Mark Hill | December 16, 2007
For goodness sakes Mark. Don’t mess up this thread with your ignorance. Gifting shares wouldn’t do a damn thing. I’ve not said anything about a “perfect market”. Thats an otherworldly neoclassical construction.
Your input is worse than useless if its just you lying again. Gifting shares doesn’t solve any of the problems of lack of clarity in property rights when it comes to infrastructure construction and admiinistration.
It doesn’t Mark. So don’t talk ignorant nonsense. You are not competent to lay forth on these matters. How will gifting shares make the building of NEW STUFF easier and more likely? It won’t do a thing. It will merely lock in the old arrangements when what we want is the building of new stuff. The building of new stuff and not under cronyism.
You see you haven’t understand any of the issues involved here have you?
No you haven’t.
What will gifting shares do? Its totally pointless. Its just you running away from the issues involved. Why reproduce the nonsense that you spouted on the two threads that I’ve already linked?
Comment by graemebird | December 16, 2007
Mark, how do you think the gumment should go about the privatisation of electricity in NSW?
Comment by Justin | December 17, 2007
Graeme
You don’t seem to understand that the main reason for privatisation in the proper sense of the word is
1) to reduce opportunities for government using the utility for piggybank and pork barreling purposes
2) to create a market for corporate control
Encouraging investments is easy - allow utility owners to use their current property rights, something which access regimes distort.
Comment by Jason Soon | December 18, 2007
Like I said at #5 Justin - gifting equal allotments of ordinary, trasnferrable shares in the energy corporations to citizens of NSW.
Comment by Mark Hill | December 18, 2007
ENCOURAGING INVESTMENT IS NOT EASY.
Its only easy if we have clarity in propety rights.
>>>>>>>>>>>>>>>>>>>>>>>>>>>
Justin and others. Can you excuse the ignorance of our neoclassical economists. It appears to be terminal. Now if their CONCLUSION appears to be closer to your way of thinking than to mine for the moment thats okay.
But you mustn’t, ever, not ever, forget that these people are insane.
They have no feeling for property-rights (just for example) or for economics more generally.
Comment by graemebird | December 19, 2007
Sounds okay by me. What’s wrong with that, Graeme?
Comment by Justin | December 19, 2007
For one thing you’ll immediately be locked in. Supposing you privatised the entire sea. I would want to privatise some of the sea. But suppose you privatised it all. That would be equivalent to a blockade. We would be locked in. To get out by boat we would be committing trespass.
Likewise with our roads. These are our freedom of movement. To sell them all off to companies at freehold immediately means we are blocked off. Unable to move from A to B but by their sufferance. And also this will have been done before any clear rules are established for building tunnels or overpasses.
So in fact we don’t have the clear rules to build, run and pay for infrastructure. Until we have that then gifting roads to some set of cronies is pretty much setting up an elite which will stop any possibility of getting clear rules for the building of new infrastructure.
Comment by graemebird | December 23, 2007
By the way I’m not calling here for a gradualist approach. The motto here is still “A Fast But Careful Transition”.
But whats required here is a certain order of events. Particularly the knowledge that you’ve got things so well sorted that new private stuff is being built even prior to much of the old stuff being sold off. This is doable and we ought to get started with it.
Comment by graemebird | December 24, 2007
From the article Terje links to:
Maybe someone can help me understand how this works. It seems like a “free lunch,” which we all know doesn’t exist. I must be missing something.
in order to construct a new baseload generator, the government had to lease existing power stations to private operators.
The government didn’t have the money (and didn’t want to raise it through increased taxes or bonds) to build a new generator, so it raises money through selling the state’s electricity retailers and leasing its power stations. (I have no idea what a electricity retailer is, perhaps some sort of administrative agency? What does it own and what sort of service does it provide?)
If there is a private concern with $15 billion to buy the retailers and lease the power stations, it’s only doing so if it can get a good return on that investment. What sort of ROI are they counting on and where is it going to come from?
Comment by Trinifar | December 25, 2007
How does Australia’s electricity supply and pricing compare with the USA?
Comment by John Hasenkam | December 26, 2007
In 2006 US electricity prices averaged 8.9 c/kWh. In California and New York it was in the range of 11 to 20 c/kWh. These prices are in US dollars.
According to the Sydney Morning Herald & Australian Associated Press from May 2007 (prices in Australian dollars):
Compare to this from 2004:
Note: 1 Australian dollar = 0.8708 U.S. dollars (today).
Looks like your electicity prices are going to be catching up with those in the rest of the developing world.
Comment by Trinifar | December 27, 2007
John, my previous comment repsonded to your question about price comparison not supply. We’ve not had any supply concerns in the US since the time a few years back when Enron was manipulating natural gas supplies in California which cause rolling blackout throughout the state for months — and which caused California to enter into long-term contracts for gas at very high prices. We’re still paying for the Enron fraud and will for the next 20 years or so.
Comment by Trinifar | December 27, 2007
Trinifar - The argument for privatisation used by Morris Iemma is quite terrible. No argument from me.
Comment by Terje Petersen | December 27, 2007
Thanks Trinifar,
You confirmed my suspicion: there are some things better not privatised. I was well aware of the Enron scandal and that was in the back of my mind. It can happen again, it will happen again, never under estimate the power of money to create immorality. What those shits at Enron did was not only criminal it was manslaughter. People died because of their market manipulation. That will happen again. The reason for our low prices may be quite simple: no nukes and lots of coal.
PS: You are brilliant at homework.
Comment by John Hasenkam | December 27, 2007
That’s just garbage.
The State of California refused anyone to build a new power plant until Grey Davis was booted in favour of the Governator.
That is your supply restriction. Accounting fraud will be much worse when the State ensures monopoly profits.
The solution is to vigiourously enforce current laws and to remove the supply side restriction.
Comment by Mark Hill | December 27, 2007
Hasenkam thats not the way to think about it. You certainly want private production of energy. But you don’t want to be silly about it and leave yourself with an elite with an insurmountable pile of red tape for outsiders to have to climb over so that they can maintain their position.
The way we tend to privatise always seems to be on a pro-crony basis. It seems to be always about raising massive amounts of money for taxeaters to waste. But when you do it this way you are doing so by creating a dysfunctional market.
Comment by graemebird | December 27, 2007
Then explain why electricity is so cheap in Australia Mark? Why privatise something when it is already amongst the cheapest in the world?
No, I don’t accept your California argument. I have even heard transcripts of Enron execs laughing over how much money they were making out of the con. You may doubt the culpability of Enron in that but the rule of law didn’t and you are are lone ranger. No-one who looks at the behavior of Enron during that time cannot but conclude that criminality was deeply entrenched.
Comment by John Hasenkam | December 27, 2007
We have comparative advantages in energy production - we export coal etc which most of our power comes from. It’s cheap and abundant, that’s why we export it.
Enron’s criminality would have had little bearing on energy prices if there was no ban on power stations being built. Otherwise they would have been your run of the mill fraudster.
The wholesale market was free but residential prices were capped and new power plants took twice as long to build in California. There was no “deregulation” to speak of. Grey Davis wanted Bush to cap national energy prices so the Californian Government could purchase electricity produced elsewhere cheaper than it was being produced at. This is because after the “deregulation”, California saw a massive long term increase in energy demand, vis a vis silicon valley and the internet boom.
Clearly this is just mad.
http://www.worldnetdaily.com/news/article.asp?ARTICLE_ID=22306
“In 1996, California legislators deregulated the wholesale price of electricity. At the time, however, the legislature also agreed to fix retail prices — the price consumers pay — for a period of five years. At the time, this seemed like a good deal. Most predicted a decline in wholesale prices. Therefore, for a period of five years, utilities expected to reap fat profits before being fully tossed into the cold, cruel world known as the free market.
But, oh-oh, instead, wholesale prices went the other way. The California population growth, the unexpectedly high demand for energy sparked by rapid expansion of the computer industry, and the non-construction of power plants conspired to hike wholesale prices higher than most experts predicted.”
Trinifar has done nothing but released another round of socialist scare mongering based on perception and not fact.
Australian energy will always be cheap, just as Cuban sugar will always be cheap. It is what both nations are the lowest cost producers of.
Comment by Mark Hill | December 27, 2007
None of that changes the fact that Enron was manipulating the market in a type of behavior that is best described as psychopathic. My concern here is that with a critical supply of power so necessary to modern life we should not let it be controlled by entities that have as recent history has shown can so quickly develop psychopathic tendencies. There is now a very long line of corporations who have been found guilty of manipulating markets, lying to investors, engaging in fraud, and generally ripping off the greater populace. I do not want people like that in control of something as important as electricity. Given that Australia is such a cheap producer and has extremely stable power supply it would be foolish of us to be exposed to such a risk.
By the way, it is a fact, time and time again, that many corporations have the legal status of individuals and the morality of snakes. None of what you have said excuses the behavior of Enron and that is the big problem here. They took advantage of bad governance and that cost a great deal. That is the equivalent of an individual looting after a hurricane. Until such time as corporations accept that have the legal status of a person means behaving like a responsible citizen I don’t want any corporations in charge of essential services. If that means I’m a socialist so be it, your name calling is puerile and irrelevant.
Comment by John Hasenkam | December 27, 2007
Enron lied about the money they were making, primarily. They lied to investors. Did this hurt retail electricity customers ios revenues were severely overestimated?
How do retail power cutsomers get ripped off considering Enron entered the distribution and transmission market (but not generation in 1985) and California virtually banned new power plant construction in 1996? What did they do that was so wrong? Enron Power was primarily concentrated in the wholesale market. Considering the increase in energy demand and the cap in prices (as opposed to the expected fall), Enron, like many other wholesalers would have been selling to overstretched county and state level service providers, not consumers.
More or less, you are conflating issues.
The “essential service of electricity” was made utterly scarce because of a Government edict which choked supply. Enron were bastards, but had very little impact on retail prices or supply.
Corporations, like the people who own them, will act in an immoral fashion. The logical policy conclusion to this is not to put it in the hands of Government which is made up of and elected by the same people. Directors should not have the corporate veil, nor should Government ministers, but otherwise a legal corporation is a legal convenience as opposed to intricate contractual considerations that would be made giving some firms corporation status.
The name calling is well called for. Trinifar has a track record of finding factoids and demanding facts and then ignoring them or saying it is unfair to bring them up. Or disputing them or similarly having double standards for it’s own evidence and everyone else’s. If you want to nationalise an industry because you don’t like corporations, but the reason for the calamity was Government regulation, you’re not just a socialist, you’re a socialist making a terrible mistake.
Comment by Mark Hill | December 27, 2007
Governments can be thrown out but once a corporation owns a good that is final. That is my problem. I prefer private ownership but recognise that in some circumstances government ownership is the preferred option. My problem is not with corporations per se but the moral environment many choose to function within. Perhaps more correctly the idea many entertain that corporations should not entertain moral concerns. To me this is a cultural absurdity, any entity that exists within a social framework must conduct itself within a moral framework. Hence my prior references to psychopathology.
Unfortunately globalisation encouraged the belief that business is solely about markets and money. If companies had put more thought into their role in society and not adopted such a singular perspective on their responsbilities then we might not be in this mess. To this day I still recall hearing those Enron people laughing as they watched the fire approach the transmission towers, hoping these would topple so as to maximise their profits. If that is how corporations teach people how to think then we have a very serious problem in our corporate culture. If you think conducting business is about doing so without a moral structure then you are not only making a terrible mistake you are an enemy of the common good.
Comment by John Hasenkam | December 27, 2007
Mark,
I think a general, unsupported slam like this speaks volumes — and not about me.
Back to the point at hand, you ask,
California has done very well growing its economy without building more powerplants, mostly through conservation and increasing efficiency, although it has for a very long time purchased additional electricity from hydroelectric utilities in Washington and Oregon. California relies heavily on natural gas to fire it’s power plants and that’s where Enron comes in.
From the Wikipedia entry California’s deregulation and subsequent energy crisis:
See also California electricity crisis:
Comment by Trinifar | December 28, 2007
I would think that the following was a major problem:-
http://en.wikipedia.org/wiki/California_electricity_crisis#Supply_and_demand
Comment by Terje Petersen | December 28, 2007
Trinifar;
Perhaps you should have read further;
Energy price regulation forced suppliers to ration their electricity supply rather than expand production. This scarcity created opportunities for market manipulation by energy speculators.
State lawmakers expected the price of electricity to decrease due to the resulting competition; hence they capped the price of electricity at the pre-deregulation level. Since they also saw it as imperative that the supply of electricity remain uninterrupted, utility companies were required by law to buy electricity from spot markets at uncapped prices when faced with imminent power shortages.
When the electricity demand in California rose, utilities had no financial incentive to expand production, as long term price were capped. Instead, wholesalers such as Enron manipulated the market to force utility companies into daily spot markets for short term gain. For example, in a market technique known as megawatt laundering, wholesalers bought up electricity in California at below cap price to sell out of state, creating shortages. In some instances, wholesalers scheduled power transmission to create congestion and drive up prices.
After extensive investigation The Federal Energy Regulatory Commission (FERC) substantially agreed in 2003:[4]
“…supply-demand imbalance, flawed market design and inconsistent rules made possible significant market manipulation as delineated in final investigation report. Without underlying market dysfunction, attempts to manipulate the market would not be successful.”
“…many trading strategies employed by Enron and other companies violated the anti-gaming provisions…”
“Electricity prices in California’s spot markets were affected by economic withholding and inflated price bidding, in violation of tariff anti-gaming provisions.”
Some proponents of deregulation suggest that the major flaw of the deregulation scheme was that it was an incomplete deregulation — that is, “middleman” utility distributors continued to be regulated and forced to charge fixed prices, and continued to have limited choice in terms of electricity providers. Other, less catastrophic energy deregulation schemes have generally deregulated utilities but kept the providers regulated, or deregulated both.
What you are quoting is the result of incompetent or corrupt deregulation, not deregulation it self. It is, I grant you something to be careful of, but does in no way represent full free enterprise.
Comment by Jim Fryar | December 28, 2007
Again,
“Trinifar has a track record of finding factoids and demanding facts and then ignoring them or saying it is unfair to bring them up. Or disputing them or similarly having double standards for it’s own evidence and everyone else’s.”
Anyone who thinks deregulation in general, as opposed to the incompetently managed “deregulation” presided over by Grey Davis was the problem, is brain damaged.
Comment by Mark Hill | December 28, 2007
“California has done very well growing its economy without building more powerplants, mostly through conservation and increasing efficiency, although it has for a very long time purchased additional electricity from hydroelectric utilities in Washington and Oregon. California relies heavily on natural gas to fire it’s power plants and that’s where Enron comes in.”
Please stop making things up Trinifar. It was unsustainable. Grey Davis begged Bush to cap the energy price in every other State of the Union so the Californian Government could keep on repurchasing wholesale electricity and selling it to the Californian retail market. Enron only came into it because no one else was allowed to build powerplants.
Comment by Mark Hill | December 28, 2007
Jim, I’m not at all trying to defend the California’s deregulation. I think it’s clear that it was mucked up quite thoroughly, and cost me a pretty penny. I also think it is quite clear that Enron gamed the system by manipulating both supply and generation which was a violation of the law. (I know of no one who disagrees with this, the evidence is overwhelming and has been studied to death.)
Mark, there is no reason to think that building more power plants would have been helpful. There was plenty of generating capacity (given the long standing agreements to buy hydroelectric power from Oregon and Washington) during the time of the crisis. It was access to natural gas that was the problem (controlled by Enron) and that Enron, in addition to megawatt laundering, was manipulating in-state power generators to shut down (fake maintenance shutdowns) in order to force the state to buy on the spot market.
Enron execs Ken Lay and Jeffrey Skilling were convicted of market manipulation in 2006. I’m not making it up.
This sums it up:
I hope Australia has a better experience than California did.
Comment by Trinifar | December 28, 2007
I’m not convinced it will go smoothly in NSW because deregulation looks like it will be hamstrung by political considerations. The state of Victoria seems to be further along in deregulation and whilst I have not followed it closely most of the pain seems to have involved investors rather than consumers.
Comment by Terje Petersen | December 28, 2007
Mark said,
Anyone who thinks deregulation in general, as opposed to the incompetently managed “deregulation” presided over by Grey Davis was the problem, is brain damaged.
———
An egregious, arrogant generalisation. Claiming that because individuals hold points of view contrary to your own is evidence they are mentally incompetent is beyond the pale. One may as well claim that the Nobel Prize winning physicist who recently claimed he believed in telepathy is a nutcase. Indeed, many would, which is why he never made the claim until after he received the Prize. People like you Mark are exactly the types of people that concern me: so narcissistic,so self-satisfied in how clever they think they are, that they feel free to insult and condemn anyone who happens to hold differing opinions.
Comment by John Hasenkam | December 28, 2007
Bloody hell Trinifar, you are testing.
If you read wikipedia (which no doubt you have corrected me in the past for being not credible) further:
[California electricity crisis]
“Due to price controls, utility companies were paying more for electricity than they were allowed to charge customers forcing the bankruptcy of Pacific Gas and Electric and the public bail out of Southern California Edison. This led to a shortage in energy and therefore, blackouts. Rolling blackouts began in June 2000 and recurred several times in the following 12 months.”
You see? Price controls restrict the supply incentive to wholesalers and generators, more generation (like in a heatwave), and there is no blackouts. Enron did not enforce the price controls. They practiced accounting fraud.
Lay and Skilling got convicted. Did any of it relate to the energy crisis?
“On May 25, 2006, the jury found Skilling: [11]
* guilty on one count of conspiracy
* guilty on one count of insider trading
* guilty on five counts of making false statements to auditors
* guilty on twelve counts of securities fraud
* not guilty on nine counts of insider trading”
“On July 7, 2004, Lay was indicted by a grand jury in Houston, Texas, for his role in Enron’s collapse. Lay was charged, in a 65-page indictment, with 11 counts of securities fraud, wire fraud, and making false and misleading statements.”
What did any of that have to do with the Californian energy crisis?
Megawatt laundering could not have happened without the price regulation system. Without the regulated price, it just would not have happened, wikipedia [Californian energy crisis] again:
“After extensive investigation The Federal Energy Regulatory Commission (FERC) substantially agreed in 2003:[4]
“…supply-demand imbalance, flawed market design and inconsistent rules made possible significant market manipulation as delineated in final investigation report. Without underlying market dysfunction, attempts to manipulate the market would not be successful.” ”
Enron reselling energy at a high margin wasn’t illegal, it was encouraged by the awfully designed “deregulation”. The State of Claifornia also wanted to do it - re Grey’s request to Bush to cap and control all energy prices in the US. Do you dare blame the Californian Government who designed the terrible cap which was meant to be a form of corporate welfare to the generators (but actually sent them broke)?
The accusation of overscheduling was evidenced by little more than hearsay. The action is irrational or easily detectable fraud. If Enron didn’t sell the scheduling contracts, they would just lose revenue before they made it up on congestion fees. Why not just change the price so the forward (booking) price is higher, relative to the spot (congestion) fee? On the other hand, if they actually oversold or engaged in fraud, market participants would have seen this very quickly, paticularly in that there would have been an unusual, permament anomoly in scheduling contracts prices and congestion fees. A secondary market for congestion fees would have emerged.
No John, it is not beyond the pale. It is just rude and misses the point. So I’ll get to the point and apologise. Can anyone actually make a cogent case that Enron, or well implemented privatisation (which never happened) was the cause of the crisis? No. So far Trinifar has confused what Enron actually did wrong, and laid blame by association, and you have repeated the “corporations are evil” mantra. They might be. But it has little to do with the crisis other than the price caps, which were intended as corporate welfare (but sent them broke down the line).
Publicly owned power and energy entities will be Crown corporations. They have even worse incentives than private corporations.
It might be gentlemanly to never make a firm conclusion or deride people for not backing up the arguments. Well then, can you and Trinifar actually then back up your arguments (such as Trinifar’s often repeated, but never explained or referenced “it was natural gas” argument), instead of relying on mythical links between accounting fraud, corporate volition and poorly designed deregulation?
Comment by Mark Hill | December 28, 2007
Mark,
Enron reselling energy at a high margin wasn’t illegal, it was encouraged by the awfully designed “deregulation”.
And if that was all that happened it would merely be despicable.
But you can read the news reports here and here and decide for yourself:
Of course there’s more:
And it’s really hard to dispute the evidence on tape:
Now what part of this do you think I’m just making up?
Comment by Trinifar | December 29, 2007
The idea of capitalism is that people can sell whatever they produce for whatever price they wish. And if it is a sound market then there is no conflict of interest between the public and the seller.
If this is not the case what has happened is that neoclassical economists have made a hash-up job of the privatisation process.
But we see that everywhere neoclassical economists are making a hash-up job of the privatisation process. This is because:
1. They are stupid.
2. They don’t listen.
3. The models they carry around in their head in no way represent real-world business.
Neoclassicals carry around in their little minds an otherworldly platonic view of firms operating in a market. Not only is it otherworldly but worse still it is a static equilibrium model that fails to appreciate the way capital resources flow in and out of an industry.
So their thinking in these matters is just unbelievably crude. Imagine thinking of selling off the roads for example. Which eventually I’d want to do as well by the way. But what follows is a look-through into the crudeness of the mind of the neoclassical economist.
Now to a neoclassical economist, of alleged free enterprise perspective, they would acknowledge that there is a potential problem of “monopoly”. Then they thinks to themselves…. “well really we don’t want an “oligopoly” either…..Hmmmmm. So we could get away with 7 competitors. Since under no definition in the textbooks is 7 competitors an “oligopoly”. So lets create 15 of these public companies. And gift the shares to the public. And no-one can say that the situation is uncompetitive”
This is their thinking as far as I can manage to discern it from out of their hard-core evasiveness. Now then the next neoclassical comes along and he isn’t quite as right-wing. But he agrees with this method of privatisation against anyone else who is trying to show how to do it properly and in accordance with the interests of the community more generally.
The next dumb-neoclassical comes along and agrees with the first dummy but he says that ITS A 20TH ORDER ISSUE.
This is the way that the discussion of privatisation of money, roads, and other infrastructure is vandalised time after time.
We have to get beyond this cyclical vandalisation of the issue and take a serious look at how we can do these things right and why we must do these things and do them right.
Comment by graemebird | December 29, 2007
For the last time Trinifar:
““After extensive investigation The Federal Energy Regulatory Commission (FERC) substantially agreed in 2003:[4]
“…supply-demand imbalance, flawed market design and inconsistent rules made possible significant market manipulation as delineated in final investigation report. Without underlying market dysfunction, attempts to manipulate the market would not be successful.” ””
Now, did Enron manipulating energy prices actually impact supply or not? No.
Comment by Mark Hill | December 29, 2007
Mark, I no longer have any idea what point you are trying to make. Enron manipulated supply in order to manipulate prices. What’s hard to understand about that? I’m flumoxed, this story has been investigated to death and is readily available all over the web.
Comment by Trinifar | December 30, 2007
The point is to counter your hit and run insinuation that we will suffer high(er) energy prices because NSW electricity will be privatised. It is garbage. Australia has comparative advantages in the production of coal. Most of our power comes from coal.
Enron did not create the crisis, they manipulated it to their own advantage though fraudulent means. Without Enron, the artificial pricing would have still sent generators broke, there would have still been blackouts. The generators went broke and the State of California had to subsidise production. The wholesale price rule forced generators broke, and beforehand regulations killed off new plant building capping Californian supply.The price regulation also created an artificial arbitrage opportunity, which honestly or dishoinestly, was taken advantage of by every energy trader in the US.
Was energy market manipulation systematic or even signficiant on the crisis? We all agree Enron, in toto was rotten. However,
“““After extensive investigation The Federal Energy Regulatory Commission (FERC) substantially agreed in 2003:[4]
“…supply-demand imbalance, flawed market design and inconsistent rules made possible significant market manipulation as delineated in final investigation report. Without underlying market dysfunction, attempts to manipulate the market would not be successful.” ””
There isn’t much difference to me between Enron and the power companies who asked for the price regulation, and got played by it. They were in it for a free lunch paid for by the misery of others.
On the other hand, properly implemented privatisation works.
“Enron manipulated supply in order to manipulate prices. What’s hard to understand about that?”
Every firm that has ever existed has done this, but generally in a much more ethical way. Why point the finger at Enron and then lay no blame at all at the Government of California which then requested all of the continental US subsidise it’s electricity after experiencing an energy intesnive boom and destroying any incentive (by a price cap, which it wanted the rest of the US to adopt) or ability to generate new power sources?
The short version: Enron were very bad and deserved what they got. The crisis was caused by a bad regulation in a poorly designed deregulation package. Enron picked at the carcass and didn’t affect the crisis in any meaningful way - as long as the price regulation continued, there was always going to be a crisis. Privatisation does not lead to higher prices and Australian energy prices are probably more reliant on our comparative advantage and rich endowments in coal and other energy sources. A well implemented privatisation package where prices are free to be set by market forces will not see such a crisis like California did.
Comment by Mark Hill | December 30, 2007
What has been the experience in Victoria?
Comment by Terje Petersen | December 30, 2007
The very discussion of government being able to produce electricity more cheaply than private industry is just rubbish. It is a socialist dream, a delusion. So the government is supposed to be more efficient than private enterprise is it? BWAHAHAHAHA! There is no excuse for this kind of invinicible ignorance any more. A hundred years ago, maybe. Only an intellectually dishonest person could continue pushing that line now.
Comment by Justin | December 30, 2007
Well thats right. But you want to do it right. The people advising government at the moment always seem to want to set up all these artificial Frankenstein companies (here I talk about privatisation in the general) which sometimes can amount to a cross between government appointments and cronyism. So they get these artificial companies together and they in effect say… “hey you Frankenstein. Go and COMPETE!!!”
You can have big business and small business and high market concentration and otherwise. And all can work if they have evolved naturally. I would contrast Standard Oil of the late 19th century America with current Mexican Telephony.
Standard Oil came out of a near-homesteading situation. Where 100’s if not thousands of people had their own little wells and small claims. Out of that came the most gigantic corporation in the world.
Your average neoclassical looks at this and says “Ho ho bigness can work.” But bigness ought to be the result of small business success.
Think of the Klondike. That was a homesteading situation. But our current consultants, instead of letting the little guy go up there and stake a claim, they’d put together a Rockerfeller/Rothschild consortium under the chairmanship of JP Morgan. They’d put together some sort of mega exploration and consultantcy bonanza. And then they’d sell leases off in such gigantic lots that only the big boys can get involved. They’d get a good price for buggering the market thusly. And the whole booty from this racket would be blown on investments in taxeater ego.
Comment by graemebird | December 31, 2007
Mark,
The point is to counter your hit and run insinuation that we will suffer high(er) energy prices because NSW electricity will be privatised.
I’m not aware of saying any such thing. I did express hope the Australian effort goes better than California’s clumsy attempt at deregulation. I also pointed out that in your own futures market, the price of a megawatt hour for delivery to NSW in 2008 nearly doubled between January 2007 and May 2007 indicating you may be approaching the sorts of prices the rest of the developed world pays irrespective of deregulation.
In deregulation of electric markets, a consumer pinch, this article is the most recent I can find on the US experiment in electricity deregulation. A federal law passed in 1978 allowed the States to individually deregulate electricity. The results are mixed at best.
A related article says:
Comment by Trinifar | December 31, 2007
NEMMCO has been forcasting power shortages in the coming years for some time. See the following article:-
http://uk.reuters.com/article/oilRpt/idUKSYD2155820071031?pageNumber=1&virtualBrandChannel=0
Whether government owned or privatised I do get the sense that the availability part of power bills is ultimately too low given peoples expectations in regards to availability. At the moment installed metering technology does not really allow retailers and distributors to customise their offering to meet the individual availability needs of different customers (except perhaps the large ones). When instantaneous shortages hit the grid then rolling blackouts of whole sections of the network are frequently the only practical way to moderate instantaneous demand. A better approach would be to blackout customers on a more selective basis with a differential availability fee so clients could choose ahead of time whether they wish to pay extra to reduce the risk of suffering such outages. Many consumers would probably prefer to pay a slightly higher availability fee which might pay for the inclusion of some more reserve capacity in the grid.
Such selective blackout control would require far more in the way of intelligent metering etc than is currently the case. The upside of such metering would be that debt recovery would also be easier because they would be able to remotely disconnect or reconnect your power based on a simple phone call (although that entails some safety implications also). Time of day billing would also become possible with new meters.
Of course most blackouts are not currently caused by power shortages but more typically by equipment failure or damage in the distribution network.
I worked for a power distribution authority for a short time in the early 1990s. The problem with smart meters being trialed at that time seemed to relate mostly to reliability. The old electro-mechanical meters will operate for decades without problems whilst the new meters being tested tended to lose the plot following electrical storms.
Comment by Terje Petersen | December 31, 2007
Terje, that article surprised me with this:
If you have a drought so severe that you must constrain coal-fired power plants from using water, well, your drought is much worse that I had thought. I also thought that most water used by coal-fired power plants was returned to its source, apparently not the case. I guess that entails closed-loop cooling like that used in parts of New Mexico which is more expensive.
It may be that Australia’s electricity has been so cheap and abundant for so long that availability issues and the schemes to mitigate them are just surfacing now. My understanding is that in California and most of the US commercial users (e.g. factories) negotiate prices based on their ability and willingness to adjust demand during spikes. A factory that can go off-line during a mid-day spike might get a very good deal comparatively.
In California, all (some?) residential customers pay more during the day (roughly 7am to 7pm) than at night. There are quite a mix of schemes around the country. You can pay a surcharge for your max demand during the day to encourage spreading out use over time. In CA, there is a monthly baseline amount (”Baseline Quantity varies by season, climate zone and heat source”
beneath which you pay 11.43 c/kwh, then four bands above that. In the top band, 300% of baseline, you pay 37.07 c/kwh — a real incentive not to be a huge user.
Still, for many people the cost of electricity is a small enough portion of their budget that they really don’t care to conserve. So I think there is merit to your idea that “Many consumers would probably prefer to pay a slightly higher availability fee which might pay for the inclusion of some more reserve capacity in the grid.”
Comment by Trinifar | December 31, 2007
Queensland has a particular problem with water. Their dams were very low last time I checked and the city water supply is also used for cooling in some of the power stations. This is not generally the case in NSW.
http://en.wikipedia.org/wiki/Wivenhoe_Dam
However for new water saving alteratives see:-
http://en.wikipedia.org/wiki/Kogan_Creek_Power_Station%2C_Queensland
We don’t have the metering systems in place to do large scale time of day metering. Most meters in use are still the old electromechanical variety.
http://en.wikipedia.org/wiki/Electricity_meter#Electromechanical_meters
We do have off-peak rates for water heating but it generally entails a separate meter and a utility controlled switch that turns the power on and off for the hard wired heating appliance and the utility decides what time of the day it turns on not the consumer. Typically it turns on at night but it is also sometimes used to absorb temporary excess supplies during the daytime and it is also typically activated during the daytime following any extended blackout to ensure a ready supply of hot water.
The recently elected federal government has talked about banning the installation of new electric hot water systems. The only readily available hot water alternatives are gas and solar although in some locations these are not that viable.
Comment by Terje Petersen | December 31, 2007
and the utility decides what time of the day it turns on not the consumer.
One can imagine a residential device that both monitors/controlls usage and negotiates price with nearly infinite flexibility — almost a real-time market with, of course, a futures market. As a residential consumer you could then decide how much you are willing to pay now and in the future for electricity at various times of the day depending on various demand conditions and essentially bid against your neighbors.
However, for something like that to be possible everyone would have to have the device and who would pay for its creation and deployment the cost of which would be nontrivial? Still, its interesting to think about the possibilities.
Comment by Trinifar | December 31, 2007
Yeah good thinking Trinifar. Contract pricing is likely to be a big part of a workable solution. And also vast differentials between peak and off-peak when it comes to infrastructure. Even if its only a leadup to privatisation.
In most cases there ought likely be some sort of “market socialism” in transition. What I mean by that is government setting the city-wide pricing. For use of the roads and the electrical wires. From there you have a price mechanism from which to set up a functioning market. And the high peak prices (it goes without saying that they are established along with strong tax and spending cuts) will bring on the competition.
The high peak prices will bring on the interest in investing in competing infrastructure. But you still face all that local government red tape. Its at this point you can work hard on getting very clear rules for the building of new infrastructure. The building, ownership, sale and pricing of it. And once you have these clear formulas, principles and regulations you have a very good basis upon which infrastructure markets can act just like other free enterprise markets.
Comment by graemebird | January 1, 2008