Apparently electricity is not a natural monopoly anymore

This is the only conclusion I can draw from this report:

The NSW government should sell off both the retail arms and the generation business of the state’s electricity sector, an inquiry has recommended.

Prof Owen said NSW needed to be in a position where new electricity baseload generation could be operational by 2013-14.

He said if the government retained most of the state’s electricity industry it would almost certainly have to fund the next baseload generator.

To do this, the financial impact on the state could be up to $15 billion.

Prof Owen said transferring the retail and generation interests to the private sector would secure ongoing generation investment in the state that was adequate, economic and timely.

The report also recommends the NSW government support a planned review of the effectiveness of retail competition, by the Australian Energy Market Commission, in 2010.

The government should then consider removing regulated retail price caps if the review found there was effective competition in the NSW retail market.

The report is here, in a thoroughly user-non-friendly form (even the table of contents is a bloody .pdf). Now, electricity production is considered a natural monopoly because its infrastructure costs are so high. Given that, I don’t understand why those costs to a state put new baseload capacity at risk, while those costs to private firms guarantee that capacity being built:

  1. The state of NSW has more money
  2. The state of NSW, if it doesn’t have enough money, is a more reliable borrower than a private enterprise, so it can secure capital at lower rents (i.e. interest rates, a cost we as consumers will also pay)
  3. The whole point to a natural monopoly is that there will most likely be only a single firm, probably not achieving technical efficiency – why should that firm be a private one? Introducing profit only exacerbates the cost problem
  4. Why does a review of the likelihood of competition come after the recommendation to privatise? Shouldn’t the Owen Inquiry have established that competition is guaranteed before making such a recommendation as this?

There are a number of other issues, prime among them (I think) environmental. The state is going to want to retain control over what manner of baseload generation is allowed. If we don’t want nuclear generation, or we don’t want coal, it makes sense that the State is building the new capacity. It does not make sense for a private firm (or cooperative) to be doing so, and then squabbling with the state over land use, environmental controls, etc.

Secondly, and relatedly, the secondary recommendation to lease the generation to the private sector. Keeping infrastructure and leasing operation to the private sector has yet to show itself to be a bad idea. Have the men and women of this inquiry never taken a train in the UK? Or a train in Sydney, NSW, for that matter? Used that cross-city tunnel? Visited Melbourne? These enterprises have not gone wrong because governments cocked up the process. They’ve gone wrong because they’re always going to go wrong.

Private electricity generation, in a society where the state will make demands over price (within reason. I’ve said before that it is too cheap), land use, environmental externalities, method of production, universal supply (i.e. not pricing people out of the market, or refusing service). Anything else? Along the way, we’ll take the lowest bid, which will turn out to be unrealistic, then face the private sector moaning about costs, <a href=”“>squabbling about which are the responsibility of whom, and ever-demanding higher rents (the economic one, not the housing one) to keep shareholders happy.

If it’s a leveraged purchased by privateers, look forward to those demands being linked to interest rates. If it’s a private equity purchase, look forward to not even being certain who will own the system in 6 months’ time, after they’ve taken their profit and sold out (and we all know how post-buy-out profit-taking goes).

Along the way, households will pay for someone’s profit along with their electricity, which just does not make sense. I’m sure mostly anybody can agree that electricity is a merit good of sorts – we all should have it, or access to it. We shouldn’t have a ‘plus’ on top of our bill, that goes to a shareholder. Nor should we pay taxes to a government that gives a portion to a private enterprise to give to their shareholders. If the government wants to tax us to build new capacity, do so. Tax current electricity. We’ll use less, use it more wisely, thereby reducing the over-consumption problem while simultaneously contributing to the funds for the next generation of baseload capacity. People aren’t idiots, they will understand algebra as basic as this.

I’m not suggesting there isn’t a problem. I just don’t see how the problem possibly, in any sense, suits the solution of a private market, or a semi-private one. These problems never have, and this one will not go at all pleasantly if anybody tries. Pro-market liberal conservatism, third ways, Private Finance Initiatives. The globe is scattered with their predictable-by-an-idiot failures. Why do we persist?


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