Electricity (in defense of privatisation)

[Arwon]

OK so this is basically me cross-posting a blog post of mine, but I want to advance an argument contra generalised left wing objections to privatisation in general as applied to electricity specifically.

The tl;dr is that my position is that privatisation of electricity doesn't mean a loss of government control or unrestrained gouging by predatory corporations as it may do with other forms of privatisation, because the system is still operated by a single operator (ie government) running the market through their computers, according to binding rules (set by the government).

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Privatisation of electricity does not mean loss of government control

I occasionally hear elements of the left getting very upset by the prospect of electricity privatisation. I understand the impulse. In most parts of the economy, selling off assets means you lose control of those assets (see also Qantas, Telstra). And electricity is an essential service for which universal access is a very big concern, which means it would surely make us feel safer and more secure for the government to have a tight grip on it.

However, I've come around to the view that the angst is actually misguided for two reasons.

The first is basically empirical. It turns out that if your goal is the cheapest and most reliable power for people within a given system, electricity markets actually do do roughly what boosters say they're supposed to. Generation markets do use the price mechanism to more efficiently generate and supply power. At the retail end, the experience in Victoria is that contestability (ie retail competition) does seem to bring retail margins down a bit compared to regulated tarrifs.

Private sector transmission and distribution grid operators, at least in Australia, actually do seem to result in cheaper grid costs in a natural monopoly environment. As an illustration, let's compare the revenue growth of the currently private and currently public grid operators in Australia. This comes from the Australian Energy Regulator with colouring added by me for emphasis.



As you can see, grid costs are going up everywhere (because we use s**tloads more power than we used to). However, as a general rule the blue privately-owned natural monopolies are clearly not going up in percentage terms more than the yellow public ones.

The actual reasons are a complex mess of issues and this isn't to say private good public bad (it might be possible to say certain state governments are crap, however...). I just wanted to demonstrate that existing private network operators clearly aren't price gouging relative to public ones. If anything it looks like the reverse, at least in Australia.

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The second reason, though, is that the quibbles about who owns generation or does retail are actually really secondary to the question of how things are structured and how the rules work. You can dispute the details of a specific asset sell-off, whether there's fair value, whether it's being done alongside other s****y measures, and so forth.

However in a properly run system it should make basically no difference who owns electricity assets because regardless, the people making the rules and running things remain the same.

I think the biggest misconception in the minds of a lot of opponents to privatisation is that privatisation means the absence of control. However, the fact is that our whole electricity market system can only exist by the fiat of government and under its ongoing control.

Even in a fully contestable market with no price regulations on generation or retail, even if every single entity within an electricity system is privately owned, the government is still calling the shots and setting the rules. This must definitionally be the case, because physics.

Yep, physics. An electricity grid isn't like a road network or system of internet tubes. It is essentially a single giant alternating current circuit, meaning the electrons shoot back and forth 50 times a second (you can read more about this at Evan's excellent blog). Since there's no unidirectional flow of stuff, and a circuit must be complete to function, the physics of a grid dictates that it absolutely must be managed by a single entity with a clear set of rules and and the power to tell everyone what to do. Markets are a fiction created to enable the controlling entity to run the system better by ensuring everyone has a monetary interest in doing a thing, but the underlying physics dictate a monopoly of control must remain.

At the very least, the correct term of abuse over privatisation should be ordoliberalism rather than neoliberalism.

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I don't think this is a trivial point. Because what it means is that in electricity production, a lot of ordinary market concepts become very utilitarian things. Having been conjured into being by government rules, features of the market are harnessed by the operator of the system as tools of coordination. That's why the idea was proposed in the first place.

The allocative efficiency of the price mechanism, for example, is here not just a principled argument for the superiority of free markets compared to command and control economies. Instead, the price mechanism is literally the principle which dictates what power generation occurs. Like, as in, a computer does all the allocation according to the price mechanism.

Price signals are obtained each day and sorted by the central operator (ie a government agency, in our case AEMO) and then as the day goes on, those prices are matched with the amount of need at that moment. Then the operator tells all the power plants whether to generate or not (this is called "dispatch"). And they do what they're told. And then they get their money from the operator.

(The market operator's magical computers also factor in wind and solar movements in their telling everyone what to do, since the sun and atmosphere refuse to obey the orders of technocrats.)

The price mechanism is thus a tool for centrally coordinating and allocating power generation effectively. Ownership of the generators is actually irrelevant, as long as they're separate and blind and numerous enough to avoid market power. In such situations it's actually impossible for a generator to price gouge in this market. It's a market created and sustained by government which is pretty close to perfect competition.

This point becomes even clearer with the concepts of supply and demand. In the case of an electricity grid, they're not just abstractions. They're actually visible things, measured and tracked from moment to moment, because they need to match up. Not for economic reasons (though that's important for efficiency and thus keeping costs and emissions down), but literally so that the system doesn't blow up. In an electricity system, over-supply or over-demand trashes everything by throwing out the frequency from what it's built to carry (50 hz), causing damage and blackouts. So it's kind of important that physical supply moves to meet physical demand, and the best way to match them up is to use a market.

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I'm not talking much about electricity retail because basically it's not as interesting as the generation market, all they're doing is competing on the rights to bill you, trying to minimise their overhead and cut margins. The justifications or nonjustifications there are basically the same as having more than one telco retailer, so fill in your own blanks there. The biggest danger is contracts becoming unfathomably complex a la mobile phones, and private companies having greater latitude to screw their workers.

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So why are prices rising? Some of our problems in the electricity sector with price rises are to do with bad regulation (the so-called gold-plating problem with public network owners would be largely a product of dumb ministers and inexperienced regulators being bamboozled by natural monopoly grid operators).

Some problems are actually to do with incomplete market creation (for instance, we'd have less peak load and therefore cheaper networks if it were possible for customers to get a bill discount in exchange for someone having the power to remotely switch off air conditioning in 15 minute bursts during extreme demand days).

However, a lot of the price rise is just the inevitable consequence of our demand for air-conditioning.

But to blame privatisation of generation, networks or retail for power rises in Australia is pretty much wrong.

There's plenty more detail to go into, but this is basically why I think the fight over privatisation is misguided. The important issue is where control and coordination sits and how that control is used. In other words, the main game is the very unsexy work of making sure the rules work to do what they're supposed to - produce and deliver power reliably, as efficiently and therefore cheaply as possible.

 

[innonimatu]

The tl;dr is that my position is that privatisation of electricity doesn't mean a loss of government control or unrestrained gouging by predatory corporations as it may do with other forms of privatisation, because the system is still operated by a single operator (ie government) running the market through their computers, according to binding rules (set by the government).

[...]

However in a properly run system it should make basically no difference who owns electricity assets because regardless, the people making the rules and running things remain the same.

If that is the case why the hell do you want ti privatize it? The sole effect of that being that some of the income will have to be destined to profit.

Yep, physics. An electricity grid isn't like a road network or system of internet tubes. It is essentially a single giant alternating current circuit, meaning the electrons shoot back and forth 50 times a second (you can read more about this at Evan's excellent blog). Since there's no unidirectional flow of stuff, and a circuit must be complete to function, the physics of a grid dictates that it absolutely must be managed by a single entity with a clear set of rules and and the power to tell everyone what to do. Markets are a fiction created to enable the controlling entity to run the system better by ensuring everyone has a monetary interest in doing a thing, but the underlying physics dictate a monopoly of control must remain.

OK, you actually want to be able to hand out money to the owners of the privatized power grids. And do it as a form of incentive for better performance? But you just said above that the control of the system would remain in effect public/bureaucratic. If that is true then your monetary incentive would have to be given to the bureaucrats and managers running the grid, not the owners. Because, as we all know by now, in big public (public as in with the stock dispersed) companies the management runs the show, the owners do not. Distributing profits to owners under those conditions is targeting the wrong people with incentives, people who are not in control and unable to respond to that incentive.

Everything else in your reasoning for the idea of privatization under those conditions is undermined by your pre-condition that control will not rest with the owners receiving the profits.

The allocative efficiency of the price mechanism, for example, is here not just a principled argument for the superiority of free markets compared to command and control economies. Instead, the price mechanism is literally the principle which dictates what power generation occurs. Like, as in, a computer does all the allocation according to the price mechanism.

Price signals are obtained each day and sorted by the central operator (ie a government agency, in our case AEMO) and then as the day goes on, those prices are matched with the amount of need at that moment. Then the operator tells all the power plants whether to generate or not (this is called "dispatch"). And they do what they're told. And then they get their money from the operator.

You do know that some of the countries of the eastern block and even the USSR made experiences with this (computers and all) minus the distribution of profits to owners (managers got rewards) during the 1980s? They called it market socialism.
Turned out that computers weren't magical. The people in control, the managers, still played their games with the system whenever it suited them. Rules never cover everything, people are awfully creative at gaming them.

The price mechanism is thus a tool for centrally coordinating and allocating power generation effectively. Ownership of the generators is actually irrelevant, as long as they're separate and blind and numerous enough to avoid market power. In such situations it's actually impossible for a generator to price gouge in this market. It's a market created and sustained by government which is pretty close to perfect competition.

See above.

But to blame privatisation of generation, networks or retail for power rises in Australia is pretty much wrong.

Sure, those profits which justify anyone buying and holding stock of the companies are put there by the tooth fairy. Perfect competition and all leaving zero margin of profit...

 

[Arwon]

I'm struggling to understand where you're referring to the network (a monopoly under any conditions), the market operator (the administrators with a computer) and to market participants (generators and retailers). They're very distinct groups with very different motivations and behaviours and need to be treated distinctly.

In particular, the whole thing which makes the market work is the separation from the people with control (grid operators, rule makers) from the people making any profit (generators, network companies, retailers).

So just to recap:

The reason for privatisation of generation is so you can have multiple participants, blind to each other's bidding behaviour, competing in a pure commodity market with enough participants that nobody has market power, in order to achieve a competitive dispatch process and efficient generation. You're right, it is pretty close to market socialism. It's almost functionally identical in fact. Which makes the argument from sections of the left that "this is neoliberal craziness" very strange.

I'd argue that the efficiency gains from running generation like this (as opposed to previous integrated state monopolies) have pretty strongly out-weighed the slight increase to wholesale spot prices from generators needing to turn a profit, remembering that in a commodity market like electricity the ability of generators to turn a huge profit is fairly limited.

The reason for privatisation of the network is weaker, and rests largely on the empircal Australian experience (remember we're a federation with different states and thus multiple network entities) which is that the private network companies have largely kept network costs down whilst the public ones have frequently overspent. I have no idea whow it's worked in other countries.

The trick seems to have been that their profit-taking (quote X, spend less, pocket the difference) tends to signal to regulators that next time they need less money. Whereas the public companies will tend to over-quote, spend all they're given, then overquote again. The regulatory model whereby networks get a revenue and spending cap to operate within for each 5 year period, seems to work better with a private grid entity, for some reason. Maybe it's just because they're at arm's length from the regulator compared to a public company.

However if you could prevent the public grid operators from overquoting (by being a more competent regular I guess), there's little reason to privatise the network itself, you're right.

And just finally on the response to "to blame privatisation of generation, networks or retail for power rises in Australia is pretty much wrong" - no, the 1 or 2 percent margins being taken at retail and generation because profit are not the price rises we're talking about. Australian power prices have basically doubled in 5 years, and the cause of this is basically air conditioning, not the capitalist mode of production.

 

[Cutlass]

Let us look at this map of electric rates in the US....



CT = 18.67 cents per kilowatt hour. What state currently most closely follows the plan laid out in the OP? Connecticut. Followed by California. (CT has 2 large nuclear plants, btw, providing about half the state's electric needs. But that doesn't help prices either.)

In Connecticut several years ago, based on lobbying by Enron, Connecticut separated power generation from power distribution. Now customers sign up with the power provider of their choice, and can change at any time. And the utility line owners act as common carriers and bill based on those generating rates. How that works out in practice is that the line owners add all sorts of fees to their service provision to make up for the fact that the generation rate used to subsidize the delivery rate, and no longer does. Line operators also are under intense pressure to cut costs everywhere they can. What this means is that preventive maintenance on the lines and rights of way is decimated, and line crews are cut to the bone. And so when bad weather hits, the utility company is entirely unprepared to deal with it.

Because the line operators skimped on preventive maintenance and cut the number of line crews CT had a real disaster last year. Twice. The biggest threat to power distribution in the state is trees. And previously the power companies would routinely trim those trees that were near power lines and a threat to them when they took storm damage. Well in 2011 we got a tropical storm in August, and then a freak blizzard in October. The result of the tropical storm wasn't so terrible, with electricity out to a couple hundred thousand people for a few days. But then we got the October storm and 800,000 people lost power for a week or better. Mostly because of the failure of the transmission companies. Notably, those few parts of the state that had public owned utilities functioned much better than the private owned ones.

.pdf of state report can be found HERE

So the service of the line operating companies becomes much more expensive and unreliable when separated from the generating companies. But what of the costs of generation itself? Why would that decline? Consider the basic economics of electricity generation. Capital costs are very high, and most of the capital costs are up front. Payoffs are at a low rate, but reliable over very lengthy time periods. This is an investment that takes decades to pay off. Given that, investors only put up the money when the rate of return can be relied upon. In a truly price competitive market, that return on investment is not something that can be relied upon because price competition among many participants inevitably means lower return to capital. And lower return to the point where the failure of one or another generator becomes a real possibility. Under those market conditions, it is not a rational investment in an economy where there are other investment opportunities. Fully regulated private utilities provide a government backed major increase in the safety of the investment, and because of that the very long time horizons of payoff for the investment are made much more attractive than doing the same under market conditions. Further, with electric generation the efficient way to operate is that the plants must be near capacity as much of the time as possible. There can't be a really huge amount of slack capacity, because it is too costly to do that. And so there will not be enough slack capacity to drive real price competition.

And so you cannot expect the private market to invest the quantity of capital necessary to create a truly price competitive market.

 

[Cutlass]

Oh, and I forgot to add, once you are trading a commodity on the spot market, you are also losing a portion of the ratepayers money to Wall St speculators. So there's a deadweight loss to the consumer by the simple fact of the trading.

 

[innonimatu]

I'm struggling to understand where you're referring to the network (a monopoly under any conditions), the market operator (the administrators with a computer) and to market participants (generators and retailers). They're very distinct groups with very different motivations and behaviours and need to be treated distinctly.

In particular, the whole thing which makes the market work is the separation from the people with control (grid operators, rule makers) from the people making any profit (generators, network companies, retailers).

If you have honest people who will maintain that separation, then you also have honest people who will run a public system integrated efficiently.
If you don't then you'll have waste on the public system, or corruption and waste (plus the profits taken from the operation) on the privately operated system. It doesn't matter if theoretically you try to create competition between different generators and regulate network operators, if they're dishonest they'll make their own arrangements. Market power can be negotiated, even Adam Smith said it would be.

The trick seems to have been that their profit-taking (quote X, spend less, pocket the difference) tends to signal to regulators that next time they need less money. Whereas the public companies will tend to over-quote, spend all they're given, then overquote again. The regulatory model whereby networks get a revenue and spending cap to operate within for each 5 year period, seems to work better with a private grid entity, for some reason. Maybe it's just because they're at arm's length from the regulator compared to a public company.

However if you could prevent the public grid operators from overquoting (by being a more competent regular I guess), there's little reason to privatise the network itself, you're right.

You really fell for the competition bullcrap, didn't you? You admit that regulators can be incompetent (euphemism for captured by other interests), but you don't realize that regulators can be tricked by private operators and that private operators can engage in price-fixing with an "incompetent" regulator turning a blind eye? It comes down to the quality of the regulators, competition is no silver bullet to fix that.

And all that Cutlass said also. I was forgetting that on top of paying out the profits of the producers and operators the traders would be getting a cut also.

 

[Old Hippy]

And just finally on the response to "to blame privatisation of generation, networks or retail for power rises in Australia is pretty much wrong" - no, the 1 or 2 percent margins being taken at retail and generation because profit are not the price rises we're talking about. Australian power prices have basically doubled in 5 years, and the cause of this is basically air conditioning, not the capitalist mode of production.

well,its just a Victorian perspective, but the main problem we had here was the state government got too much for them when they sold them ... now this sounds good but the company's borrowed too much at high interest to get them so now after twenty years of little private investment, large increases in prices are being approve for infrastructure improvements, fair enough...but compared to a state owned system which we had ... it amounts to the equivalent of privatization of tax increases compared to the old system where at least the parties had to justify the cost at election time ...

they also failed to take into account just how well the electricity network was run when compared to private companies...

The SECV in fact delivered affordable electricity to consumers whilst making a healthy profit. In 1992/3, the year before it was broken up, ‘it paid $995 million in interest, a $191 million dividend to the State Government, and had a profit of $207 million’ (Skulley 1995). An Independent Inquiry into the Privatisation of Victoria’s Electricity Industry found that in the year prior to SECV restructuring, its debt-equity ratio was 342 percent compared with an average of 382 percent for the top 20 Australian companies on the Australian stock exchange. In addition a 1994 Bureau of Industry Economics study found that Victoria’s electricity prices to industry were eighth cheapest out of 40 OECD countries (Anon. 1995, 4). That Project Victoria nonetheless called for the privatisation, deregulation and corporatisation of the State’s electricity demonstrates its ideologically driven nature.

http://www.uow.edu.au/~sharonb/ProjVictoria.html

of course the left pointed all this out at the time... as well as the fact that properly designed housing would drastically reduce the costs of air conditioning, or was that the Greens ... maybe both... anyway it is still not required ...

it was also pointed out that at high prices the companies would not maitain investment and that Kennet was restricting price increases for twenty years when massive rise would become due, to pay for the infrastructure and the interest the companys had invested in the purchase price ...it would have made sense if the state run enterprise was not returning a dividend to the state after meeting interest borrowing costs ...

 

[uppi]

As you can see, grid costs are going up everywhere (because we use s**tloads more power than we used to). However, as a general rule the blue privately-owned natural monopolies are clearly not going up in percentage terms more than the yellow public ones.

The actual reasons are a complex mess of issues and this isn't to say private good public bad (it might be possible to say certain state governments are crap, however...). I just wanted to demonstrate that existing private network operators clearly aren't price gouging relative to public ones. If anything it looks like the reverse, at least in Australia.

Without showing that the quality of service (i.e. the reliability of the grid) is the same between public and private owned distributors, that data is useless. If the costs were the same, but the private companies did not invest as much in their infrastructure this would also be a negative effect of privatization.

If costs and quality were the same, then you would have to answer two questions: 1) Where do the profits of the private grid operators originate? 2) Why bother with privatization anyway?

To defend privatization, you would have to show that it can deliver better quality at the same cost or the same quality at lower cost (or both). Just showing that the costs do not increase is no argument at all.

 

[Arwon]

Let us look at this map of electric rates in the US....



CT = 18.67 cents per kilowatt hour. What state currently most closely follows the plan laid out in the OP? Connecticut. Followed by California. (CT has 2 large nuclear plants, btw, providing about half the state's electric needs. But that doesn't help prices either.)

In Connecticut several years ago, based on lobbying by Enron, Connecticut separated power generation from power distribution. Now customers sign up with the power provider of their choice, and can change at any time. And the utility line owners act as common carriers and bill based on those generating rates. How that works out in practice is that the line owners add all sorts of fees to their service provision to make up for the fact that the generation rate used to subsidize the delivery rate, and no longer does. Line operators also are under intense pressure to cut costs everywhere they can. What this means is that preventive maintenance on the lines and rights of way is decimated, and line crews are cut to the bone. And so when bad weather hits, the utility company is entirely unprepared to deal with it.

Because the line operators skimped on preventive maintenance and cut the number of line crews CT had a real disaster last year. Twice. The biggest threat to power distribution in the state is trees. And previously the power companies would routinely trim those trees that were near power lines and a threat to them when they took storm damage. Well in 2011 we got a tropical storm in August, and then a freak blizzard in October. The result of the tropical storm wasn't so terrible, with electricity out to a couple hundred thousand people for a few days. But then we got the October storm and 800,000 people lost power for a week or better. Mostly because of the failure of the transmission companies. Notably, those few parts of the state that had public owned utilities functioned much better than the private owned ones.

.pdf of state report can be found HERE

So the service of the line operating companies becomes much more expensive and unreliable when separated from the generating companies. But what of the costs of generation itself? Why would that decline? Consider the basic economics of electricity generation. Capital costs are very high, and most of the capital costs are up front. Payoffs are at a low rate, but reliable over very lengthy time periods. This is an investment that takes decades to pay off. Given that, investors only put up the money when the rate of return can be relied upon. In a truly price competitive market, that return on investment is not something that can be relied upon because price competition among many participants inevitably means lower return to capital. And lower return to the point where the failure of one or another generator becomes a real possibility. Under those market conditions, it is not a rational investment in an economy where there are other investment opportunities.

I can't speak to the details of American systems, and particularly to which network infrastructure may or may not be dilapidated and underinvested, but I would note that there's no way you can explain that level of price variance by the ownership status of the generators. This is because the US is a number of networks across which wholesale prices will necessarily be the same.

These are the areas: http://www.ferc.gov/market-oversight/mkt-electric/overview.asp

For example, wholesale spot prices are higher across the southeast than they are in California or New England, and spot prices are about the same in the southwest as they are in California. To have that level of disparity in to-the-socket prices must have other factors involved.

Fully regulated private utilities provide a government backed major increase in the safety of the investment, and because of that the very long time horizons of payoff for the investment are made much more attractive than doing the same under market conditions. Further, with electric generation the efficient way to operate is that the plants must be near capacity as much of the time as possible. There can't be a really huge amount of slack capacity, because it is too costly to do that. And so there will not be enough slack capacity to drive real price competition.

And so you cannot expect the private market to invest the quantity of capital necessary to create a truly price competitive market.

What do you mean by "fully regulated" here as opposed to market conditions? How does a power plant sell its power? What's the incentive for a new entrant to enter the market if all the established players are comfortable and contracted to continue steadily supplying power at a set rate? And in an arena with price caps and other such regulation, how do you prevent things like the Californian electricity crisis from occurring?

Finally, with electricity generation the "efficient" way of doing it is to have as much generation as you need to meet the load at a particular moment. With the fluctuation of demand, it's not actually possible or desirable for everyone to just stay "on" all the time. If nothing else, that throws the frequency out and causes damage if there's too much supply compared to demand. Given that demand fluctuates, supply has to fluctuate, and how do you select who gets prioritised to stay on if not a price signal?

But more than that, that way of thinking is based on traditional power sources with high capital costs, low fuel costs and inflexible turbines. It's basically the viewpoint of those who own nuclear or coal power plants, not a viewpoint which prioritises customers. Grids don't have to work like that and in fact it's inefficient and wasteful to have excessive baseload because that necessarily means you're spending more than you need to in order to provide the power you need. One of the advantages of making the generators compete on price to sell their power is you make space for innovation in how power is produced and sold.

That's pretty much how wind has entered the market in a big way - it's absolutely not a coincidence that wind penetration has been highest in market environments like Texas and Spain and Denmark. Rather than having to wait and fight regulators to get some space within existing system (and therefore necessarily get someone else displaced), they can just set up because their business model says they can make some money and displace other generation. I would in fact argue that realtime wholesale markets are damn near essential for facilitating intermittent renewable energy rollout.

Because ultimately if someone can sell the necessary power cheaper at a particular moment, why should an entrenched inflexible operator get to keep generating and selling power at moment? I'd also note that by chucking an effectively high carbon price in there as well, you undermine the ability of coal plants to just sit there lazily guaranteed to sell tall the power they generate.

Oh, and I forgot to add, once you are trading a commodity on the spot market, you are also losing a portion of the ratepayers money to Wall St speculators. So there's a deadweight loss to the consumer by the simple fact of the trading.

On the other hand, the ability for retailers and generators to hedge their directly opposite risks in the futures market is pretty important for price stability in a market environment.

You really fell for the competition bullcrap, didn't you? You admit that regulators can be incompetent (euphemism for captured by other interests), but you don't realize that regulators can be tricked by private operators and that private operators can engage in price-fixing with an "incompetent" regulator turning a blind eye? It comes down to the quality of the regulators, competition is no silver bullet to fix that.

And all that Cutlass said also. I was forgetting that on top of paying out the profits of the producers and operators the traders would be getting a cut also.

No, In that paragraph I was actually referring to the monopoly utility, not to the competitive generation market. There's no competition in a network, so how could you read what I wrote as "falling for competition bullcrap"? All I said was the private monopolies seems to have done better than the public ones in this country and offered one commonly given explanation for that.

 

[Arwon]

well,its just a Victorian perspective, but the main problem we had here was the state government got too much for them when they sold them ... now this sounds good but the company's borrowed too much at high interest to get them so now after twenty years of little private investment, large increases in prices are being approve for infrastructure improvements, fair enough...but compared to a state owned system which we had ... it amounts to the equivalent of privatization of tax increases compared to the old system where at least the parties had to justify the cost at election time ...

they also failed to take into account just how well the electricity network was run when compared to private companies...

http://www.uow.edu.au/~sharonb/ProjVictoria.html

of course the left pointed all this out at the time... as well as the fact that properly designed housing would drastically reduce the costs of air conditioning, or was that the Greens ... maybe both... anyway it is still not required ...

it was also pointed out that at high prices the companies would not maitain investment and that Kennet was restricting price increases for twenty years when massive rise would become due, to pay for the infrastructure and the interest the companys had invested in the purchase price ...it would have made sense if the state run enterprise was not returning a dividend to the state after meeting interest borrowing costs ...

This is all true but exactly the same thing has occurred in other states which didn't privatise their network infrastructure (eg NSW where Transgrid are government owned, along with Essential, Endeavour and Ausgrid). The overriding reason why large increases in prices are being approved for infrastructure improvements is because of our ever rising peak demand caused by air conditioning. That's it. None of our electricity sector has had an incentive to reduce demand by customers and this is a huge problem, but it's a huge problem in states where everything is more privatised and less privatised. The debate over privatisation and price is a complete furfy, except inasmuch as certain solutions (new renewable generation on the supply side, demand management on the demand side) are contingent on the existence of markets.

Some of the most effective solutions to managing peak demand and increasing demand in general are actually basically only possible in a competitive retail market. (that's retail, not networks) Give the retailers, the generators or distributors a monetary incentive to find demand savings in households and small businesses (maybe some sort of tradeable "foregone consumption" certificate similar to the renewable energy certificate system) and you'll find they start doing so.

But yeah I don't think networks necessarily need to be private or public to manage costs better, they just need to have accurate and realistic caps set on investment and revenue. That has been harder in the case of NSW than Victoria and one strong argument is the regulator in NSW is too soft on the state owned grid companies.

Without showing that the quality of service (i.e. the reliability of the grid) is the same between public and private owned distributors, that data is useless. If the costs were the same, but the private companies did not invest as much in their infrastructure this would also be a negative effect of privatization.

If costs and quality were the same, then you would have to answer two questions: 1) Where do the profits of the private grid operators originate? 2) Why bother with privatization anyway?

To defend privatization, you would have to show that it can deliver better quality at the same cost or the same quality at lower cost (or both). Just showing that the costs do not increase is no argument at all.

Yeah you're right, my argument on networks is a negative one (private networks are not gouging relative to public ones) rather than a positive one (private networks are intrinsically better), since all we can say is they seem to be lower in a few specific cases. I can't tell you for example whether Finngrid (mostly privately owned) or Svenska Kraftnat (government owned) are better, for instance. Though, private or public, I'd trust Nordic regulation a lot more than I trust New South Wales regulation!

Grid operators cannot be allowed to make unregulated profits because they're a monopoly entity. Regardless of ownership, some regulator needs to set a cap on network build and maintenance costs. There must necessarily be an assessment process and a cap on investment and revenue. The only question becomes how accurate those assessments are and how effective the regulation.

My argument here is pretty solely that for whatever reason, the regulation seems to have worked better in South Australia and Victoria. Perhaps there's a selection bias here - governments willing to undertake the reforms might tend to be better at regulating the grid regardless of ownership. Who knows.

One of the big arguments for why the infrastructure costs are so high in certain states now is the use of overly burdensome reliability standards *so-called "gold plating". And for whatever reason (many argue it's political fear by governments being more easily applied to government owned companies) these have tended to be concentrated in the state-owned networks more than the private ones. I'd actually argue that the biggest reform Australia needs in this order is to have a single body overseeing all network regulatory assessments rather than letting each state do it. State governments are generally crap.

However as noted above, the overriding factor driving prices up in Australia is the network spending caused by peak demand. More than anything else, bringing those prices down or stabilising them involves finding a way to manage the tendency of households to use an ever increasing amount of power for air conditioning.

 

[dutchfire]

Does Australia have some sort of white roofs project?

I think giving e.g. tax cuts to energy efficient house building would be a nice idea.

 

[Cutlass]

I can't speak to the details of American systems, and particularly to which network infrastructure may or may not be dilapidated and underinvested, but I would note that there's no way you can explain that level of price variance by the ownership status of the generators. This is because the US is a number of networks across which wholesale prices will necessarily be the same.

These are the areas: http://www.ferc.gov/market-oversight/mkt-electric/overview.asp

For example, wholesale spot prices are higher across the southeast than they are in California or New England, and spot prices are about the same in the southwest as they are in California. To have that level of disparity in to-the-socket prices must have other factors involved.

I'm sure there are other factors involved. My focus is more on the end user. And I was pointing out that deregulating the producers resulted in increased price to the end user, rather than decreased. While at the same time line maintenance and emergency preparedness declined. Reliability declined.(I'm a little confused by the data in your link, so I'll leave that aside for now.)

What do you mean by "fully regulated" here as opposed to market conditions? How does a power plant sell its power? What's the incentive for a new entrant to enter the market if all the established players are comfortable and contracted to continue steadily supplying power at a set rate? And in an arena with price caps and other such regulation, how do you prevent things like the Californian electricity crisis from occurring?

Finally, with electricity generation the "efficient" way of doing it is to have as much generation as you need to meet the load at a particular moment. With the fluctuation of demand, it's not actually possible or desirable for everyone to just stay "on" all the time. If nothing else, that throws the frequency out and causes damage if there's too much supply compared to demand. Given that demand fluctuates, supply has to fluctuate, and how do you select who gets prioritised to stay on if not a price signal?

But more than that, that way of thinking is based on traditional power sources with high capital costs, low fuel costs and inflexible turbines. It's basically the viewpoint of those who own nuclear or coal power plants, not a viewpoint which prioritises customers. Grids don't have to work like that and in fact it's inefficient and wasteful to have excessive baseload because that necessarily means you're spending more than you need to in order to provide the power you need. One of the advantages of making the generators compete on price to sell their power is you make space for innovation in how power is produced and sold.

That's pretty much how wind has entered the market in a big way - it's absolutely not a coincidence that wind penetration has been highest in market environments like Texas and Spain and Denmark. Rather than having to wait and fight regulators to get some space within existing system (and therefore necessarily get someone else displaced), they can just set up because their business model says they can make some money and displace other generation. I would in fact argue that realtime wholesale markets are damn near essential for facilitating intermittent renewable energy rollout.

Because ultimately if someone can sell the necessary power cheaper at a particular moment, why should an entrenched inflexible operator get to keep generating and selling power at moment? I'd also note that by chucking an effectively high carbon price in there as well, you undermine the ability of coal plants to just sit there lazily guaranteed to sell tall the power they generate.

The US has a very mixed electric market. And that makes it hard to generalize. You'd need to really work to get into the details. We have electric producers that are federally owned, state owned, municipally owned, cooperatively owned, and privately owned. We have distributors that are municipally owned, privately owned, and owned by other governments. We have private systems that are thoroughly regulated, and not so much. This great level of variation of the system makes regional breakdowns and comparisons hard, because in just about every area there is a mix of types in operation.

Now I agree that legacy producers should not be protected from the markets. Which is why most places allow other producers to sell in to the local grid. And I agree with a carbon tax to take away the advantage of legacy coal. And yes, I understand about peak and baseline capacity. The point I was trying to make is that it is not economically rational to invest to create and keep baseline capacity much above actual baseline use projections, nor does it make sense to have peak capacity much above peak use projections. And this comes from the nature of capital investment. One thing that all electric generation shares is that the upfront investment is very large (for any given capacity) and the payoff is very long. To investors sooner is better than later, more is better than less, and safe is better than risky. However getting all three of those preferences in one investment is pretty well a lost cause. And so individual investors work their own preferences. Because a regulated privately owned utility has government guarantees it is less risky, and can therefor get capital on a longer term basis for lower costs than it could in a more cutthroat environment. Now there should be some happy medium here that allows for both new technologies to enter and for long term investments. But bases on our experience here, I don't see how full separation of the generators and the distributors is accomplishing that. Price is determined by supply and demand. To push price down supply has to be high and demand low. But low price results in demand being high. And so price high. While low price the opposite.

Now when you factor in the long time horizons for the investments to pay off with the sale price factors, you are not seeing a market where it is really something you can expect for new entrants to add enough capacity to have a significant downward pressure on price. You need not just slack capacity between baseline and peak, but you need significant slack capacity within both baseline and peak. Now to make those investments attractive, you have to know that you can displace some other producer. Not all production types have the same costs curves. And typically legacy systems have an advantage for a number of reasons. Now I agree with plans to drive a lot of that legacy capacity out, particularly legacy coal and oil. But that is doable without the downsides of the deregulation. But is very difficult to do without other regulations designed to accomplish it. Specifically, coal can undercut the costs of pretty much anything, but only so long as the government lets it do so. But if the government is going to push coal (or at least legacy coal) out, then it doesn't matter whether the rest of the industry is public or private, regulated or not regulated. It's still basically a non-market price action.

In short, there are ways to accomplish the upside without getting stuck with the downside of what the goal of your basic premise seems to be. But I don't really see how to avoid the downside without just adding a great deal of regulation elsewhere.

On the other hand, the ability for retailers and generators to hedge their directly opposite risks in the futures market is pretty important for price stability in a market environment.

While that may be true, in order for the end user to gain those benefits, then the speculators have to be tightly controlled. As is, they get a big rakeoff simply because they can, not because of any service they provide. As for the Californian electricity crisis, that was the specific actions of private speculators in a deregulated environment. That happened 2-3 years after distributors and suppliers were separated, and had nothing to do with generating capacity.

California had an installed generating capacity of 45GW. At the time of the blackouts, demand was 28GW. A demand supply gap was created by energy companies, mainly Enron, to create an artificial shortage. Energy traders took power plants offline for maintenance in days of peak demand to increase the price.[6][7] Traders were thus able to sell power at premium prices, sometimes up to a factor of 20 times its normal value. Because the state government had a cap on retail electricity charges, this market manipulation squeezed the industry's revenue margins, causing the bankruptcy of Pacific Gas and Electric Company (PG&E) and near bankruptcy of Southern California Edison in early 2001.[8]

The financial crisis was possible because of partial deregulation legislation instituted in 1996 by Governor Pete Wilson. Enron took advantage of this deregulation and was involved in economic withholding and inflated price bidding in California's spot markets.[9] The crisis cost $40 to $45 billion

This is what you missed, that the price instability was the result of deregulation and the futures markets, not in any sense something which happened that it might have prevented. It did not happen except as market action in a (partially) deregulated and segregated environment.

 

[Arwon]

I think the "partially" is the key there with the Californian crisis. It's possible to create some truly horrendous perverse situations if you have the wrong type of partial deregulation.

 

[Cutlass]

Well, a total deregulation is not in the cards. But that doesn't change the fact that it was private action, and not public action, which caused the crisis. The same people you would charge with stabilizing the system found out that it was far more profitable to destabilize it. The government's contribution was not in actions, but in choosing not to act.

 

[innonimatu]

double post, sorry

 

[innonimatu]

That's pretty much how wind has entered the market in a big way - it's absolutely not a coincidence that wind penetration has been highest in market environments like Texas and Spain and Denmark. Rather than having to wait and fight regulators to get some space within existing system (and therefore necessarily get someone else displaced), they can just set up because their business model says they can make some money and displace other generation. I would in fact argue that realtime wholesale markets are damn near essential for facilitating intermittent renewable energy rollout.

Because ultimately if someone can sell the necessary power cheaper at a particular moment, why should an entrenched inflexible operator get to keep generating and selling power at moment

In Spain and Denmark there have been massive subsidies for wind energy production, with price guarantees. And that is the only reason why private money entered that "market": because it was a market with guaranteed revenues. I'm willing to bet this has been the case in Texas also.

The very same states that subsidized those investments with guaranteed prices could have done the investments. The whole private investment in the area consisted of the people involved going to banks, borrowing money based on the future revenues guaranteed by the state, and setting up the wind farms. A state company could have done exactly the same thing. And cheaper, for the private profit parcel would not have to be included in the final price.

No, In that paragraph I was actually referring to the monopoly utility, not to the competitive generation market. There's no competition in a network, so how could you read what I wrote as "falling for competition bullcrap"? All I said was the private monopolies seems to have done better than the public ones in this country and offered one commonly given explanation for that.

Because you are assuming there will be a competition of interests between the regulator and the private operator of the grid, instead of collusion. That the regulator will competently defeat the public interests. But I was saying that if you have such people to direct the regulating body, you can do away with the regulator entirely and employ those people for managing a state-owned network. It will be cheaper and more efficient than having two bodies which need to be paid, one of which will need, on top of that, to make a profit.

If, however, you do not trust the people making up the regulator to be competent, then there is no way they will recognize any "signals" about the true costs of maintain a grid. They won't understand if low costs mean that maintenance is being skipped, for example. They won't understand if the apparently small profits of the operator hide large payouts to subcontracted companies belonging to the same people. And so on. There are so many ways to game such a system.

And it you do not trust the people in the regulator to be honest... well, I need say no more, do I?

Regulators to keep a watch or private interests that are granted monopolies are always either unnecessary or ineffective. Either way they're useless form the point of view of the public interest. They're excuse for granting or maintaining those monopolies: "but we'll regulate them..."

 

[Arwon]

Yeah, they used Feed-in Tarrifs to promote the industry and push wind along the cost curve, pretty standard infant industry stuff. However it's a mature and competitive technology now and its rollout in many places is being hampered by regulation and the entrenched electricity generators. Texas hasn't needed a FiT, South Australia has had the Australian renewable energy target and supporting policies. That's all fine, fiddling the price that generators can afford to bid doesn't undermine the integrity of the bidding-dispatch process, it just changes what different generators can afford to bid. Carbon taxes work on the same principle but in the other direction.

The business case is pretty easy to make for wind farms in suitable areas now - all you need to show is the repayment time at market prices justifying the capital outlay. A lot of this is due to the leg-work done by Denmark and Spain. A similar story is unfolding now with household PV in Germany - their feed-in tarrifs have promoted a huge expansion in the industry which has brought the costs down to the point where a lot of places don't need such a thing to make PV viable.

I suppose you're right that governments can just do the building and running of new generation themselves, but the thing is they don't have to. There's private money willing to build stuff, with renewables there's significant scope for local co-ops to do the building and running (the largest wind farm in the world is owned by a co-op of West Texas farmers). Sure, governments can do things that the private sector is perfectly capable of doing but what you're making here is a much more general argument for a very different political economy than what we have. It's a little bit outside the scope of what I'm arguing - I'll concede that after we bring down capitalism the electricity sector may need tweaking (probably the same system but with non-private entities doing all the things).

As for the argument that if people aren't useless or corrupt then you don't need separation between different functions and you don't need regulators, I really don't buy that. It seems to me that having independent regulators separated from participants in an activity is the most effective way to maintain the integrity of that activity. A similar argument for why we have independent auditors, central banks, electoral administrators, statistics agencies, and the like. What you say seems to me to be an argument against institutional independence and separation in general. Call me a silly technocrat if you will, but I tend to think that institutions should be separate and narrowly focussed and designed to keep a check on each other. That's why you separate grid operators from load managers, and why you separate the rules-makers and enforcers from both. Minimises potential conflicts of interest and collusions.

Also in the case of electricity, having a specific market operator running the dispatch process is about the only way to fairly prioritise generators over other generators as the total load fluctuates. Otherwise, how do you fairly choose who gets kicked offline or called online to maintain the frequency of the system?

 

[Cutlass]

I think one thing we see with private generating capacity investment in the US is that we get some that we might not otherwise see because of some other external factors. 3 come to mind right away. 1 we have growing demand, and so need growing supply, and the big utility operators are not adding capacity (for a variety of reasons, including NIMBY siting concerns in some cases), and so that leaves room for private actors to add capacity without really being in competition with legacy capacity. 2 some legacy capacity is going to go offline in the foreseeable future for a variety of reasons, and this also leaves room for new capacity in a not really competitive environment. And 3, regulations are going to kill some legacy capacity, also making room.

The next 20 years could see some serious retirement of America's nuclear plants, and it's likely that few to none will be completed to replace them.

 

[Arwon]

Are any of the nuke plants private, incidentally? I've tended to assume not.

Also, is American demand growing at all times, or are you mostly experiencing peakier demand like we are? I guess in many parts of the country your biggest peaks would be winter night times instead of extremely hot summer days like here.

 

[Cutlass]

As far as I know pretty much all the nuclear power stations are privately owned and operated. If you look at the two reactors still operating in Connecticut, they are currently owned by a company called Dominion Resources. The other two nuclear plants built in the state are no longer operating, and one of them has already been completely dismantled. I don't know of any of them that are government owned other than the ones in the nuclear weapons and research programs.

This tells me that total demand is up over time.



Which would make sense with a growing population and the fact that the South is growing faster than the North. Also houses are bigger and we use many more devices on a daily basis.

Peak electricity is summer days because very little of our individual building heating comes from electric. We heat buildings primarily with gas and oil. With wood as a secondary source, and some of the big city downtowns heated by central steam plants, which would be gas fired most of the time.