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Undeniable logic

Written By: - Date published: 9:08 am, June 22nd, 2012 - 39 comments
Categories: cost of living, energy, privatisation - Tags:

39 comments on “Undeniable logic ”

  1. RedLogix 1

    Bollocks…. Max Bradford assured us that privatisation would ensure prices drop.

    • joe90 1.2

      In Maxieboys own words.

      Any party in this Chamber that votes against this purpose clause is saying that it is not in favour of lower prices for electricity consumers, or choice for consumers.

    • Max Bradford 1.3

      Bollocks to you too. National said power prices would drop after the introduction of competition, not privatisation, and they did. It was only after the Clark led Labour government reintroduced a bizarre form of regulation from 2002 onwards and compelled generation companies to invest in high cost renewable forms of electricity that power prices exploded.

      The facts are there for all to see……Labour policies caused the 78 percent plus rise in power prices from around 2002 onwards, not National.

      [The email address looks legit…RL]

      • RedLogix 1.3.1

        Max,

        My best answer to why it all went so very wrong is this paper from Steven Keen.

        http://www.debtdeflation.com/blogs/wp-content/uploads/papers/KeenUtilitiesPolicy2004.pdf

        Introduction
        Deregulation of the US electricity market was driven
        by the belief that a free market would result in a more
        efficient outcome than either regulated competition or
        the public provision of electric power. The story told to
        the economic layman was that both the cost of production
        and final consumer prices would fall. The story
        told to the economic cognoscenti was that the elimination
        of regulation would enable a closer matching of
        the marginal benefits and marginal costs of electricity
        production. Both explanations anticipated a substantial
        rise in social welfare.

        It concludes:

        Neoclassical microeconomics is conventionally
        regarded as a ‘‘pro-market’’ theory, whereas Marxist
        economics (for example) is ‘‘anti-market’’. But the promarket
        perspective of neoclassical economics is ideological
        only:While it is a useful weapon with which to
        assert the superiority of the market over central planning,
        it is a dangerous notion to apply to actual economies
        and firms.
        Firstly, even on its own terms, the theory mis-specifies
        the point of profit maximization for the individual
        firm. Secondly, it falsely presumes that competition
        can force profit-maximizing firms to produce where
        marginal cost equals price. Thirdly, it assumes equilibrium
        market-clearing spot prices will apply, when
        mathematically, spot prices are unstable in a multicommodity
        model of production with growth.
        Fourthly, it believes that marginal cost pricing is
        compatible with profit maximization, when given realworld
        cost structures, marginal cost is well below average
        cost.
        Neoclassical economics is thus a totally inappropriate
        tool to use to decide how real-world prices should
        be set, especially in so crucial a market as electricity.
        Pricing of electricity should return to the historic practices
        of the industry, while policy should return to the
        oversight on adequate profitability and cost recovery,
        and the maintenance of reliable supply with low price
        volatility.

        The argument is typical Keen, very open and blunt in it’s thrust, while backed by a solid technical case. I’ve took the time a few years ago when I first found this paper to follow the maths through as best I could … and it made sense to me.

        As for the 4th Labour govt; most of us on the left still regard them as having not strayed very far from the same economic neo-classical economics that the previous National govt had pinned it’s hopes on. While they attempted to soften the edges of the ECA for example, in the end their economic legacy was really just a tweaking of direction than anything fundamentally different.

        • Max Bradford 1.3.1.1

          I could find you a dozen scholarly articles arguing the opposite too. It suffers from at least 2 problems: (1) it ignores the facts of what happened in the NZ context, and the facts of what happened to electricity prices and why; and (2) how is it that the US has a competitive electricity market, albeit subject to necessary regulation where there are monopoly parts of the market (as it is here), and the rest of the world has either competitive markets or are moving to competitive markets?

          There will be always someone to argue the ideological opposite of what actually happens in the real world.

          The fact is that electricity prices will have to rise everywhere, as we move away from fossil fueled electricity generation systems, towards higher cost renewable systems such as hydro (yes they are more expensive to build now), wind, solar or any one of the other variants being devised. A competitive market is necessary to keep the pressure on producers to produce electricity from these new renewable sources at the lowest cost.

          • Colonial Viper 1.3.1.1.1

            A competitive market is necessary to keep the pressure on producers to produce electricity from these new renewable sources at the lowest cost.

            No private investment in generation will occur unless private producers can make handsome profits from that investment.

            And those profits, from consumers pockets, will go into private corporate pockets.

            THAT is not the lowest cost.

            The fact is that electricity prices will have to rise everywhere, as we move away from fossil fueled electricity generation systems, towards higher cost renewable systems such as hydro (yes they are more expensive to build now)

            Prices would rise less if private generators did not have to add a profit margin on top.

          • RedLogix 1.3.1.1.2

            I could find you a dozen scholarly articles arguing the opposite too.

            Yes but Keen’s paper closer reflects what actually happened. Always a strength I find.

            You might also note that Keen is one of only a handful of professional economists credited with work that correctly anticipates the GFC.

            http://www.brw.com.au/p/sections/features/keen_to_be_heard_ibhMdopX0E8Soh00ql3mPO

            This business of countering one argument by simply saying “I can find ten others who say different” (and who by implication will confirm your own preconceptions)… simply is not good enough. In real science an hypothesis is nothing until tested against reality. In that sense Keen does well.

            Now Keen himself makes it clear that no-one can ‘predict’ the future (that would imply the kind of perfect and omnipotent rational agent which neo-classical theory heavily leans upon)… it’s also clear that beyond just the paper I’ve referenced above, that his work has gained attention because while written before the GFC… it lays out a strong technical case for describing what actually eventuated.

            BTW…Did you ever see the ‘Rule Book’ that Transpower uses to ensure that the so-called competitive market in this country is run fairly? It’s a dense and massive document. The idea that some ‘invisible hand’ magically yields the maximum social welfare is a nonsense.

            Oh and Keen is an incredibly accessible man. He even commented here at The Standard a while back.

            Back to the future: electricity privatisation

            • Max Bradford 1.3.1.1.2.1

              We simply aren’t going to agree will we? The blog exchange you referred to in 2009 pointed out a number of references, and fact based research which commentators on the left choose not to agree with, so we’ll simply have to agree to disagree.

               

              • RedLogix

                Max,

                We rarely see people who start with diametrically opposing positions get to the point where they ‘agree’. That’s not the purpose of these discussions. The real point is to get people to make their case and open their assumptions and reasoning to scrutiny. If it’s a strong case then you’ll be able to defend it on it’s own merits. If not then hopefully a bit of honest appraisal might go on in the privacy of your own mind. It’s not for anyone here to declare ‘winners and losers’ in the debate.

                The problem for any case based on neo-classical “the free unregulated market will solve all problems” idea.. is that for 30 years since Reagan and Thatcher (not to mention Douglas here in NZ) we tried that prescription… yet events of the last few years have proven it a very broken argument.

                Which is why in the meantime since 2009 Keen has gone from an obscure academic in Sydney… to someone whose getting quite a lot of attention these days. Having reality on your side helps.

                • Max Bradford

                  It might be so in your terms, but we still won’t be on any ground worth arguing, as you are starting from the proposition that the 1998 reforms were to move to a “free unregulated market”. They never were that e.g. the lines business was and still is regulated. The wholesale market where prices are set (that was a reform well before the retail market reforms of 1998-99) is replete with rules set by the industry and the regulators. The transmission sector has regulations to ensure the market is allowed to work without gaming.

                  So the basic place you start is not in the real world, and never was.

                  If this blog site was of more moment it might be worth exploring arguments, but it is clearly a site with a slant, and that reduces it’s utility as a place to argue reality and options for improvement.

                   

                • RedLogix

                  They never were that e.g. the lines business was and still is regulated. The wholesale market where prices are set (that was a reform well before the retail market reforms of 1998-99) is replete with rules set by the industry and the regulators. The transmission sector has regulations to ensure the market is allowed to work without gaming.

                  Given that I spent some years operating those rules I’m glad to see we have some common ground. My point being of course that the whole basis of neo-classical economics was that de-regulation and increased competition is fundamentally a good thing. You yourself have argued that increased competition will reduce prices.

                  But in the real world all firms avoid real competition wherever possible; they seek advantages over their competitors via all sorts of means.. only some of which are of any benefit to their customers … but all of which increase costs. They do this because pure unrestrained competition on price always reduces profits to zero.

                  But as Steven Keen clearly demonstrates, in some markets like utilities, the most efficient firm is always a monopoly. Competition in these markets cannot reduce prices below that of a monopoly supplier. As you discovered in the real world…much to your undoubted chagrin over the years.

                  If this blog site was of more moment it might be worth exploring arguments,

                  All blogs have a slant Mr Bradford. You initially thought this blog was of sufficient moment that is was worth your while to come here and defend your actions… now you suddenly seem less keen as it were.

                  • Max Bradford

                    If the competition is the evil that Keen thinks it is, and that monopolies are “the most efficient firms”, then why is it that all governments – except North Korea and other quaint countries like that – are pursuing neo-classical market competition?

                    You simply can’t be serious – even if Keen is – that it will be better for consumers that industry sectors convert to monopolies. Nor is it sufficient to argue that the electricity sector is so different from every other industry that it needs to be a monopoly presumably owned by the government. The reality of history is that consumers get screwed by monopolies whoever owns them. Competition, where it can take place, is far better for consumers.

                    For those elsewhere on this blog who argue that prices would be lower if profits weren’t part of the picture, conveniently ignore that government owned monopolies and SOEs pay a healthy dividend to the government each year – that is where profits go in a privately owned utility or company as well, to the people who have placed their savings with them through the purchase of shares.

                    Redlogix concludes with a snaky comment about my motivation in  commenting on this blog somehow because I had to “defend my actions”. I have no need to do so, and am quite comfortable with the decisions the 4th Labour government and the 1990s National government took on the electricity reforms. They were necessary, as would be apparent to anyone who knows what the old NZED monopoly was like. What is more they have endured even when mangled by the Clark led Labour government, and have endured rather better than the arguments appearing on this Standard blogsite.

                     

                    • Draco T Bastard

                      If the competition is the evil that Keen thinks it is, and that monopolies are “the most efficient firms”, then why is it that all governments – except North Korea and other quaint countries like that – are pursuing neo-classical market competition?

                      1.) Keen is a committed capitalist and thinks competition is good
                      2.) Because the governments have bought the lemon that the economists (spit) sold them

                      You simply can’t be serious – even if Keen is – that it will be better for consumers that industry sectors convert to monopolies.

                      It is most definitely better for society that natural monopolies such as power generation and distribution are a state monopoly under democratic control.

                      Competition, where it can take place, is far better for consumers.

                      And it can’t take place in natural monopolies.

                      For those elsewhere on this blog who argue that prices would be lower if profits weren’t part of the picture, conveniently ignore that government owned monopolies and SOEs pay a healthy dividend to the government each year…

                      Which is actually wrong. State monopolies shouldn’t pay out dividends to government at all as their return is social – society itself becomes better. As profit (dividends) is a dead weight loss (as proven by Telecom taking ~$15b in profits and now getting paid taxpayer dollars for what they should already have provided) what the government is doing in taking dividends from SOEs is actually making the country poorer.

                      State monopolies should have a small surplus that gets used to upgrade the infrastructure. Large investments should be tax funded – effectively the populace investing in their society.

                    • RedLogix

                      then why is it that all governments – except North Korea and other quaint countries like that – are pursuing neo-classical market competition?

                      Well we can safely conclude that it had nothing to do with reducing prices… can’t we?

                      Nor is it sufficient to argue that the electricity sector is so different from every other industry that it needs to be a monopoly presumably owned by the government.

                      Were you not paying attention when you sold/broke it up? As with all utility industries it has several unique features. (1) It is dominated by very large fixed capital costs, whereas it’s marginal production costs per unit are both very low and flat/decreasing with volume. (2) The product is undifferentiated, in other words one generator’s electrons are absolutely identical to another one’s. The only possible difference is price. (3) True competition, as defined by Adam Smith where the market consists of a large number of sellers is matched by a roughly equal number of buyers, does not and cannot exist. The real industry is more in the nature of an oligopoly, where information and power is assymetric.

                      The reality of history is that consumers get screwed by monopolies whoever owns them. Competition, where it can take place, is far better for consumers.

                      Privately held monopolies that are only accountable to a wealthy class of rentiers are the problem you have in mind. Public monopolies are an entirely different creature because they can be held accountable through a properly functioning political process.

                      They were necessary, as would be apparent to anyone who knows what the old NZED monopoly was like.

                      Better than you do. As do most older New Zealanders who can remember power prices they could afford and a system that was designed and maintained to be resilient and operated as a public service to the nation.

                      What is more they have endured even when mangled by the Clark led Labour government, and have endured rather better than the arguments appearing on this Standard blogsite.

                      I’m tempted to be snarky again… but what are you telling us? That any time soon the reforms you imposed will be successfully reducing electricity prices now that there has been a National government in power for what… four years now?

                    • KJT

                      Good case of cognitive dissonance.

                      Making power companies work like a business has failed.

                      Still defending you fuckup long after it has resulted in.

                      Higher power prices.
                      Duplication of administration and infrastructure.
                      Plethora of highly paid boards and executives bludging off us.
                      Companies charging domestic consumers more so they can chase large customers.
                      Asset stripping and run down infrastructure resulting in failures such as Aucklands power cuts.
                      Large increase in our external deficit with borrowing and profits going offshore.
                      Reduction in competitiveness of NZ manufacturing due to the hidden taxes in power pricing.

                      Not to mention future costs when private owners decide they can make more money by asset stripping and we have to rebuild. Or when we need to pay the costs of converting to sustainable energy.

                      You should be in jail for the theft of our assets;. Pity we do not have strict liability for cabinet when they fuck-up.

                      PS. The reason why I do not give my name is because a cabinet minister threatened my job some years ago when I was fighting the so called “open coast”. Another fuckup by you and you partners in crime.

                      What happened to all the promises in the 80’s that reforms would leave us better off.

                      I have news for you. Most New Zealanders are much worse off. Unlike those in countries that did not buy your bullshit.

              • McFlock

                Very much the typical tory response: argue that there’s conflicting information, get the debate down to “agree to disagree”, change nothing, and act surprised when people die.

                • Descendant Of Smith

                  While talking electricity a few years back someone posted a link to a good document or web page about the transition from steam to electricty and the behaviour of the powerful to regulate and take their economic power back.

                  I’ve tried to find it again but cannot. If anyone can help.

                  In my view government should take the infrastructure back and then take a committed path to allow small businesses and individuals to find ways to pump into the national grid. Make linking back into the grid easily to make technologies such as solar and power, battery storage and downloading electricity at night for use during the day easy.

                • Max Bradford

                  The further the debate moves on, the less the commentators show their understanding of (a) competitive markets and (b) the structure of the electricity sector in NZ.

                  For Redlogix, let me say I have been involved in energy economics since the 1970s as an economist and not as an engineer. The perspectives are completely different. The argument about large fixed costs is specious to a competitive market: what about the airline industry or telecommunications where the fixe cost component is just as much an issue, but nonone apart from some of those subscribing to this blog I daresay, argue for a government monopoly of those sectors.

                  And another thing that bemuses me about contributors to this site: why don’t you use your real names rather than shelter behind a pseudonym? Very sneaky and non-transparent. 

                  • xtasy

                    Dear Mr Bradford:

                    “For Redlogix, let me say I have been involved in energy economics since the 1970s as an economist and not as an engineer”

                    Yes, of course, you are not an engineer, but some may describe you as a kind of “economic engineer”, if I may allow that bit of a punt.

                    Your reforms of the energy or electricity sector are remembered, but while some here may not remember or know the past that well, one thing has been proved by history: The promised lower prices never really came about.

                    It is of course correct that SOEs were and are run like any other successful business, but they remain to be accountable to the government and public, also paying dividends, which can be reinvested for the common good, rather than ending up in the pockets of various private shareholders, who may simply use their dividend incomes to invest them in real estate, yachts, overseas holidays, perhaps even shares invested overseas or whatever.

                    What the present government is doing is going to sell off up to 49 per cent for some cash income, which they will spend on schools, hospitals, highways, prisons and so forth, which will NOT earn dividends. At the same time the government will forego up to 49 per cent of dividend income and thus end up with a loss on that side, while private investors, Kiwis or whoever else, will invest to earn the dividents for their individual investment choices.

                    Also, why should the NZ government, and with that the taxpayers and every resident and citizen NZer sell something, which they as the public already own, handing it on a silver platter to a few selected ones, who have that spare cash to buy shares on offer.

                    And the minority shareholders cannot be ignored in a company, as the company will have to also represent their interests. Hence lower power prices, meaning most likely also lower margins, are the last thing that the new mixed owned enterprises will have on their mind.

                    The whole matter is bordering on insanity.

                  • RedLogix

                    let me say I have been involved in energy economics since the 1970s as an economist and not as an engineer.

                    And therein lies the rub.

                    Neo-classical economic theory is still essentially rooted in the notion of markets reaching equilibrium. And while there is some allowance for short-term disturbance the root conditions used for analysis are essentially static.

                    This is analogous to where engineering was during the Victorian and Edwardian eras. Bridges were built by adding up the deadload of the structure, the live load of the vehicles that might drive over it and then a safety margin was added on. Mostly this worked… except sometimes.

                    The Tacoma Narrows bridge collapse vividly changed this thinking. From then on civil engineering was all about dynamics and understanding modes of instability. The primary tool used by engineers to achieve this are differential equations.

                    Us engineers understand Steven Keen because unlike almost every other economist we try to read, Keen talks our language. Specifically he’s a good mathematician and good at differential equations…

                    And this is where Keen (and he’s not alone by any means, but he is the most accessible heterodox economist right now) is trying to take the economics profession… from the era of statics and equilibrium to that of dynamics and instability. It took a number of very visible disasters to change the thinking of the engineering profession, but so far the economics profession seems remarkably resistant.

                    The argument about large fixed costs is specious to a competitive market: what about the airline industry or telecommunications where the fixe cost component is just as much an issue,

                    Not at all specious. High fixed capital costs are a natural barrier to entry in the market. And inevitably as you add competitors to the market there is some duplication of those costs.

                    For instance two competitive generators will each have their own system control and SCADA systems.. which is almost a total duplication of costs. Exactly the same reason why this government argues for the amalgamation of government departments and local bodies; to reduce internal cost duplication.

                    And it is in capital intensive industries that are most sensitive to this duplication as you add competitors to the industry. To the point where very quickly you observe a relatively low number of firms operating in most mature markets because there is simply an upper bound to the number of firms the market will support.

                    And another thing that bemuses me about contributors to this site: why don’t you use your real names rather than shelter behind a pseudonym?

                    Site policy. Please read the section on Privacy. Please.

                    As moderators we enforce this policy strictly and capriciously. At the same time you are not the first person … well known in the public domain… using his/her real name who has found it uncomfortable debating with others using pseudonyms. There is a tension there but it is the price you pay for being a public figure.

                  • fender

                    “And another thing that bemuses me about contributors to this site: why don’t you use your real names rather than shelter behind a pseudonym? Very sneaky and non-transparent.”

                    When someone in your position Max starts to complain about not knowing who it is exactly they are talking to online it can be rather creepy and reinforces the desire to remain anonymous.

                    MP’s are percieved as being resourceful people capable of using those resources to achieve many outcomes.

                    [I was rather hoping that the pseudonym thing wouldn’t become a distraction to an otherwise decent discussion. To this point I think Max is reacting as have we have seen a number of other people in a similar position… feeling somewhat at a disadvantage debating under his own name openly, while feeling his opponents are hiding in the shadows. It’s a fairly natural reaction and I’m prepared to give him the benefit of the doubt here. …RL]

                    • fender

                      RL, Sorry didnt intend to distract, Max brought it up and I wished to provide him with my reaction to his irritability with anonymity when he started to lose the debate.

                  • KJT

                    So you can threaten us as NZ politicians are unfortunately wont to do with those who disagree with them.

  2. yeshe 2

    can you also pse post today’s cartoon .. Tom Scott’s Chairman Key ? Not sure I’m allowed to other than the link … http://www.stuff.co.nz/blogs/opinion/cartoons/6736460/Tom-Scott-2012

  3. ianmac 3

    Yeshe: Salesman rather than Statesman was the tenor of the Listener article by Espiner. Did I detect a slightly ummm …. cynical tone from Espiner?
    http://www.listener.co.nz/current-affairs/politics/interview-john-key/

    • yeshe 3.1

      Thanks ianmac … hadn’t seen it. Sardonic for sure from Espiner and clever. Key does come off as an Enid Blyton Famous Five member … loved Espiner’s “Johnnie does Hollywood” … lends itself to future use very well. It could all be funny it were not so terribly serious and harmful for this little land. Key is just so embarrassingly hollow and and empty. Vacuous even away from his commercial scripts.

      On live Budget day reporting on TV3, Key has just done his best “Johnnie does Parliament” when it cut back to the studio .. and I’m pretty sure it was Duncan Garner who picked up the link and quite wrathfully referred back to Key with a derisory comment to the effect it was hard to tell he if was ‘ Prime Minister or a stand-up comedian’. ( Hmmm. In retrospect, wasn’t this just a couple of days before he resigned as TV3 political editor ?)

      • yeshe 3.1.1

        Oops .. lost my edit … went on to say Key is redolent of Peter Sellars’ Chauncey Gardener in Being There … almost exactly who he is. The perfect puppet with sad, dead eyes.

  4. Steve Withers 4

    Having observed this process across 4 decades the one thing I can be sure of is that when one organisation buys another I’ll be paying for it.

    I reckon I’ve helped buy some organisations several times. We all have….yet we own none of it.

  5. xtasy 5

    With all respect for Max Bradford, his perhaps understandable apprehension to correspond with pseudonym identities or similar, what I have realised, electricity prices were only insignificantly lower for about a year after some “competition” system was introduced in 1998, as far as I remember.

    Yet there is NO proof that this actually was due to the law changes, and not rather for full lakes and reservoirs at that time, which allowed for better use of high generation capacity, which of course could have led to also slightly lower retail prices.

    That did not last long, and already from 2001 on (before the law change by Labour led government) prices were increasing again.

    Sorry, not convincing, dear Max, debate interesting, but definitely not won.

  6. Max Bradford 6

    Xtasy needs to do his or her homework before launching into such diatribes. Energy prices fell for 3-4 years after the reforms in 1998, and lines prices fell for many years before slowly rising again. The data shows that clearly.

    And the retail electricity prices fell because of competition,  nothing else. If there had been any such effects as full lakes – and there weren’t any – then the impact would have been on wholesale electricity prices. If there had been a series of dry years, there might have been a longer term impact on retail prices, but in fact retail prices rose after 2002 because of the policy changes by the Clark led Labour government as I explained earlier.

     

    • MikeG 6.1

      Or could it be that prices fell because the retailers were in a desperate grab for customers at unsustainable low prices? That’s the way the market works isn’t it?

    • xtasy 6.2

      Max Bradford –

      Figure 4 in the summary web page on the Statistics NZ website, viewable under the below link, does not correspond with your claims, I am afraid. This same information was made available by a link in the post by RedLogix from 23.06.12 at 10:48 pm:

      http://www.stats.govt.nz/browse_for_stats/industry_sectors/energy/water-wind-and-kilowatts.aspx

    • KJT 6.3

      Really. Ours didn’t. As they have every year since. By much more than inflation! I think you are being a little economical with the truth there.

      They did not fall for domestic consumers.

      Maybe it is just an example of RW statistics.
      Like the insistence on only using income tax figures when talking about who pays the most tax. Ignoring other taxes which are strongly regressive. Or trying to pretend incomes went up because the average did. Ignoring the fact the average went up because of loss of jobs at the bottom end and excessive rises for a very few at the top.

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