During its period of operation, the SEC held a monopoly over the generation, transmission and supply of electricity, consistent with the view that power was a public service and a responsibility of the state to ensure it was supplied to all citizens at equitable prices.<\/p>\n
The aim of the SEC was unambiguously to provide a public service – in this case, electricity – and it did so in a reliable fashion at a decreasing real price even though it was faced with continually increasing demand for its services as the population and industry grew in the Post-WW2 period.<\/p>\n
The Melbourne Age Op Ed (April 13, 2010) – Smart meters another dumb economic idea<\/a> – by John Legge is a useful summary of the way in which privatisation has undermined the welfare of Victorians.<\/p>\n John Legge says that the SECV was created on the assumption:<\/p>\n \n… that the best way to supply electricity was by treating generation as a single, integrated system. The most economical way used three types of generator: very large, very efficient and very expensive baseload generators that could operate around the clock; intermediate load generators that were less expensive and slightly less efficient but could be started quickly to smooth out load changes; and peak clipping generators that were cheap though inefficient, but could start instantly to cover occasional demand peaks.<\/p>\n The system had a total capital cost and a total operating expense and it was a simple matter to set a tariff that covered both.\n<\/p><\/blockquote>\n This system never sat well with the mainstream of my profession whose knowledge didn’t extend much beyond the undergraduate microeconomics textbooks that were their bibles – such was their religious zealotry.<\/p>\n They wanted markets, competitors, and efficiency.<\/p>\n But the hard data showed that the state-owned monopoly electricity provider was very efficient and generally satisfied household needs.<\/p>\n The following graph shows the real electricity prices between 1948 and 1992 [taken from Abbott, M. (2006) ‘The Performance of an Electricity Utility: The Case of the State Electricity Commission of Victoria, 1925-1993’, Australian Economic History Review<\/em>, 46(1), 23-44.]<\/p>\n It was also profitable once the basic infrastructure was in place (building of the coal extraction mines and the power stations). The following graph (from Abbott) shows the rate of return that the SECV provided to the State Government.<\/p>\n Mark Skulley wrote an article in the Sydney Morning Herald in 1995 (I only have notes – “Private power, public interest”, Sydney Morning Herald<\/em>, March 11, 1995) where he reported that in the financial year before it was privatised (1992\/93), the SECV:<\/p>\n \n… paid $995 million in interest, a $191 million dividend to the State Government, and had a profit of $207 million.\n<\/p><\/blockquote>\n This was an enormous boost to the State budget (the Victorian government being revenue constrained as a currency user).<\/p>\n Malcolm Abbott’s historical analysis of the SECV found that “the growth of total factor productivity (TFP) growth was strong during the 1950s. At an average of 5.3 per cent per year it was high by Australian standards”. This growth strengthened in the decade before it was scrapped by the neo-liberals.<\/p>\n In the 1980s, as the neo-liberals started to occupy government, the SECV started to be squeezed. Malcolm Abbott says that the “SECV was finding it difficult to finance its construction projects, the Labor Government demanded that it contribute more to government revenue in order to assist in the funding of its social programs.”<\/p>\n For the first time in 20 years, real power prices rose to fund the cost gap, which strained the excellent public image the utility had enjoyed up until then.<\/p>\n But it remained that international studies found that (see Malcolm Abbott for extensive evidence):<\/p>\n \n… after accounting for scale and other external factors the technical efficiency of the Australian electricity supply industry was close to the best practice benchmark performance.\n<\/p><\/blockquote>\n By the end of the 1980s, productivity was improving at the SECV after a period of heavy capital expenditure. Real prices fell again.<\/p>\n The following graph (from Abbott) shows output per employee from 1947 to 1993.<\/p>\n In this 2005 article – Neo-liberal think tanks and neo-liberal restructuring<\/a> – by Damien Cahill and Sharon Beder, the insidious machinations of “neo-liberal think tanks” in Australia is outlined in some detail. [Full Reference: Damien Cahill and Sharon Beder, ‘Neo-liberal think tanks and neo-liberal restructuring: Learning the lessons from Project Victoria and the privatisation of Victoria’s electricity industry’, Social Alternatives 24(1) 2005, pp. 43-8]<\/p>\n They also cite evidence that the SECV was not inefficient:<\/p>\n \nThe Electricity Supply Association study of 1000 utilities around the world found that SECV was in the top ten for efficiency of resource use and that it was also highly efficient in terms of technical efficiency of distribution. And a study by London Economics in 1994 found SECVs resource efficiency compared favourably with best practice utilities worldwide …\n<\/p><\/blockquote>\n But by the early 1990s the neo-liberal forces were building and were determined to privatise anything that moved and had value that could be redistributed to the private sector (specifically a few wealthy interests that funded their think tanks (and probably their personal incomes)).<\/p>\n Damien Cahill and Sharon Beder note that:<\/p>\n \nNeo-liberal think tanks form the organisational backbone of the new right or radical neo-liberal movement … which arose in Australia and grew from the mid 1970s onwards. These neo-liberals view the free market as the most efficient and most moral way of organising society, and therefore argue that functions of government be devolved to the private sector through privatisation, deregulation and marketisation.\n<\/p><\/blockquote>\n The article is, in fact, a case study of what has become known as Project Victoria, which the authors describe as:<\/p>\n \n… an initiative of the Melbourne-based neo-liberal think tanks the IPA and Tasman Institute along with thirteen employer groups including the Australian Chamber of Manufacturers, the Business Council of Australia (BCA), the State Chamber of Commerce and Industry, the Victorian Employers Federation and the Victorian Farmers Federation. Commencing in 1990, the purpose of Project Victoria was two-fold: to prepare a radical neo-liberal agenda for the Liberal Party which, it was hoped, would win government; and, to put radical neo-liberal ideas on the public and political agendas in Victoria. Project Victoria was far reaching. It covered water, ports, electricity, public transport and workers compensation. Tasman and IPA prepared a number of reports and strategies on these issues between 1991 and 1993. In the lead up to the 1992 Victorian election, there were close links between Project Victoria and the Victorian Liberal leadership.\n<\/p><\/blockquote>\n Coordinated operations such as Project Victoria – where extremely well-funded right-wing think tanks (which provide the propaganda) link with the peak representatives of capital and the major conservative political forces – are common in all advanced nations.<\/p>\n Their existence is one of the reasons the political left has had little traction in the public debate over the last 30 or 40 years. The left is relatively disorganised, highly fractured and largely refuse to fund research centres, which might produce material that could advance the progressive cause more effectively in the eyes of the public, which votes.<\/p>\n Project Victoria claimed that the SECV was inefficient and should be broken up and privatised – with competition introduced to each of the stages of production and service delivery – supply, generation and distribution.<\/p>\n They produced this report in 1991 – Victoria : an agenda for change<\/a> – one of the authors being an academic who taught me in my Master’s studies at Monash University. He was totally obsessed with free markets and privatisation.<\/p>\n The narrative they spun to the Victorian people was that we would all enjoy “lower prices for electricity consumers and more efficient management of the industry”.<\/p>\n It was all about the benefits of “profit motive, and the disciplines associated with the markets”‘” and the desire to “eliminate waste and inefficiency” (quoted in Cahill and Beder).<\/p>\n Project Victoria also hated the fact that power was cross-subsidised across communities under the so-called “community service obligations”, which was a principle equity device to ensure all citizens enjoyed the same access no matter where they lived.<\/p>\n Project Victoria led the industry being privatised. The SECV was split into three corporatised entities which were responsible for generation, transmission and distribution and supply.<\/p>\n These entities were, in turn, further split and privatised and a national grid was established where in the words of Damien Cahill and Sharon Beder “electricity was traded among generators and suppliers”.<\/p>\n The competition did, initially, drive down prices such that several companies went broke and others cut “back on maintenance” and sacked staff (which meant they lost their maintenance capacity anyway).<\/p>\n As a result, “a number of blackouts resulting from equipment breakdowns” occurred. Reliability of service fell after privatisation.<\/p>\n But the lower prices were short-lived. Cahill and Beder note that:<\/p>\n \nIn 2000-1 the price of electricity in the National Electricity Market increased by 60%.\n<\/p><\/blockquote>\n But the regulated retailers were then unable to cope and so a series of manipulations occurred to keep the “average” price within the regulated range. For example, “off-peak electricity rates” increased “by 175 percent” with peak rates falling, a move which damaged certain segments of the population who relied on off-peak power for their operations (for example, farmers).<\/p>\n The industry was also fast becoming more concentrated again with a series of mergers, acquisitions.<\/p>\n But more worrying was that the privatisation “failed to deliver any increased generating capacity and generator breakdowns were threatening blackouts”.<\/p>\n Further, prices “increased particularly for low-income households” and “businesses … which had been prime drivers of privatisation, suffered from rising wholesale prices after 2000”.<\/p>\n Damien Cahill and Sharon Beder note that at the time, “60 percent of those surveyed opposed privatisation”.<\/p>\n John Legge notes that the privatisation really just “handed huge pricing power to the generating companies” who are “allowed to quote any price they like for supplying the market; power that costs a few cents a kilowatt-hour can be, and frequently is, offered at prices as high as $10.”<\/p>\n He notes (it is public data) that:<\/p>\n \n… the price of electricity has risen by 50 per cent in real terms; and five of the Black Saturday bushfires were started by under-maintained power lines connected with auto reclose circuit breakers. It would be easy to conclude that public service and public safety can suffer when there is a profit to be had.\n<\/p><\/blockquote>\n Two things brought all this back to me. Victoria is currently reflecting on an anniversary of some sorts – 20 years since the ultra-right Kennett Government came to power and turned the State upside down (and it is still suffering today) – and – an article in the London Review of Books (September 13, 2012) – How We Happened to Sell Off Our Electricity<\/a> – by James Meek.<\/p>\n The LRB article analyses the sell-off in Britain and demonstrates how ludicrous the whole privatisation scam has been. It is a long article and I encourage you to read it – it will make the hair on the back of your neck bristle with anger.<\/p>\n The basic thrust is this. The power was sold off and it is now owned by non-British interests. German companies (for example, E.ON of D\u00fcsseldorf and RWE of Essen), Spanish companies (for example, Iberdrola of Bilbao), and other foreign owners, own the stations, supply the power and maintain the infrastructure.<\/p>\n Key power companies (for example, Electricit\u00e9 de France por EDF and Areva) are state-owned French companies despite Maggie Thatcher claiming whe was reducing state involvement in public utilities. EDF is a “a near monopoly on the production and supply of electricity in France, run by technocrats and members of a powerful trade union, the Conf\u00e9d\u00e9ration g\u00e9n\u00e9rale du travail (CGT).”<\/p>\n James Meek says that EDF:<\/p>\n \n… in effect renationalised the industry its neighbour had so painstakingly privatised. Renationalised it, that is, for France. As well as being one of the six dominant UK suppliers of energy, EDF now owns a fat portfolio of British power stations, including the fleet of nuclear reactors that still provides around a sixth of the country’s electricity.\n<\/p><\/blockquote>\n Thatcher’s last speech as PM claimed (patriotically) that the creation of private power shareholds was giving “‘power back to the people’, and how competition at home and open markets in Europe would free British enterprise to lead the world”. The LRB article shows that the “the result of electricity privatisation was to take power away from the people”.<\/p>\n All individuals can do is choose to “switch from the confusing tariff of one oligopolistic supplier to another” which “doesn’t protect them from sharp, unpredictable swings in prices”.<\/p>\n The LRB article provides a good historical analysis as to how Britain reached this ludicrous state – which has overtones to the Project Victoria machinations.<\/p>\n James Meek notes, ironically, that privatisation was a concept that emerged from Hitler’s economic program, which enriched those favourable to the regime – “national socialist elite”‘.”.<\/p>\n Britain soon became obsessed, as did Victoria, with selling off everything it could – “telephones in 1984, gas in 1986, airports in 1987, water in 1989, leading up to electricity and the railways in the 1990s”.<\/p>\n In the case of electricity, the privatised companies were forced to follow a RPI-X rule, which meant that prices would rise by the rate of inflation minus a productivity bonus (X) that would be set by the regulator. It was sold as a price cap to consumers.<\/p>\n But as James Meek notes there were huge opportunities “for privatised electricity companies to cut costs, and not just by laying off workers”:<\/p>\n \nAs long as they kept their prices in line with the X-factor, managers could bank the profits they made from cost-cutting, or pass them on to shareholders, jacking up their own salaries along the way …\n<\/p><\/blockquote>\n This was looked upon favourably because if profits rose, their microeconomic textbook-infested minds, concluded that competition would increase, which would undermine the profits and improve services – such that the “the need for regulation would largely wither away”.<\/p>\n But the architects of this scheme failed to understand that markets don’t work like undergraduate textbooks, even when the government deregulates as if they do.<\/p>\n James Meek notes that:<\/p>\n \n… once the privatisers factored in the costs of spare capacity, and the different profiles of different kinds of power station, they came up with a system for setting the wholesale price of electricity so complicated that the only people who understood it were the people who ran the companies in whose interest it was for it to be as high as possible.\n<\/p><\/blockquote>\n The result being that costs fell (“mainly by cutting workers”) but “the wholesale price of electricity stayed the same”. The “big private players” manipulated supply (closed power stations at strategic ) found ways to manipulate the market to keep prices high. Once the price rose “the power station magically came back online”.<\/p>\n![\"\"](\"https:\/\/billmitchell.org\/blog\/wp-content\/uploads\/2012\/10\/SECV_Electricity_Prices.jpg\" "\\"SECV_Electricity_Prices\\"")
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