If you have an interest in the power crisis in Victoria because of what may happen to your beautiful country too, please try to grasp this article.

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Private power leads to people switching off
By KENNETH DAVIDSON
Thursday 10 February 2000

IN the 1920s the founder of the State Electricity Commission, Sir John Monash, was able to convince governments and public opinion that if the Victorian electricity supply industry was to be left to private markets, the supply would be both expensive and unreliable.

The lesson was forgotten in 1992. It is still relevant, although the Bracks Government appears to be occupying a dream world in which the problems of supply can be solved by trampling on the rights of a handful of power workers.

One of the arguments advanced by proponents of privatisation was that the SEC was run by engineers who had a vested interest in "gold-plating" the system.

In practice, this meant that the SEC was prepared to invest tens of millions of dollars in extra capacity to guarantee that the last 2 per cent of demand would be met as reliably as the first 2 per cent of demand, even though the financial return from the investment to guarantee peak demand would have been less than a tenth of the return on the investment in base load capacity.

Gold-plating violated one of the fundamental tenets of economic rationalism that already applies to education and health: if you want more than an inadequate basic service, pay more. Already most prestige office blocks have their own gas turbines designed to maintain air-conditioning during power cuts or restrictions. Soon households and small business, which have neither the resources nor the space to maintain what amounts to a jumbo jet engine in the basement, will be able to buy premium power that guarantees supply during brownouts.

According to the National Electricity Market Management Company (NEMMCO), peak electricity demand last Thursday required 7.7 gigawatts of capacity. Victoria has only 6.9 gigawatts of installed capacity. The balance of demand had to be met from New South Wales generators. Over the past couple of years NSW generators have had surplus capacity, which they have been prepared to supply to the Victorian market cheaply. This has kept prices at around $20 a kilowatt hour, compared to about $35 a kilowatt hour, which is the price necessary to cover all their operating costs including the interest on the borrowings to finance the purchase of the generators.

To avoid default, Victorian generators have been capitalising their interest costs. Under NEMMCO rules, once NEMMCO accepts there is an industrial dispute in a generator affecting supply to the electricity pool, Industrial Relations force majeure (IRFM) replaces the auction system. Under IRFM, the price of electricity is set at $110 per kilowatt hour, which is about four to five times the average price that has been set by the market for most of the past couple of years.

Because there is a limit imposed by the capacity of the transmission line connecting the Victorian and NSW grids, it does not require a conspiracy theorist to see that under the present NEMMCO rules, there is not a strong incentive for power companies to resolve industrial disputes quickly - especially if they have bilateral agreements with other power companies to meet their long-term customer contracts in the case of power cuts for whatever reason. Those who are into conspiracy theories might argue that ignorance on the part of the Bracks Government and the union has allowed them to be set up to take the blame for blackouts that will cost the community dearly, will not cost the power companies much at all, and may provide the ultimate dividend of de-unionising the power industry in the La Trobe Valley.

What is required is a full, open inquiry into the operations and rules of NEMMCO, and all agreements and commercial contracts entered into by the generator companies in the weeks leading up to the shutdown of the Yallourn Energy generating capacity. Irrespective of the motives of the main players, it appears the rules governing the national market magnify the tendency towards higher prices. An increased unreliability of supply also appears to be inherent in the competitive Electricity Supply Industry model that replaced the SEC monopoly. Rules that have the potential to make a bad situation worse should be changed.

Meanwhile, the misery for Victoria will be compounded over the coming years as electricity demand rises, requiring 300 megawatts of additional capacity each year. By 2001 the East Link transmission line connecting NSW and Queensland electricity markets will be completed, which could mean Victoria will be paying two to three times the present price for NSW electricity to meet the growing Victorian production capacity shortfall.

Why should Victorian generators build new capacity when scarcity drives up prices and additional base load capacity drives down prices? To pose the question is to bring the issue of electricity supply ownership back into focus. The publicly owned SEC always went those last few yards in building capacity, because every dollar spent guaranteeing reliable electricity supplies probably added $100 to the Victorian economy.

Reliability of supply throughout the system is not an issue that exercises the minds of foreign investors in Victoria's power generators. On the contrary. But it still helps if the unions are made patsies for decisions not to invest in new generation capacity. More power will be desperately needed over the next couple of years if even worse blackouts than occurred this week are to be avoided.

Kenneth Davidson is a staff writer, and editor of the new public affairs journal Dissent. His column appears on this page on Mondays and Thursdays.

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Comment:
I hope this article helps to explain why I, a disenchanted Liberal Party supporter of 23 years, finds it necessary in this particular case to ask strong questions. I have some sympathy for the worker and the ordinary Australian, who are, I believe, given a bad deal. Private power isn't what it's cracked up to be for you and me. From my understanding such a situation may well be possible in America too. Take care.

Regards From OZ

-- Pieter (zaadz@icisp.net.au), February 11, 2000

Answers

Postscript:
The major question asked on tonight's TV current affairs is 'who does run Australia's power industry?'. The journalism is improving...

Regards,

-- Pieter (zaadz@icisp.net.au), February 11, 2000.

Freedom from functional tyranny imposed by the socialist parasitical class of government bureaucrat plunderers is the only solution, morally, ethically, and functionally, by definition - in ANY industry, power included. Ignore first premises of your thought system at your peril and see what you get. Get over the challenge of accepting millions are simply dead wrong in their misled thinking and get on board the freedom train to the land where looters cannot go. All other trains go over cliffs, of various heights and times from the station. Take your mental pick.

-- Howard Roark (nowork@noeat.com), February 11, 2000.

Bravo, "Howard"! If I didn't know better, I would think Ayn Rand was alive and well and posting here!

-- Steve Heller (stheller@koyote.com), February 11, 2000.

You can see that the acceptance of "public" power instead of private power, back in 1920 (whenever) has led to the present SNAFU.

The philosophy of centralization of Power (electrical, political, economic ...) is not a new thing.

If electrical power had been privatized then, who knows what kinds of alternatives we might have today? Consider that if computers were forced to be centralised in the U.S.A. There would be only a handful of IBM big iron equivalents, and no PCs. If we were in that situation, could anyone envision a PC?

-- A (A@AisA.com), February 11, 2000.

If power supply and distribution had been allowed to compete, alternative methods would have already been available ... for that last 2% - to the 2% who absolutely want, and who want to pay the premium to get it reliably delivered.

You are making the false assumption that the "government" knows what's best for you, and that an ever-bigger government will properly supply it to you.

False. The free market will get you the most reliable, cheapest power (or anything else) at the right time.

It is only when the government restricts the market, and declares itself the sole supplier of a good or service that service fails to meet the real needs of everybody. Or do you think Communist Russia, government health systems, or Social Security actually are working?

-- Robert A. Cook, PE (Marietta, GA) (cook.r@csaatl.com), February 11, 2000.

Here in Oregon, our local franchise, Portland General Electric, was acquired last year by a Scottish firm. Ludicrous to have such critical distribution infratructure owned by foreigners, even "fellow capitalist" foreigners .....

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-- Squirrel Hunter (nuts@upina.cellrelaytower), February 11, 2000.

I remember a graph in one of Dick Mills articles on the Westergard site, showing that in the summer of this year we'll be down ot operating with only about 9% reserve capacity for the entire US. Of course that 9% is not equally distributed -- so that power outages in Chicago are nearly certain with any sort of hot summer.

Worse, with deregulation, the entire power generation phase of the industry has become a pariah.......buying and selling (wheeling) is the way to make money.

So, we're faced with a continuing increase in demand and either capacity that is not keeping pace.

Is it any wonder that companies such as Ballard Energy Systems in Canada and Power Pump are attractive to investors?

-- rocky (rknolls@no.spam), February 11, 2000.