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The neoliberalist downfall of energy and the NBN

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Neoliberalism can be blamed for problems in the energy market and the state of our NBN (Images via Pixabay/Wikimedia Commons)

Dr Evan Jones continues his examination of the effects of neoliberal economic policies, focusing on electricity reform and the NBN.

You can read the first part of this article HERE.

Electricity “reform”

John Quiggin opens his chapter on electricity with a salvo (p.149):

‘Since the creation of the National Electricity Market (NEM) in the 1990s, electricity reform in Australia has been a comprehensive failure. None of its objectives of lower prices, greater system reliability or environmental sustainability have been met.’

The old model, deemed eradicable, was a vertically integrated structure under public ownership, overseen by a statutory authority.

Pricing was determined according to long-term recovery of:

‘...the full cost of provision through charges for electricity supply, including an amount sufficient to service the cost of capital [lower because government-guaranteed] and with sufficient surplus to fund new investment’.

A 1996 study by the International Council on Large Electric Systems (CIGRE in the French) of the post-WWII electricity industry (in a bad way in 1945) shows ‘a record of sustained and sometimes dramatic improvements to the extent, quality and cost efficiency of electric supply under public ownership’. The period of “reform” has moved real electricity prices to amongst the lowest in the world to amongst the highest.

Electricity was to be subject to the universal creed of competition, which meant disaggregation and, preferably, privatisation. The agenda was given added weight by the bludgeoning edifice of Paul Keating’s National Competition Policy regime.

Thus was constructed gradually a national electricity market formally of great sophistication. It is presided over (with gas) by the Australian Energy Market Operator, an industry-funded non-profit, belatedly created in 2009.

The centre of gravity is a continuous-time auction market delivering a half-hour average spot price.

However, the structure, devised by idealists and tech-heads, has not been able to transcend the particular character of the “product”. A central part of the sector – distribution – is a natural monopoly, where significant capital and capital costs reside. Add the uniqueness of electricity, that cannot be stored en masse.

The outcome is that “the market” generates huge variations in price, tending to extremes, which does not cater to the presumed multiple-dimensioned signalling role of price in an ideal market. Disaggregation has enhanced the problem of managing systemic risk — that and other factors have pushed the sector towards re-aggregation.

Price volatility provides no signals for appropriate long term investments. The system was set in place (after 1991), based on coal-powered supply, with no accommodation for climate change policy. This latter is now factored in on the margin pragmatically rather than coherently.

Then there are the consumers. Contrary to the rhetoric, consumers don’t want “choice”. They want a supply that is reliable and as cheap as possible.

A key argument for privatisation and the introduction of a national electricity market was to eliminate claimed over-staffing (“featherbedding”). What has resulted is the long-term reduction of technical staff but a dramatic rise in managerial staff (highly paid) and marketing staff. Pricing power avoids pressure to eliminate current overstaffing. The public purse is left to fund an elaborate regulatory apparatus.

Quiggin concludes (p.164):

‘Among the many failures of micro-economic reform in Australia, the failure of the NEM has been the most spectacular. Not only have none of the promises of reform been delivered but the price increases [that] reform has driven have been used as evidence to obstruct the shift to a decarbonised electricity supply.’

The NBN

The National Broadband Network (NBN), in essence and in its rollout, is proving dramatically inferior to that initially mooted in pre-election 2007 by Labor in Opposition and announced by the Rudd Labor Government in 2009. Lee Ridge explains that significant gap is not an accident but has been strategically organised.

The culpable parties are the Abbott-Hockey Government and its Communications Minister, Malcolm Turnbull, Telstra, Rupert Murdoch’s News Limited and an assortment of hired gun “experts”.

The problem has its roots in the privatisation of the integrated Telstra during the Howard-Costello Government era (1996–2007), comprising the network and retail operations. A publicly-owned network would have been the natural vehicle for the mooted rollout of a fibre-to-the-premises (FTTP) system. A privatised integrated Telstra was a natural impediment to such a rollout.

Instead, we get “multi-technology-mix” (MTM), centred on fibre-to-the-node (FTTN), the crucial remaining bit being supplied by Telstra’s ageing copper network. This would be complemented by pay TV (Murdoch/Telstra to the fore) and satellite.

The cut-down version, supposedly significantly cheaper (it isn’t), was defended loudly by then Opposition Leader Tony Abbott. The low capacity and slow speeds are all the population want and need, he claimed“essentially a video entertainment system”.

As Communications Minister under Prime Minister Abbott, Turnbull cleaned out NBN management and replaced it with his mates and functionaries. A quick “strategic review” of Labor’s FTTP by members of the cabal (not least Henry Ergas, Telstra consultant and Australian columnist) followed, naturally plumping for the MTM.

The review was a scam. It used an inflated discount rate to deflate the estimated net present value of the FTTP option. It used a false shortened timeframe for an MTM rollout to inflate the NPV of the MTM. The long-term benefits of FTTP were buried under a mountain of propaganda.

Ridge concludes (p.235):

[The third-rate outcome results from] a combination of political opportunism and partisanship on the part of the Coalition Government and its intellectual fellow travelers, the mobilisation of market fundamentalist rhetoric to delegitimise the Labor Government’s NBN and a re-shaping of the NBN in line with the interests of Telstra. Previously facing the loss of a significant part of its business, Telstra, in receipt of billions of dollars of government funding for its “end of life” infrastructure, has emerged as the most significant beneficiary of the current NBN.

Some people believe that Malcolm Turnbull is basically a well-meaning man, thwarted by reactionary political colleagues. Turnbull’s disgraceful role in the inhibition to a functional NBN should disabuse them of this myth.

The big picture

Neoliberalist policies lead not to a rational shrinking of the state, but to its depredation and distortion. The resulting pillage is ongoing and is gargantuan in scale. The pillage is also well-hidden from public view.

The early 1970s saw the natural end to the post-1945 Long Boom and the conditions that underpinned it. Capital needed to exploit new fields. In the “first” world, the public sector was deemed ripe for plunder.

Arguments for contracting out, overarching dismantling of existing structures and privatisation blanketed the populace. The vested interests that stood to benefit believed none of it. Happily, a band of ideologues could be employed as flunkeys for the task.

The general public never believed it either, but public opinion was ignored. Public opinion was damned to electoral insignificance by the fact that nominally Labor and Social Democratic parties swallowed the snake oil — in some countries (as in Australia) they led the charge.

Two institutions peculiar to Australia (both created by Labor) entrenched the neoliberal ethos. First, the Productivity Commission, evolving from the 1974 Industries Assistance Commission, is the Australian Government’s sole official think tank. Neoliberalism is inscribed in its DNA.

Second, in 1992 Prime Minister Keating created the National Competition Policy (NCP) machine to force State Governments into neoliberal “reform” of their infrastructure. Of course, State cooperation mechanisms are desirable to forge coherence across the Australian Federation, but NCP was a top-down measure, blackmailing State Governments into acquiescence. Chris Sheil’s incisive 2001 essay, What do we expect of government, exposes the heist.

Notable is the contrast between “competition” in theory and competition in practice. Competition is the claimed lynchpin that harnesses private sector interest to the public interest. But the ideologues learn only the abstractions and know nothing of how competition plays out in any particular sector. Nobody in authority to date has cared about the distinction between ideology and experience.

Essential services provision, when it survives, is now fragmented, inefficient and unnecessarily expensive.

The recent exposure by the ACCC, emboldened under Chairman Rod Sims, of the Baird Government’s corrupt NSW ports privatisation in 2013 is representative of the processes that have brought us to this point.

The current political class has “matured” in an environment, heavily propagandised, in which policy options have been dramatically circumscribed. Public sector integrity, competence and will have been vitiated. Escaping this impasse is a long-term proposition.

The Wrong Way book covers in detail a wide cross-section of areas experiencing dysfunctionality from this 30-year period of economic “reform”. It’s a worthy Christmas present for a friend or relative who would appreciate something other than escapist literature.

Dr Evan Jones is a retired political economist.

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