Productivity Commission says no rationale for State ownership of Energex and Ergon

Paul Syvret in the Courier-Mail today has a nice summary of the Productivity Commission’s latest report on Electricity Network Regulation. The Commission suggests there would be cost savings and lower power bills flowing from privatisation of electricity network businesses such as Energex and Ergon, noting on pages 24-25:

While governments have a legitimate role in owning and operating many services in Australia, the rationale for state-ownership of electricity network businesses no longer holds. This reflects the development of sophisticated incentive regulations that function best when the regulated businesses have strong cost-minimising and profit motives.

State governments often impose multiple constraints on state-owned corporations that are incompatible with maximising returns to their shareholders…

…There are strong arguments for privatisation of these businesses. There is no evidence that the productivity, reliability, quality or cost performance of private sector electricity network businesses is worse than their public sector equivalents. To the contrary, the evidence in Australia and internationally suggests that such private sector enterprises are more efficient.  [emphasis added]

The Productivity Commission makes the important point that consumer welfare is best protected by having good regulation in place, rather than State ownership. Indeed, State ownership can be bad for consumers because Energex and Ergon might be too worried about the political consequences of blackouts or brownouts that they over-invest in infrastructure to minimise the risk of power failures at an unacceptable cost to the community.

My previous posts on the electricity sector, particularly the desirability of selling Energex and Ergon (which are now to be merged but remain in State ownership), include:

Qld budget surplus delay not a big deal, but reinforces need to consider Energex & Ergon sell off

Qld Government should sell assets – further spending cuts would weaken economy further

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5 Responses to Productivity Commission says no rationale for State ownership of Energex and Ergon

  1. The Happy Hillbilly says:

    While I on the other hand see no compelling case for privatising a crucial piece of infrastructure that earns the government a positive rate of return.

    The problem with arguing that the private sector will do it better overall is that we can always massage data and re-define terms in order to prove any such point, especially when there are vested interests involved.

    Bill Mitchell’s recent experiences with the privatised Victorian electricity industry while setting up a new research centre in Melbourne demonstrated appalling inefficiencies for which the public must ultimately pay.

    But we shouldn’t really be comparing the Victorian electricity industry with that of Queensland – providing electricity to consumers when 90% of them live in a circle 100km in diameter is always going to be somewhat different logisitcs-wise to providing electrictiy to almost the same number of people spread out along a 2000km long stretch – more infrastructure is very likely needed to reach the same number of consumers. We should be certain that we’re comparing apples with apples.

    I would reply to Syvret’s comment that vital public services exist to do just that – they exist to provide maximum benefit to the public, not to provide maximum commercial return to private shareholders. Maximising the benefits to all is indeed incompatable with maximising returns to the few.

    When something is providing a useful – vital – service and also paying for itself, I see no compelling need to take it out of public hands. Doing so is really just corporate welfare – they know that the service is so vital that government will not let the industry fail under any circumstances. If that doesn’t invite moral hazzard then I don’t know what does.

  2. The Happy Hillbilly says:

    I should probably add that we should not be surprised if they are never sold.

    While I’m sure that cabinet members would like to arrange some juicy asset sales to the old boys they went to university with – and who wouldn’t like to own a private business that is kept shielded from the uncertainties of the private market by a gauranteed stream of taxpayer dollars? – I think that political pragmatism will likely come into play. Privatising state assets is the very thing that saw the previous government absolutely butchered on polling day. Queenslanders overall have shown they are staunchly opposed to such asset sales.

    Regardless of their huge majority, the government are playing with fire here.

    • Gene Tunny says:

      Yes, I can’t see it happening in the short-term because of community opposition, but longer-term I expect it will happen. That may be another ten or twenty years though.

  3. The Happy Hillbilly says:

    Here is the blog article Gene.

    http://bilbo.economicoutlook.net/blog/?p=21157

    No doubt you will disagree with Mitchell’s conclusions but I still see very little evidence that private ownership of electricity assets is superior overall to public ownership.

    Since privatising a natural monopoly necessarily requires strict, ongoing and constantly updated regulatory oversight to keep up with new developements – I wonder how many public servants jobs need to be created to oversee and administer this behemoth?

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