Academic journal article The Economic and Labour Relations Review : ELRR

Market-Oriented Reform in the Australian Electricity Industry

Academic journal article The Economic and Labour Relations Review : ELRR

Market-Oriented Reform in the Australian Electricity Industry

Article excerpt

Introduction

From World War II until the early 1980s, electricity in Australia was provided by public monopolies owned primarily by state governments, and operated as statutory authorities. Although the arrangements differed in their details, the electricity industry in each state was characterised by a high degree of vertical and horizontal integration and, except in crises such as the widespread blackouts in New South Wales during the late 1970s, a substantial degree of autonomy. The major authorities were controlled primarily by engineers, and pursued objectives defined in terms of meeting the needs of households and business for a reliable supply of electricity, with prices being set to cover average costs.

The reforms (1) of the 1980s and 1990s were designed to change almost every aspect of the pre-reform institutional framework. The integrated, state-owned and bureaucratically-run electricity monopolies would be replaced by a profit-oriented, privately-owned industry, operating in a competitive national market characterised by a clear separation between the activities of generation, transmission and distribution, and retailing. Consumers would be able to choose their supplier in a competitive retail market. With the partial exception of privatisation, which was rejected in several states, these reforms were nearing completion by 2000.

The reform program in the electricity industry consists of a number of elements, which are logically independent, but mutually supportive. First, there is the creation of the National Grid and the National Electricity Market. Second there is the process of corporatising government business enterprises engaged in electricity supply. Third is the restructuring of the industry and the separation of generation, distribution and retail functions. Fourth is the regulation of natural monopoly activities such as electricity transmission and distribution. Finally, the reform process is regarded as complete when the industry is fully privatised.

Most commentators on the reforms have concluded that they have been highly successful in increasing efficiency and reducing electricity prices. By contrast, discussion of similar reforms in the United States and the United Kingdom has been considerably more critical, in part because, in some instances, electricity prices have increased substantially. In this paper, the costs and benefits of reform of the electricity industry are assessed. Following a brief discussion of international experience, each of the five components of the reform program discussed above is analysed in turn and the outlook for the future is considered.

International Experience

Although a variety of pooling arrangements have been adopted in many jurisdictions, the recent upsurge in the creation of electricity markets may be traced to the national market established in the United Kingdom by the Thatcher government following the privatisation of the British electricity industry.

As with the Australian case, discussed in detail below, the British system allowed for electricity to be sold both through long-term contracts and through a spot market or 'Pool'. Although most evaluations of the electricity reforms in the United Kingdom have been, on balance, positive, serious problems emerged. To maintain high sale prices, the generating component of the former public monopoly was divided into only two main firms. In combination with design features of the Pool, this gave rise to opportunities for the two main suppliers to extract monopoly rent through strategic bidding (Green and Newbery 1992). In 1998, the Pool was abolished. Opinion remains divided as to whether this decision was an appropriate response, or whether design changes to the Pool could have yielded superior outcomes, as argued by Newbery (1997).

Apart from the the United Kingdom model on which the design of the Australian electricity market was based, most Australian discussion of electricity markets overseas has focused on experience in the United States, and, in particular, on the failure of the Californian electricity market. …

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