Hydro One Privatization; The Gifts of Nature are for the Friends of Ed
The latin motto of the Hydro Electric Power Commission of Ontario (HEPCO), the public-owned integrated monopoly founded in 1906 that was renamed Ontario Hydro in 1972 was "Dona Naturae Pro Populi Sunt" - the Gifts of Nature are for the People. The Wynne government's release of an Initial Purchase Offer prospectus for the sale of equity in the Hydro One Networks Inc - one of the successor companies following the breakup of Ontario Hydro in 1999 - implicitly changes that motto to "Dona Naturae Pro Amicos Ed" - the gifts of nature are for the friends of Ed. The "Ed" is Ed Clark, the chair of the Wynne government's Advisory Council on Government Assets which recommended the privatization. The friends are Ed's buddies in the financial community who will rake in over $100million in commissions.
The bottom line on the deal is that the Wynne government is selling Ontario's birthright for a mess of pottage. In order to make the deficit look smaller in one year Ontario consumers will pay too much for their electricity in perpetuity. They will pay too much because equity is more expensive than debt.
To understand more about this odious deal and many other ichthyoid aspects of the grotesquely failed electricity restructuring policy in Ontario, read on this site, "Selling Bottled Lightning: Ontario's Electricity Policy Debacle" by FWT Manhattan and TWT Berlin.
The latin motto of the Hydro Electric Power Commission of Ontario (HEPCO), the public-owned integrated monopoly founded in 1906 that was renamed Ontario Hydro in 1972 was "Dona Naturae Pro Populi Sunt" - the Gifts of Nature are for the People. The Wynne government's release of an Initial Purchase Offer prospectus for the sale of equity in the Hydro One Networks Inc - one of the successor companies following the breakup of Ontario Hydro in 1999 - implicitly changes that motto to "Dona Naturae Pro Amicos Ed" - the gifts of nature are for the friends of Ed. The "Ed" is Ed Clark, the chair of the Wynne government's Advisory Council on Government Assets which recommended the privatization. The friends are Ed's buddies in the financial community who will rake in over $100million in commissions.
The bottom line on the deal is that the Wynne government is selling Ontario's birthright for a mess of pottage. In order to make the deficit look smaller in one year Ontario consumers will pay too much for their electricity in perpetuity. They will pay too much because equity is more expensive than debt.
To understand more about this odious deal and many other ichthyoid aspects of the grotesquely failed electricity restructuring policy in Ontario, read on this site, "Selling Bottled Lightning: Ontario's Electricity Policy Debacle" by FWT Manhattan and TWT Berlin.
Economics for Humans: The Price is Right
"In the center of the ring
They are torturing a bear
And although it cannot sing
We can make it whistle 'Londonderry Air'
And the price is right, the cost of one admission is your mind"
– The American Metaphysical Circus, The United States of America
In this series so far I have dealt with the main concepts of economics with respect to the supply side of the economy. The unfolding debacle of electricity system restructuring provides a perfect context in which to begin to unravel the threads of the intellectual frauds that constitute the cloth of consumer theory in modern economics. We at NETWIT particularly enjoy the truly Greek irony involved in the collapse of the dream of "competitive electricity markets" .
The premise of this neo-conservative fantasy is that electrical energy can be "unbundled" from the wires that deliver it and that electrical energy is a private good. The irony is that the truest of blue economists that have provided the rationale for this are those most given to "physics envy" (an average paper in the American Economic review uses more advanced mathematics than Einstein's famous 1905 paper on special relativity) yet they have been undone by their failure to acknowledge the physics of electricity.
Back in the early days of economics, it was not so critical for Ricardo, Smith and even, later, Marshall, to define precisely what they meant by a "good" or "commodity". Their aspirations were not to build a "science" but to develop some useful concepts about trade and business. Then came the "marginalist revolution" led by Jevons in England and Walras in Austria, who explicitly modelled their concepts and mathematical formulations on the physics of the day. The key idea, that economic decisions in consumption and production should be based on the value of the last or "marginal" unit consumed or produced, was driven by a desire to ape the success of the application of calculus to physical problems.
The powerful image that still dominates the modern textbooks is that of the Walrasian auctioneer. The idea is that market exchange in a self-regulating market economy (or "free market" in the language of the neocons) may be understood as a number of simultaneous auctions. Each market is "cleared" by the last "bid" for the last available unit of each product and this is the applicable price for that product. Somehow the bidders are aware of all of the other prices when they bid for each product.
This is an undeniably neat scheme and it has entranced several generations of economists. So much so that they have ferociously dismissed any nitpicky criticisms as lacking in the mental capacity to understand that this is an "as if" model, the explanatory power of which is so great that all reservations as to how it corresponds to actual markets are beside the point. Some of us are incorrigible, however. We see them nits and...pick, pick,pick!
There are three broad categories of nits to be picked with the auctioneer model: the nature of the "commodities" that are auctioned; the period of time in which the auctions occur; and, the information available to participants. Although there is overlap among these categories, this first piece in the consumer side of the series will focus on the issue of "what is a commodity?"
It may be supposed that such a crucial concept as a "commodity" would be
defined with some rigour. While the metaphysical status of mass has been muddied by relativity and subsequent developments in theoretical physics, it cannot be denied that physicists have developed a formidable set of operational definitions and measurement protocols for mass. Not so with the equally fundamental concept, in economics, of "commodity". Characteristically, the keepers of the conventional economic flame deal with this in the same forthright manner they deal with other basic problems, such as "what is capital?" and "what is the nature of production?", which are the subjects of other pieces in this series. Which is to say they sweep the matter under the rug (for example, even the text book by the doyen of modern economists, Paul Samuelson, has no definition for a commodity.)
Let us turn directly to the auctioneer analogy to see why this might be a problem. In an actual auction the most obvious feature is that each item auctioned is specific; this is true of even bulk goods, such as tea. Just pursuing the latter example, particular lots of tea, representing a specific leaf type, farm, type of processing (fermented or not) and when picked. At an art auction every piece is specific and all auction goods, within limits of homogeneity, are discrete.
More fundamentally, commodities sold at auction are private goods. They are transferred from one owner (or group of owners) to another, for the private enjoyment of the buyer.
In contrast, goods consumed jointly are called "public goods". Economists make the distinction with private goods more precise: public goods are not "excludable" nor "rivalrous". Once streetlights have been provided no-one may exclude anyone else from their benefits, nor can anyone be said to compete with anyone else for a share. In contrast, either I eat the frog vomit truffle or you do (or we could each take a bite but each bite may only be taken by you or me – this is exclusion). If you want the whole truffle you'll have to pay more for it – this is rivalry.
The distinction between public and private goods is not clean; there is a spectrum of possibilities, with relatively "pure" private goods as rare as their public counterparts. For example, to some degree all consumer durables, including automobiles, fail to meet the criteria of complete excludability and rivalry. Very few people buy a TV set for their sole personal use and even fewer expect visitors to pay a fee for the privilege of sharing a viewing of The Young and the Restless. Most food and drink are also purchased for some sort of communal purpose in addition to bodily sustenance, from eating together as a family to eating at Maxim's as a public signal of personal affluence and attainment. As noted above, snack foods may be the only pure private good.
Because public goods are consumed jointly without rivalry or exclusion, there cannot be markets for them. Much of the neocon revolution of the past twenty years has been an assault on public goods, such as health, education, security (policing) and environmental quality. While this has produced many problems they are not so clearly identifiable as stemming from neocon policy.
In the case of electricity, the neocon economists have overstepped the mark because they have failed to grasp that bulk electricity, too, is a public good. The most obvious feature of electrical systems is that they consist of circuits. The entire system is conceptually the same as each household, except there are transformation stages in between the generators and end-users. Consider a single circuit within your household. There may be a lamp, a vibrator, a TV and a vacuum cleaner on the circuit. As long as the circuit is not overloaded then all the devices consume the power jointly. When it is overloaded none consume.
This is true of the entire bulk system. Consumers do not seek to exclude one another from using the grid or to outbid each other to own it. Either everyone consumes at the same time or entire areas (or conceivably, as happened in 1965 in Northeast North America, the entire system) consume nothing (i.e. they are disconnected). In your home if you add a hair dryer to the above circuit you may blow the whole circuit.
The eagle-eyed will have noticed that I use the term "bulk electricity"
in the foregoing. This is because electricity can be provided as a private good; this is what we do when we walk around with a Walkman or when we use a cellphone. There is only one circuit and one private user. This only goes to emphasize the intrinsic public nature of our use of the stuff that comes out of our sockets.
Bulk electricity systems are able to meet the fluctuating levels of load by means of an extremely complex system controlled by a central operator. The established practice of such system operators for fifty years or more has been to arrange hourly supply by stacking available generation in a "merit order", with the highest cost or marginal unit providing the final block of power to meet forecast load. "Haha!", said the neocons. This looks like a Walrasian auctioneer. Unfortunately, this auctioneer is trying to auction a public good. To see the complications that arise, let's look at a more familiar public good - a bridge across a river, which was also the first example of a public good, in a work by Cournot in the early 19th century.
Before the bridge is built, how would the auction go? Who will bid to pay for the bridge? How much? Well, the answers are: no-one and zero. No-one could afford to pay for a bridge for themselves and everyone would want to "free ride" on the expense incurred by anyone stupid enough to agree to pay. This is known as the "free rider" problem that is inherent in all public goods. After the bridge is built, again no-one would volunteer to set the price voluntarily. The auctioneer model just does not work for public goods.
The universal answer to these problems, since the days when there were private toll roads and bridges (and not much transport), is to build bridges with public funds and recover the costs through taxes, tolls or some combination. Now suppose, we make the bridge "look like" it is a private good by auctioning the rights to a private owner to charge tolls. Note that there is a crucial distinction between auctioning the rights to monopolize a public good and the good itself. As I discuss a little more below, there is a range of public to private goods, with streetlighting and national defense at one end and snack foods at the other. Where there are means to charge for a public good after it has been provided at public expense there are no shortage of people, doubtless out of an excess of public spirit, willing to make the collection of fees more "efficient".
Would we be surprised if that owner, instead of charging enough to recover costs, charged whatever they could get away with? This is exactly what happened in California, the original "poster-boy" (now revealed to have been heavily airbrushed) for electricity restructuring, where the electrical generators charged whatever they could until the point at which the system operator had to disconnect people. The way in which the generators "gamed" the auctioneer is somewhat complicated in its details but in its essence was simply withdrawing supply to force up the price. This would be like having several bridges between downtown and the suburbs and shutting one or more of them down at rush hour.
While bulk electricity has proven to be a case that has exposed the fallacies of private provision of public goods because of the intractable physical nature of electricity, the damage being done to other public goods is often more easily obscured by the rhetorical smokescreens of the media apologists for "free enterprise". Goods which are clearly not private are being misrepresented as private goods.
This piece has focused on the basic classification of goods as a foundation for consumer theory. In general, the worldview of economics in respect of consumers is accurately captured by the refrain from the song by the United States of America, "the price is right, the cost of one admission is your mind". To be fair, from a sufficiently "high level" metaphysical view of society, the cost of participation in any set of social arrangements is our collective rationality. There is always some set of ideas that define how people think at some point in history in some geographical space. Yet, to enter into the circus of mass-market America we all, in effect, become the atomistic, possessive individuals of Thomas Hobbes and agree to take it on faith that price is the sole determinant of value. In companion pieces I address some of the other basic difficulties that arise from applying this principle to consumer behaviour.
I do not wish to leave the impression that the failure of economic theory to withstand critical scrutiny diminishes the essential accuracy of the Hobbesian account of the human psyche in a generalized market society (but not "self-regulating" as is the neocon creed). The problem is the extent to which the Hobbesian self-image holds dominance over other images, such as humans as fundamentally social creatures. When we are engaged in an economy where value is determined by exchange for most of our waking hours, we do approximate mechanistic human atoms ricocheting from transaction to transaction governed solely by our appetites and our wherewithal to buy and sell. This cannot fail to carry over into others aspects of our lives. In this context, the provision and use of public goods serve the purpose of jarring us from our Hobbesian condition and remind us of the fundamentally social nature of human life. Since this is a series that concentrates on explaining and criticizing economic concepts, this is not the place to explore in detail the political, social and psychological significance of the tension between public and private goods but we should also not make the mistake of assuming economics exists as a separate sphere of social existence.
The institutions of the market economy could not exist without a malleable and enigmatic human nature capable of behaviours governed by possessive individualism. The true nightmare, captured in the song, is that this may be all-encompassing, a one-way admission into the free-market metaphysical circus. The failure of the attempt to force the public good of bulk electricity into the straitjacket of a private market is a welcome reversal of the trend towards rendering all of life the subject of market exchange. We must prevent the subsuming of other public goods into the maw of the private economy monster and reclaim those that have been swallowed, however far along their state of partial digestion. Otherwise the cost of admission to the utopian/dystopian vision of a hegemonic and complete "free market" indeed will be our minds.
Economics for Humans (4): The Price is Right © Hector LaPaunche, 2001
"In the center of the ring
They are torturing a bear
And although it cannot sing
We can make it whistle 'Londonderry Air'
And the price is right, the cost of one admission is your mind"
– The American Metaphysical Circus, The United States of America
In this series so far I have dealt with the main concepts of economics with respect to the supply side of the economy. The unfolding debacle of electricity system restructuring provides a perfect context in which to begin to unravel the threads of the intellectual frauds that constitute the cloth of consumer theory in modern economics. We at NETWIT particularly enjoy the truly Greek irony involved in the collapse of the dream of "competitive electricity markets" .
The premise of this neo-conservative fantasy is that electrical energy can be "unbundled" from the wires that deliver it and that electrical energy is a private good. The irony is that the truest of blue economists that have provided the rationale for this are those most given to "physics envy" (an average paper in the American Economic review uses more advanced mathematics than Einstein's famous 1905 paper on special relativity) yet they have been undone by their failure to acknowledge the physics of electricity.
Back in the early days of economics, it was not so critical for Ricardo, Smith and even, later, Marshall, to define precisely what they meant by a "good" or "commodity". Their aspirations were not to build a "science" but to develop some useful concepts about trade and business. Then came the "marginalist revolution" led by Jevons in England and Walras in Austria, who explicitly modelled their concepts and mathematical formulations on the physics of the day. The key idea, that economic decisions in consumption and production should be based on the value of the last or "marginal" unit consumed or produced, was driven by a desire to ape the success of the application of calculus to physical problems.
The powerful image that still dominates the modern textbooks is that of the Walrasian auctioneer. The idea is that market exchange in a self-regulating market economy (or "free market" in the language of the neocons) may be understood as a number of simultaneous auctions. Each market is "cleared" by the last "bid" for the last available unit of each product and this is the applicable price for that product. Somehow the bidders are aware of all of the other prices when they bid for each product.
This is an undeniably neat scheme and it has entranced several generations of economists. So much so that they have ferociously dismissed any nitpicky criticisms as lacking in the mental capacity to understand that this is an "as if" model, the explanatory power of which is so great that all reservations as to how it corresponds to actual markets are beside the point. Some of us are incorrigible, however. We see them nits and...pick, pick,pick!
There are three broad categories of nits to be picked with the auctioneer model: the nature of the "commodities" that are auctioned; the period of time in which the auctions occur; and, the information available to participants. Although there is overlap among these categories, this first piece in the consumer side of the series will focus on the issue of "what is a commodity?"
It may be supposed that such a crucial concept as a "commodity" would be
defined with some rigour. While the metaphysical status of mass has been muddied by relativity and subsequent developments in theoretical physics, it cannot be denied that physicists have developed a formidable set of operational definitions and measurement protocols for mass. Not so with the equally fundamental concept, in economics, of "commodity". Characteristically, the keepers of the conventional economic flame deal with this in the same forthright manner they deal with other basic problems, such as "what is capital?" and "what is the nature of production?", which are the subjects of other pieces in this series. Which is to say they sweep the matter under the rug (for example, even the text book by the doyen of modern economists, Paul Samuelson, has no definition for a commodity.)
Let us turn directly to the auctioneer analogy to see why this might be a problem. In an actual auction the most obvious feature is that each item auctioned is specific; this is true of even bulk goods, such as tea. Just pursuing the latter example, particular lots of tea, representing a specific leaf type, farm, type of processing (fermented or not) and when picked. At an art auction every piece is specific and all auction goods, within limits of homogeneity, are discrete.
More fundamentally, commodities sold at auction are private goods. They are transferred from one owner (or group of owners) to another, for the private enjoyment of the buyer.
In contrast, goods consumed jointly are called "public goods". Economists make the distinction with private goods more precise: public goods are not "excludable" nor "rivalrous". Once streetlights have been provided no-one may exclude anyone else from their benefits, nor can anyone be said to compete with anyone else for a share. In contrast, either I eat the frog vomit truffle or you do (or we could each take a bite but each bite may only be taken by you or me – this is exclusion). If you want the whole truffle you'll have to pay more for it – this is rivalry.
The distinction between public and private goods is not clean; there is a spectrum of possibilities, with relatively "pure" private goods as rare as their public counterparts. For example, to some degree all consumer durables, including automobiles, fail to meet the criteria of complete excludability and rivalry. Very few people buy a TV set for their sole personal use and even fewer expect visitors to pay a fee for the privilege of sharing a viewing of The Young and the Restless. Most food and drink are also purchased for some sort of communal purpose in addition to bodily sustenance, from eating together as a family to eating at Maxim's as a public signal of personal affluence and attainment. As noted above, snack foods may be the only pure private good.
Because public goods are consumed jointly without rivalry or exclusion, there cannot be markets for them. Much of the neocon revolution of the past twenty years has been an assault on public goods, such as health, education, security (policing) and environmental quality. While this has produced many problems they are not so clearly identifiable as stemming from neocon policy.
In the case of electricity, the neocon economists have overstepped the mark because they have failed to grasp that bulk electricity, too, is a public good. The most obvious feature of electrical systems is that they consist of circuits. The entire system is conceptually the same as each household, except there are transformation stages in between the generators and end-users. Consider a single circuit within your household. There may be a lamp, a vibrator, a TV and a vacuum cleaner on the circuit. As long as the circuit is not overloaded then all the devices consume the power jointly. When it is overloaded none consume.
This is true of the entire bulk system. Consumers do not seek to exclude one another from using the grid or to outbid each other to own it. Either everyone consumes at the same time or entire areas (or conceivably, as happened in 1965 in Northeast North America, the entire system) consume nothing (i.e. they are disconnected). In your home if you add a hair dryer to the above circuit you may blow the whole circuit.
The eagle-eyed will have noticed that I use the term "bulk electricity"
in the foregoing. This is because electricity can be provided as a private good; this is what we do when we walk around with a Walkman or when we use a cellphone. There is only one circuit and one private user. This only goes to emphasize the intrinsic public nature of our use of the stuff that comes out of our sockets.
Bulk electricity systems are able to meet the fluctuating levels of load by means of an extremely complex system controlled by a central operator. The established practice of such system operators for fifty years or more has been to arrange hourly supply by stacking available generation in a "merit order", with the highest cost or marginal unit providing the final block of power to meet forecast load. "Haha!", said the neocons. This looks like a Walrasian auctioneer. Unfortunately, this auctioneer is trying to auction a public good. To see the complications that arise, let's look at a more familiar public good - a bridge across a river, which was also the first example of a public good, in a work by Cournot in the early 19th century.
Before the bridge is built, how would the auction go? Who will bid to pay for the bridge? How much? Well, the answers are: no-one and zero. No-one could afford to pay for a bridge for themselves and everyone would want to "free ride" on the expense incurred by anyone stupid enough to agree to pay. This is known as the "free rider" problem that is inherent in all public goods. After the bridge is built, again no-one would volunteer to set the price voluntarily. The auctioneer model just does not work for public goods.
The universal answer to these problems, since the days when there were private toll roads and bridges (and not much transport), is to build bridges with public funds and recover the costs through taxes, tolls or some combination. Now suppose, we make the bridge "look like" it is a private good by auctioning the rights to a private owner to charge tolls. Note that there is a crucial distinction between auctioning the rights to monopolize a public good and the good itself. As I discuss a little more below, there is a range of public to private goods, with streetlighting and national defense at one end and snack foods at the other. Where there are means to charge for a public good after it has been provided at public expense there are no shortage of people, doubtless out of an excess of public spirit, willing to make the collection of fees more "efficient".
Would we be surprised if that owner, instead of charging enough to recover costs, charged whatever they could get away with? This is exactly what happened in California, the original "poster-boy" (now revealed to have been heavily airbrushed) for electricity restructuring, where the electrical generators charged whatever they could until the point at which the system operator had to disconnect people. The way in which the generators "gamed" the auctioneer is somewhat complicated in its details but in its essence was simply withdrawing supply to force up the price. This would be like having several bridges between downtown and the suburbs and shutting one or more of them down at rush hour.
While bulk electricity has proven to be a case that has exposed the fallacies of private provision of public goods because of the intractable physical nature of electricity, the damage being done to other public goods is often more easily obscured by the rhetorical smokescreens of the media apologists for "free enterprise". Goods which are clearly not private are being misrepresented as private goods.
This piece has focused on the basic classification of goods as a foundation for consumer theory. In general, the worldview of economics in respect of consumers is accurately captured by the refrain from the song by the United States of America, "the price is right, the cost of one admission is your mind". To be fair, from a sufficiently "high level" metaphysical view of society, the cost of participation in any set of social arrangements is our collective rationality. There is always some set of ideas that define how people think at some point in history in some geographical space. Yet, to enter into the circus of mass-market America we all, in effect, become the atomistic, possessive individuals of Thomas Hobbes and agree to take it on faith that price is the sole determinant of value. In companion pieces I address some of the other basic difficulties that arise from applying this principle to consumer behaviour.
I do not wish to leave the impression that the failure of economic theory to withstand critical scrutiny diminishes the essential accuracy of the Hobbesian account of the human psyche in a generalized market society (but not "self-regulating" as is the neocon creed). The problem is the extent to which the Hobbesian self-image holds dominance over other images, such as humans as fundamentally social creatures. When we are engaged in an economy where value is determined by exchange for most of our waking hours, we do approximate mechanistic human atoms ricocheting from transaction to transaction governed solely by our appetites and our wherewithal to buy and sell. This cannot fail to carry over into others aspects of our lives. In this context, the provision and use of public goods serve the purpose of jarring us from our Hobbesian condition and remind us of the fundamentally social nature of human life. Since this is a series that concentrates on explaining and criticizing economic concepts, this is not the place to explore in detail the political, social and psychological significance of the tension between public and private goods but we should also not make the mistake of assuming economics exists as a separate sphere of social existence.
The institutions of the market economy could not exist without a malleable and enigmatic human nature capable of behaviours governed by possessive individualism. The true nightmare, captured in the song, is that this may be all-encompassing, a one-way admission into the free-market metaphysical circus. The failure of the attempt to force the public good of bulk electricity into the straitjacket of a private market is a welcome reversal of the trend towards rendering all of life the subject of market exchange. We must prevent the subsuming of other public goods into the maw of the private economy monster and reclaim those that have been swallowed, however far along their state of partial digestion. Otherwise the cost of admission to the utopian/dystopian vision of a hegemonic and complete "free market" indeed will be our minds.
Economics for Humans (4): The Price is Right © Hector LaPaunche, 2001