Even the Financial Times throws in the towel.
By Leonard Hyman and Bill Tilles, Oilprice.com
According to a poll taken late last year, 77% of respondents in the UK wanted to re-nationalize all of Britain’s energy utilities. In addition, 83% of those surveyed wanted to renationalize the water utilities as well.
To a degree this seems like a repudiation of Margaret Thatcher’s great privatization experiment of the 1980s. She and her Conservative government privatized large swathes of the economy including the nation’s electric, gas and water utilities.
Unlike other industries which could become genuinely competitive, utilities remained monopolies. As a result they required something to protect the public against unlimited corporate pricing power. Prime Minister Thatcher, taking the optimistic view of good corporate intentions, sought to introduce genuinely competitive markets with way too few legitimate participants. Even Adam Smith wrote about what would inevitably happen.
We could call it “light handed competition.” This goes along with their pro-business policy of “light handed regulation.” Whether right or wrong, this corporate friendly concept swept the world of public policy on both sides of the Atlantic during this period. These ideas informed California’s reorganization of its electric utility sector. (Ugh!) And has influenced American utility policy ever since. Globally even an august institution like the World Bank genuflects at the shrine of light handed regulation and extols the virtues of public-private partnerships.
Maybe the UK privatization sentiment poll was wrong. But we see other signs.
When does it become clear that a particular public policy has begun to “hit the skids” so to speak? First sign: widespread public dissatisfaction, complaints about the level prices or the uneven delivery of services. Eventually this dissatisfaction reaches the politicians.
The present Conservative government UK, whose incoherent policies have helped mightily to push up energy prices, has at an inopportune time decided to forsake its adherence to competition and market-based solutions and advocate for price controls. It’s the only way they can pay for their planned fleet of high-priced nuclear power stations.
The Labor opposition, also hewing to its traditional roots, has offered its solution: renationalize the utilities. This represents a marked departure from previous Labor government’s policies of accommodation with Thatcherite policies and a return to old time Labor orthodoxy.
Now we’re at the stage were the intellectual adherents are all almost about to say they were misinterpreted or whatever tiptoeing towards the exits looks like in these circles. Political support starts to peel away. A noted energy economist recently wrote a report for the government highly critical of the electricity industry and its rather lax regulatory structure. An ex-regulator even went so far as to accuse the regulatory establishment of not being adequately pro-consumer.
Then follows the fatal cut, possibly. Well, maybe that is too dramatic for a full page exposé in the Financial Times, Britain’s (and maybe the world’s) most prestigious financial paper, a stalwart of old-style liberal (i.e. conservative) economics.
The article (in the paper version on January 23) was entitled THE BIG READ: PRIVATISATION REVISITED. The not so subtle conclusion? “Britain was once the pioneer in privatisation but now many people believe that investors have run rings around regulators. That has prompted a rethink about how public utilities should be managed.”
Let’s begin with the admission. The intellectual linchpin of price cap regulation, the incentive regulation formula, was devised in only two days. And, contrary to more than a century of prior regulatory practice, the Thatcher government would not countenance any limit on utility corporate profits because that would have been “socialism.”
The academic, Prof. Steven Littlechild, who devised the performance based ratemaking scheme now says that efficiency gains could be split with customers. This is what his formula was always supposed to do on a somewhat delayed basis.
The Financial Times article criticizes utility financial policies and then ends up asking whether existing utilities could be replaced by local non-profit organizations. These would have lower profitability requirements and would be required to reinvest profits back into the utility business. It’s a sad day for capitalism when even the staunchly neoliberal editorial board of the FT advocates for government ownership of the means of electric utility production. That is the real news.
Neither political party, right or left seems to like the existing energy policy. And the public is becoming increasingly restive. Worse yet, neither party has much grasp of energy economics. Which is both typical and regrettable.
How long will the UK’s now privately-owned utilities continue to prosper, or even stay private? Will American policy makers, who recently demonstrated a rather shaky grasp of economics and electric-grid operation (but a seemingly solid grasp of short term political expediency), begin to follow suit if British Conservatives admit defeat and reconsider public or governmental ownership of their utility industry? And if so, what is the timeline?
As devotees of opera and Wall Street trading floors both know, ‘It ain’t over till the fat lady sings.” For utility investors, the question is whether Brunhilde is in the wings just offstage waiting her cue. By Leonard Hyman and Bill Tilles, Oilprice.com
So who is taking the risks, and who is getting paid to take them? Read… When Profits at Utilities are Privatized and Losses Socialized, Do We Still Need Public Shareholders?
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A large part of the populace–in particular, Trump’s base, but including most republicans–have swallowed the ‘government is the problem’ kool-aid. Until more people realize there is a place for government in our country–‘shareholder value’ isn’t the be-all and end-all of all life–and regulations–otherwise known as ‘rules’–are needed as much in public endeavors as football games we’ll continue to circle the drain.
Wolf, did you catch the article in the Mercury News about how well the BA airports are doing, thanks to diligence from government airport administrators and their long-term approach to public resource management? It’s a good thing the airports weren’t sold to private equity firms (aka ‘vulture capitalists’).
Absolutely. Great comment.
Be careful or they may start taxing the air we breath. If every human on the planet paid a $1.00 per month air tax, that would be over $7 billion per month of new tax revenue for governments world wide. Keep this quiet, here? Keep it on the QT!!!
Make presidents, prime ministers and low-makers pay double the income tax of every other citizen and double the fees on any other facility and let them then decide their regulatory and taxing policy.
Or even worse, some municipality might (I’m sure this would never happen) permit a bottler to pump essentially free city water and resell it back to the populace at virtually infinite mark up.
I suspect that your comment was heavily loaded with tongue in cheek.
IF not – scout the web for comments concerning—->
“Michigan regulators were deluged with angry comments this week, after reports that the state had drafted a permit approval for Nestlé to nearly double the amount of groundwater it pumps from a plant in Evart, Michigan to 210m gallons a year.
The pumping increase is only expected to cost the Swiss food giant $200 a year, and possibly the price of a permit fee, because its bottling plant in Evart is considered a private well under state law, regulators said.
In a statement, Nestlé touted the move as a boon to the state because it is created “some 20 new jobs”. The company is valued at $219bn.”
I have to wonder how much of that is true? I sorta think much of it really is.
What do you think a carbon tax is?
It took them 10 years to make a decision over a third runway at Heathrow mean while the Chinese had built four international airports.
The still need capacity in the London area.
Some of that is no-growth pushback. They want a new airport in San Diego, sure build a new airport and you have urban sprawl, thousands of new residents, better build a new freeway while you’re at it. Pretty soon the city you love looks just like LA. Thinking also of Bejing where government has created an ecological disaster of global proportions. So what do they do? Outlaw children. There is regulation which cannot succeed.
In order to build NUCLEAR POWER PLANTS???? Completely insane.
For those interested in this topic, I recommend the book “Private Island”, by James Meek, which addresses the disastrous effects of privatization (i.e., privatization of profits while making expenses public while the public gets a double whammy by poorer, more expensive essential services) in the UK. If I recall, he focuses on power, water, the railways, and medicine primarily.
Each sector needs “proper regulation” in order to have a free market. A free market is like a game or sport. For example, the net in tennis is a necessity. The net doesn’t mean you can’t have a fair and “free” game.
Utilities have economic features that have been shown to benefit from and/or require a certain kind of “increased” regulation. Because they must use public space, as one example, they have certain monopoly characteristics. Thus the need for regulation.
When I was young, the US seemed to have this pretty much figured out. The utilities were private, BUT they were heavily regulated, up to and including profit margins. You can write a long thesis on why this worked well. Believe me it is well studied and documented.
The zealots on both sides are wrong on a lot of these situations with utilities. They can be privatized, but benefit from heavy regulation.
Privatization does not mean making the risks/losses public and the profits private. That is obviously corruption, plain and simple. (i.e. it is not a feature of free market economics).
Many/most other businesses are in a different situation, and benefit from more “freedom of competition”.
So, I pay 6.9 cents per KWh in Texas….check powertochoose.org for current fixed and floating rates. I have been paying way lower rates on electricity since 2002 than most of the country. Now compare to NY or CA or any other regulated state…..then tell me about need for regulation. Texas is deregulated. Don’t get me wrong, prices leapt to 16 cents per KWh on 2008 in TX due to natural gas price leap, but thats how markets work.
I cannot comment on how the Brit market is structured. I can comment on how the CA market WAS structured (it was stupid and Enron and others took advantage of the stupidity) and then the collapse of that market was blamed on “free markets.”
So given the article and comments (increased regulation / government takeover / etc.) and the other absurd occurrences around the world (massive increase in debt / central banks out of control, increased military conflicts), I expect a collapse of economies sometime in the not too distant future. Government “solutions” are a mirage. This is due to the failure to learn history (George Santayana (1863-1952) “Those who cannot remember the past are condemned to repeat it.”)
While the numbers on your monthly electric [and indeed other utilities such a phone] bill may well be lower in Texas, it appears much of the apparent “savings” is due to the PARTIAL pass through to the consumer of cost externalization and [franchise] tax evasion.
The actual aggregate or total real cost of most items in the American economy is extraordinarily difficult to determine, due to rampant cost externalization, egregious tax avoidance/evasion, and soaring “hidden” subsidies.
One example: the costs of services/goods purchased at a fast food chain or big box store are significantly understated because of the wage subsidies in the form of food stamps, section 8 housing, and other social service payments to the underpaid employees of these establishments. Also many of these operations have special tax preferences not available to the locally owned/operated competition.
This is not free money as you, I, and the other taxpayers must cover these costs, not at the register, but when we submit our tax returns.
Hi Todd,
Two thoughts. First, as a civic booster you might justifiably point with pride to the beautiful beaches or scenic hiking trails within your city. While certainly true or real, both are a total consequence or accident if you will of geography. Same with electric utility prices. Prices in Texas were low because of a reliance on coal, lignite, nuclear and gas. Texas electricity prices continue to benefit from geography with its proximity to relatively inexpensive windpower. The offset and price volatility as you point out comes from increasing reliance on natural gas as a boiler fuel.
As to your second point, we have consistently tried to make one point. There are two key business variables we have observed that remain critical: management and assets. A deficiency in either the former or the latter can be crippling. However, the key distinction between public vs private sytems is primarily how they’re financed. Publicly owned entities like TVA for example don’t look all that different than other privately owned utilities in the region.
Excellent refernce, thank you.
Good article, well informed and overdue. It’s time privatising public monopolies was reversed. It’s easy enough to do as far as paying for it is concerned. The BoE just has to sell a few gilts and the money is there. Perhaps the utilities could be reimbursed with gilts in one step. Whatever the job should already be under way. Everything Thatcher stood for needs to be wiped off the face of the nation.
Free market advocate always promote private ownership of the utilities under the assumption that it will eventually lead to lower costs and better management. In reality, that has not happened. Since they have to make a profit, they have an extra layer of expenses a government owned utility does not. The pursuit of profits often results in poor management and short term thinking. Also, there needs to be an extra layer of government to supervise this private utility, such as a Public Utility Commission. All these expenses are paid for by the taxpayer and do not show under the Profit and Loss statement of the private utility. The true cost of the electricity or water or gasoline is much higher than the company claims.
Public or private. Does not matter, it will be shitty in the end. If it’s private, the shareholders will make sure that in the end investment will be cut off to maximize short term return. If it’s public, the pensions will eventually bleed the revenue dry.
Look at Tokyo. The “public” metro or should I say metros are run by private companies. They are super clean, super reliable AND profitable. BEST in the world.
In Hong Kong, Seoul and Taipei, each Metro system is run by a government subsidiary, and they are very good as well. Not on the level of Tokyo, but fantastic regardless.
Contrast that to the US. Let’s take the public SF Muni i.e. Metro system of the tech capital. Last Friday there was a fire in a shop near one of the lines. Total chaos. The system, the drivers, no one was communicating, tons of trains backed up filling many streets with abandoned metro trains.
Attitude is everything i.e. service. Western monkeys do NOT understand that concept.
I believe it was the economist John Kenneth Galbraith who described the very situation to which you allude. He had been traveling abroad and was stunned to find himself in a, pardon the expression, shithole airport. He was describing re-entry to the US via JFK. In the late fifties.
JFK still is a Third World airport. Go to Hong Kong, Shenzhen, Seoul, or almost any airport in Asia, then fly to JFK. What a drab, tired, broken down, unfriendly excuse for an international airport.
Hmmm…. I would take PG&E vs. PREPA any day! As a California transplant to Puerto Rico, you really don’t know how good you have it until it’s gone. I am a strong believer in private utilities with strong hand regulation. If you look at nearly all the countries in Europe with significantly lower costs than the UK it is developing Eastern Europe or Finland. Not too shabby…
But sure drink the kool-aid on public utilities and watch prices triple, select bureaucrats get amazingly wealthy and hidden warehouses full of equipment. Bienvenidos, to public la-la land.
Hi Sean,
I think it would be tough to argue that PREPA didn’t have financial and probably management “issues”. However I think a more apt comparison would be another archipelago electric utility heavily dependent on oil-fired power plants like Hawaiian Electric.
As for the low power costs in “developing Eastern Europe” that is primarily due to reliance on coal fired power generation much of which will be retired in a decade.
In SoCal, we are reamed on our rates. The Public Utility Commission is in bed with the utilities. And SDG&E has enriched itself by raising rates through questionable capital improvements. And some utilities are considered quasi-public like Water Districts and their employees are in the state CALPERS retirement system with huge pensions. It’s the old saying” “Privatize the profits and socialize the losses”. This applies to making ratepayers pay for fires caused by SDG&E and the decommissioning of the San Onofre Nuclear Plant. Give us PG&E (City-owned utility in L.A.) any day instead of private SDG&E
Hi Stan,
In your last sentence I think you meant to give a shout-out to LA DWP not PG&E.
This was attempted in BC Canada about 16 years ago. The right wing ‘Libs’ (Fibs) tried to privatise BC Hydro and almost succeeded. They did break it up into three entities, (Office operations,Generation, and Transmission), and managed to privatise/contract out the office function. However, the workers managed to retain their Union membership/rights and did fight back. The public outcry pretty much stopped it there. There has been some contracting out for new construction and the blend seems to work just fine. The new construction is just as expensive, private or public, so much so I purchased and put in my own power pole to save on costs.
We have a public utility that works pretty damn good as far as I can see. I live in the boonies where we experience crap weather; lots of big winds, wet snow, falling trees, the works. Last Sunday night our power ‘went out’. And there were the BC Hydro linemen, working in the dark, in the snow, in 40 kt winds. They did a fine job restoring power in unbelieveable conditions.
BUT, the raids on Utilities/Crown Corporations continued. The Govt. then signed sweetheart deals for run-of-the-river private producers and guranteed them return rates of up to 6X of what I pay for my residential hydro. I believe one company is Texas-based. Then, they raided their revenues for general Government funding, (up to a billion per year) and deferred debts in order to load up on cash out of the Utilitiy’s cash flow. This bakes in rate increases in the future for al us ratepayers, and Hydro will get the blame for it..
The Fibs also raided our Govt auto insurance revenues which has resulted in huge increases for premiums just in time for the increased costs repairing modern vehicles. They used these funds to ‘supposedly’ balance their budget and to be able to crow about how fiscally prudent they are.
It was only a huge public outcry that stopped the sale of BC Hydro….and it was just in time. But alas, the Insurance Co (ICBC) is now so discredited that it may die. The patient has been bled dry.
They did the same with BC Ferries, one of the largest fleets in the world. When they privatised it the Corp was forced to finance new vessel construction at higher interest rates, and had new vessels built in foreign shipyards (Poland). This resulted in a loss of thousands of shipyard jobs here in BC, whose salaries and taxes would have remained here, at home, growing the economy. Ferry rates are now so expensive we don’t even leave the Island anymore. We don’t have to so why bother?
Some aspects of Govt are done well as a collective effort, for example, buying bulk Pharmacuticals and taking the profit motive out of health care. And many many things are best done by Private intiative and Private business. A sensible Govt accepts a blend of both, is open to criticism, and selects what works best for citizens…FREE from ideaology. After all, “many hands make light work”. Sometimes it is best to pull and work together for a common service or solution. And sometimes competition and profit is the best way to go.
regards
In the UK, there are the Big 6 Utilities ;BT etc ; who Rip Everybody Off. However, there are Small Private Utility Companies, who are much Cheaper than the State Companies used to be. The State Companies; British Gas etc used to Pay their CEO`s Obscene Salaries. You can pay your Electric, Gas, and Broadband on a monthly Direct Debit, to small Utilities.
Public private can work if it is public OWNERSHIP and private contracted, Public Supervised, reviewable administration.
Which is effectively a State Owned Enterprise, with private contracted management. Where the profits revert to the state and there a very small Performance Bonuses for very few Employees.
The UK consumer is apathetic too.
Most of these monopoly issues could be side-stepped by activist consumerism, or just consumers looking for best price and/or service.
The area where I see issue is railways/busses due to no real provision for competition.
Finally, the one thing left in public hands, like the road network, is totally shafted in most of the UK.
That isn’t reason though, to make it private.
It’s reason for elected representatives to be held accountable and dragged over the coals.
Pension promises to be adjusted and people to accept the world isn’t a bed of roses.
But once again public apathy strikes!
But the more their eyes open the more they’re distracted by nonsense sideshows and gov encouraged subversive societal divisions.
Not one person on the street seems to accept it’s all going to go to crap because of the impending shrinking population.
All seem to think pensions and care in old age and roads and cities will all be sustained by the smaller lazier future generations!
+1. Don’t ever say the world is not fair. Because it is.
The public gets the shit they deserve.
That’s why they are called …. muppets!!!
At least you have the guts to point this out as opposed to the rest of the commenters making this a black and white issue. Public is good, private is bad. LOL. If it’s so easy, why just not make everything public?
It’s not only apathy – it’s decades of neoliberal propaganda, geared up to making people believe there is no alternative to the current systems which keep pushing the wealth gap larger – and also geared up to making people believe that state-provided services are incredibly wasteful across the board, even whilst providing absolutely no data to show that private sector service providers are any less wasteful (and they certainly are a damn sight more expensive).
You should be aware that Thatcher never privatized out of belief in capitalism – it was a purely political move based on simple economics. The utilities had been seriously underfunded for decades to the point of major infrastructure breakdown. The cost to improve the situation was colossal and imminent and would have huge political fallout for the party which bit the bullet and raised the rates and or taxes as needed. By privatizing, she shifted responsibility to the new owners who inevitably passed it to the consumers and conveniently took the blame off government where it rightly belonged.
The success of the policy is demonstrated in the vastly improved infrastructure and the blame being diverted. The failure is with the implementation – not having sufficient competition. This latter being politically difficult and always the case after government interference.
Re “Thatcher never privatised out of a belief in capitalism”:
“Hayek’s critique of socialism, in particular the way in which the ideology undermines individual liberty was always a cornerstone or intellectual underpinning of the Thatcher government’s outlook”. (UK, Center for Policy Studies, Sept. 2012)
Carillion just went bust in the UK. £1 billion missing from the pension fund. With virtually nothing paid into the fund for ten years whilst the company was circling the drain.. During that time directors took huge bonuses for themselves and gave large dividends to shareholders.. The pension regulator connived in this theft and of course I expect none of them will go to prison or face any retribution..
No to address the problem would be interference with the ‘free market’ – and that would be socialism.
And we don’t do that unless it benefits the wealthy, as you may have noticed. And will keep noticing I’m afraid, without substantial political change.
According to a MS report, Global Utilities, electrical demand for Bitcoin mining will far outpace increased demand to operate electric cars by 2025. Further it said regionals with low costs will find Bitcoin mining to be profitable. Factor in government regulation of rates. This is particularly beneficial to regions which have unused capacity. [So the competition to lower rates, good for consumers and industries also has the added benefit of subsidizing this profitable activity. Government which has the pricing power, and is able to tier their pricing according to which industry they are trying to attract will have the benefit over a private industry system. ]
I think it is possible Bitcoin might not be around in 2025…
How is my comment at Jan 28, 2018 at 10:26 pm awaiting moderation when comments made after that period are accepted. I guess that is what happens when you point out an article is mere conjecture.
That’s what happens when you pile on partisan politics.
√
Your comment started out this way: “This yet another left-wing hit piece advocating for state control.”
This is as far as I read before I hit the delete button. I do the same thing about comments that start with “… another right-wing hit piece…” I don’t even think about.
European ‘privatization’ schemes:
1 – Government builds nice, functional public utility at public expense.
2 – Government sells same to political allies for some small fraction of its actual value.
3 – New owners squeeze every last penny out of their new acquisition, while failing to perform any maintenance that can be at all avoided.
4 – System eventually stops functioning, and the public eventually reaches the end of their rope, and the government buys back the now decrepit utility for some large multiple of its actual worth – the process then effectively repeats from step 1 at this point.
Yup – even worse when the imbeciles sell the utilities/ public transport infrastructure to foreign companies, who care not one jot if the country’s pensioners freeze…this is neoliberalism – corporate stockholder gains are the only concern under that doctrine, even nations don’t matter – so that’s the government’s problem to deal with.
Welcome to the ‘free market’ (LOL!!!!) world of corporate welfare.
Still could be worse – at least we haven’t got socialism like those daft Chinese – man, they must really be struggling!
Sounds rather like what happened in Russia after the USSR collapsed.
I should be alarmed that the same is happening here in Canada as well.
Is a cycle. Sell public services to the private sector, have the private sector ruin them while making money, then have the state buy them back. It has happened in other countries before. Then wait a decade or two and start selling the public services to the private sector again!
It’s called capitalism, where the deft are deft and the deaf are deaf!!!
This story doesn’t match facts onto he ground.
There is zero people calling for BT to be nationalized, as people still remember the basket case it was when in national hands. No-one outside the unions has a problem with royal mail being outside out government hands, it just isn’t relevant any more, and very few people have a great problem with private energy suppliers, as competition works reasonable well. (UK energy prices compare quite well to Europe averages).
A council tried to run a state energy supplier, it posted massive loses the other week. The energy market is much more complex than it was when in government hands.
The only place where people want it out of private hands is rail, where of course in most cases there is no competition so no true market exists. Of course if that happens they will realize very quickly that the price of tickets is all about government subsidy not who runs the trains.