Public strategy for private power

"Privatised utilities were sold too cheaply - the result was a bad deal for consumers and for taxpayers."

That is the verdict of the British Labor government on the pricing policies in the privatisation programme - including the electricity sector - of its Conservative predecessors.

Between 1981 and 1996 the governments of Prime Ministers Margaret Thatcher and John Major sold off all or part of 35 major state enterprises in the industrial, telecoms, energy transport, water and technology sectors.

The big names included British Aerospace, Cable & Wireless, BP, Jaguar, Rolls-Royce, British Airways, British Steel, and a score of electricity producers and distributors in 1990-96.

The Blair government, elected in 1997, has decided to try to repair some of the faults it finds in Britain's first generation of privatisation of utilities, including electricity services.

One of the government's first actions was to impose a US$7.5 billion windfall tax on companies which were privatised at bargain prices to buyers who then made enormous sell-on and share increase profits.

The Blair government now plans to legislate for a "fair deal for consumers" of privatised utilities, including electricity. The inference is that the customers of the private electricity (and water, gas and telecoms) companies which took over government agencies can do better if the government applies some new regulations to such deregulated sectors.

From this year all UK energy users, domestic and business, will be able to choose their supplier. Hence the need to monitor this increased competition and marketing.

The British actions will encourage politicians and consumers elsewhere who question or oppose aspects of sales of essential public services, particularly supply of electricity.

In Australia, for instance, there is strong political and public opposition, on the left and right, in New South Wales and Queensland to aspects of electricity deregulation and privatisation.

In electricity generation, the UK split the state-owned monopoly Central Electricity Generating Board into a number of smaller, competing generators in 1990, and sold shares in the two fossil-fuel generating companies (National Power and PowerGen) the following year.

A third company, owning the nuclear generators of the former CEGB, was withheld from sale in 1991 because of concerns about decommissioning liabilities.

The more modern nuclear generating stations were privatised, as British Energy, in 1996. A state-owned company continues to operate the older nuclear generators.

The electricity supply changes were not always smooth. The opening of the medium-to-large commercial/industrial electricity market (supplies above 100kW) in 1994 was described as 'chaos' by the auditors Coopers & Lybrand.

New Zealand, some Australian states, Argentina, and Hungary are among those using the UK model of the separation of the generation, transmission and supply sectors of the electricity industry.

Britain's Minister for Trade and Industry, Mrs Margaret Beckett, is shaping a strategy for the regulation of privatised utilities over the next decade. It deals with corporate responsibility as well as consumers' interests. The government favours a free market but not a free-for-all.

The Beckett proposals are designed to safeguard the interests of consumers, to anticipate changes in market structure, particularly the integration of the electricity and gas market and the growth in multi-utility companies,and to improve the regulatory process.

Mrs Beckett said: "For too long, householders who pay the electricity gas, water and phone bills have felt that shareholders' interests have come first. Our proposals will get the balance right. They will keep the pressure on the utility companies and the utility regulators to drive prices down and standards up, and provide more choice for all. For the first time, the consumer interest will be put at the heart of the regulatory system."

Key proposals affecting the electricity industry include:

* Directives on how the utilities should contribute to social and environmental objectives (including energy efficiency)

* Regulation of electricity and gas supply to be integrated to reflect convergency in the energy market. The licensing of electricity supply and distribution would be separated.

* The energy companies should act to ensure that "disadvantaged" consumers benefit from improved efficiency, more choice and greater fairness.

The Blair government has no intention of re-nationalising utilities. It acknowledges the successes of privatisation, but is determined on "effective regulation to ensure that the consumer comes first."

Minister Beckett says "The privatised utilities were sold too cheaply and price controls set by previous governments on privatisation were too lax. The result was a bad deal for consumers and for taxpayers."

The wealth of experience gained by UK officials and advisers in almost 20 years of privatisations includes successive innovations introduced since the earliest sales.

These include the move from underwritten fixed-price offers to the use of "bookbuilding" to set prices; arrangements to encourage small investors and to maximise the shares available to them; and the introduction of ways to allow greater public participation in share sales.

Another innovation is to allow independent financial advisory firms (known As "share shops") to have a role in the distribution network for shares. Share owners in the UK increased from 3 million to 10 million between 1981 to 1996.

To encourage smaller investors to take part in privatisation, the UK developed a range of special incentives. Some of these have been adopted by other governments.

The five main incentives were: instalment buying; share bonuses to buyers who hold their shares for a set period (normally three years in the UK); a discount (up to 8 percent) on second and third instalments as an alternative to bonus shares; vouchers related to the value of the shareholding, redeemable against the holder's utility bill; and special prices for employees.

At a seminar in Sydney last month, British electricity industry officials and experts, pioneers in power privatisation, described the managerial and financial expertise Britain has to offer other governments following its example. Britain also has political and public interest lessons to pass on.

COPYRIGHT 1998 First Charlton Communications Pty Ltd.
COPYRIGHT 2000 Gale Group