Big G and Little G

Paul Laity

  • The British Electricity Experiment edited by John Surrey
    Earthscan, 329 pp, £40.00, July 1996, ISBN 1 85383 370 3

The new government of 1979 had no grand plans for privatisation. It was intended that a number of small, state-owned enterprises would be sold off, but even the Tory radicals did not contemplate taking the utilities – natural monopolies providing essential services – out of the public sector. An increasingly peremptory Prime Minister, however, came to see privatisation as a ‘central means of reversing the corrosive and corrupting effects of socialism’ and ‘reclaiming territory for freedom’. By the mid-Eighties, the Government had reached the conclusion that even the utilities were better off in private hands. Electricity privatisation was introduced after the flotation of telephones, gas and water because it was, according to Thatcher, ‘the most technically and politically difficult privatisation’. The Government’s audacity in embarking on the electricity sell-off should not be underemphasised: this kind of project had not been tried in any other major industrialised country. Now the ‘British electricity experiment’ is being copied all over the developed world.

The nationalised electricity industry had a reputation for competence but not efficiency. The privatisers accused it of overestimating demand, of being chronically overmanned and of paying too much for fuel and equipment because it was obliged to buy British. They pointed out that the public had to pay for this inefficiency in inflated prices – absence of competition meant that the industry was free to pass on whatever costs it incurred. Despite this, the Government had to accept a low rate of return on its investment.

Because, when BT and British Gas were privatised, the preservation of their monopolies had provoked criticism, electricity was to be broken up before sale, with the intention of introducing internal competition. Generation was to be separated from the National Grid and restructured into competing companies selling electricity through a ‘pool’ on a day-to-day basis. The regional boards were to become supply companies buying the cheapest electricity and selling it to consumers. Eventually, domestic consumers would be able to shop around for the cheapest deal rather than be subjected to the old regional monopolies. Transmission via the National Grid could not be made internally competitive, so would have to be permanently regulated to prevent the exploitation of its customers. Regulation of generation and supply, on the other hand, was envisaged merely as temporary: once competition had been established, the natural working of the market would produce low prices. The result of privatisation would be a lean, efficient, consumer-friendly industry.

In his 1978 party report on the nationalised industries, Nicholas Ridley had deplored the fact that certain unions could hold the Government to ransom by striking or threatening to strike. The outstanding example, of course, was Heath’s acceptance in 1974 of a 35 per cent pay increase for the miners after their strike had caused prolonged electricity shortages. The electricity industry consumed three-quarters of the coal mined in Britain, and its re-organisation had a special appeal as the means to crush the NUM – particularly in the wake of Thatcher’s own showdown with the miners. This, as Steve Jones points out in one of the essays here, is what the Government had in mind when referring to the advantages of ‘diversifying’ fuel supply.

Timing was also crucial. At an exploratory meeting to discuss electricity privatisation held at Chequers in 1987, Thatcher, as she has told us, ‘insisted that all legislation must be enacted before the end of that Parliament’. She was in a rush to make Britain ‘the first country to reverse the onwards march of socialism’. Privatisation also promised revenue to finance tax cuts before the next election: the sale of electricity in 1990 was especially lucrative, raising£14.8 billion, £11.1 billion of which was available for immediate use. The attractive underpricing of the shares of the new companies marked a further stage in the creation of an electorate with a vested interest in keeping the Conservatives in power.

These two objectives – a speedy completion before the election and the destruction of the NUM – shaped the whole process of electricity privatisation. One corollary of Thatcher’s attitude towards the miners was her infatuation with nuclear power, shared by the minister organising privatisation, Cecil Parkinson. The Conservatives reiterated their commitment to nuclear power in their 1987 manifesto, announcing plans for several new pressurised water reactors. The incumbent chairman of the Central Electricity Generating Board, Walter Marshall, was a former chairman of the Atomic Energy Authority and second to none in his support for nuclear power. ‘Dear Walter’, as Thatcher referred to him, was ‘owed a great debt’ by the Prime Minister for keeping the electricity industry at full capacity during the 1984-5 strike. Marshall was opposed to any break-up of the CEGB because only a powerful generating sector could cope with the financial burdens of nuclear power – among them, the out-of-date Magnox stations. He was, however, ‘willing to go along with a two-way split’ in generation, with one much larger company owning and running the nuclear stations. Effective competition required generation to be split up into a number of smaller companies, but the nuclear imperative called for a duopoly.

The costs of the nuclear power industry were in fact too high, even for the larger of the two generating companies, but the plan to include nuclear power in the restructuring went ahead. One reason was that nobody was prepared to give Mrs Thatcher bad news. Poor Cecil knew that ‘Margaret, with her deep commitment to nuclear power, would never wear it.’ At the last minute, reality broke through: the nuclear power stations were withdrawn from the sale and transferred to Nuclear Electric, which remained, for the time being, in public ownership. Despite this, the privatisation of generation was rushed forward on the basis of the proposed duopoly. Even the Tories admit this was a serious mistake. The duopoly, comprising National Power, with a 70 per cent market share, and PowerGen (‘Big G’ and ‘Little G’, as they were known in the original White Paper) allowed a market dominance far from the competitive ideal. For years the ‘pool’ set the price of electricity and, although their market share has now been eroded by new generating companies, adequate price competition has yet to be established.

The Government was also unwilling to introduce a completely free market for the fuel used in generation. An EC directive which restricted the use of gas as a ‘premium fuel’ was repealed and the ‘dash for gas’ that followed scuppered the British coal industry without the help of nuclear power. By this time, however, the least profitable pits were worked, not by the NUM, but by the UDM, the union which broke the 1984-5 strike. Partly to protect UDM jobs, National Power and PowerGen were obliged to purchase a quota of expensive British coal, as well as being forced to buy some of their power from Nuclear Electric. Their customers had to pay a levy to cover the cost.

The 12 area boards which made up the supply sector of the nationalised industry were transformed, on privatisation, into 12 regional electricity companies (RECs), all of which initially owned a part share in the National Grid Company (which was floated separately in December 1995). Although the ultimate goal was clear – consumer choice between different suppliers – it wasn’t obvious how this could be achieved: competition, restricted in generation, has therefore been postponed in supply until 1998. Until then, the RECs benefit from the existing regional monopolies: as Parkinson records in his account of the privatisation, the Area Board chairmen were ‘delighted that the boards were to be floated as independent companies’. Like the other utility sell-offs, the restructuring of electricity, which was supposed to emphasise internal competition, has in fact entailed the passing of lucrative monopolies into corporate hands.

The RECs were floated in 1990, but the pattern of ownership of electricity supply has changed a great deal since then, thanks to successive mergers and takeovers, which have reduced competition before it had a chance to work. Only five of the original 12 RECs remain as independent entities. Ian Lang’s decision in December to allow the US-based firm CalEnergy to proceed with its contested bid for Northern Electric effectively marked an end to takeover restrictions. Nearly 50 per cent of the industry will soon be owned by US-based multinational corporations, attracted by Britain’s much more lenient profit regulation. Surplus profits are now as likely to benefit the American economy as the British. It matters little that Cal-Energy has been linked to one of the biggest fraud cases in California legal history, or that Dominion Resources, the US power company bidding for East Midlands Electricity, was named at the end of last year as one of America’s worst corporate polluters.

Nothing seems to have been thought out. Next year’s introduction of supply competition is likely to turn into a logistical nightmare as the system tries to cope with new patterns of metering and billing. Stephen Littlechild, director general of the Office of Electricity Regulation (Offer), recently drew back from the ‘big-bang’ approach to full domestic competition, in favour of a six-month phasing-in period. ‘We are under no illusion as to the magnitude of the task,’ he told a House of Commons committee. ‘The whole concept of competition in electricity supply does not exist outside this country.’ The new strategies of sale are already with us. Five-year old children at Christchurch Junior School in Dorset have been targeted by energy companies, in a bid to sign up their parents as customers before 1998 (for every household that signs, the school receives £7.50). John Battle, Labour’s energy spokesman, told me that electricity and gas packages can now be bought from mailorder catalogues.

The preservation of monopoly elements in both generation and supply has encouraged the febrile profit-making which we associate with the privatised utilities. As with previous flotations, the profiteering was kick-started with deliberate underpricing. The Government was generous with taxpayers’ money in ensuring that electricity privatisation was a success – £52m on advisers’ fees, £51m on underwriters’ costs, £49m on ‘receiving bank costs’, £22m on selling and brokering commissions, £25m on marketing and £55m on miscellaneous, including the Share Information Office. Yet the sale was never going to fail and the shares were six times oversubscribed. Shares in Southern Electricity offered at £1 were already worth £1.64 on the day of sale. The average value of the shares of the two generating companies rose by 171 per cent between 1991 and 1995; the shares of the RECs rose by 200 per cent in the same period, while the average gain to shareholders of those RECs taken over by another company has been 356 per cent. Fat-cat salaries and gains made by company executives from share options are no longer news. The chairman of the National Grid made gains approaching £2m from the flotation of ‘his’ company in 1995; mergers and takeovers have led to £27m paid out in ‘compensation’ and pay-offs to industry executives. And so on, though what matters more is the scale of the companies’ total profits: added together, nearly £4 billion in 1994/5, an increase of nearly £2 billion since 1990/1.

There are two main reasons why the electricity industry has been so profitable. One is a permanent moult of jobs. At the time of privatisation, the workforce was 144,000; by December 1995 it had fallen to 92,000, in part – but only in part – because the new gas-fuelled power stations need fewer people to work them. Since 1989, the numbers employed by National Power have been cut by 77 per cent. Pay has also been affected. M.B. Burke, a firm working for Southern Electric, has been paying its cable layers among the lowest rates recorded in modern Britain (81p an hour). The second and overriding factor has been the collapse in the price of fuel – gas, oil, coal and uranium. The new availability of cheap gas has assisted the privatised companies merely as a matter of chance. National Power cut its operating costs by £904m between 1990 and 1995, while its revenues fell by only £425m. The fuel price collapse puts paid to the claim that lower prices for consumers are the direct result of privatisation.

The average household electricity bill has fallen from £318 in 1989 to £284 in 1996, and last year the National Consumer Council told us that six in ten customers thought the price of electricity reasonable (helped, no doubt, by receiving a rebate of £50 early in the year). But the drop in prices has not been anything like proportionate to the fall in the price of fuel. The question is not whether electricity prices have come down, but by how much. They were already falling before the Government hiked prices in preparation for the sell-off: if the rate of reduction had been maintained, they would have been lower in 1995 than they actually were. (When the British record for large, industrial customers is considered relative to that of other European countries, prices show a steep rise.) In fact, there has been a comprehensive transfer of money from customers to shareholders. John Surrey’s informative volume, the work of a Sussex University research unit, is not slow to point out the weaknesses of electricity privatisation. But the conclusion of essay that domestic customers ‘have neither very obviously gained nor lost’ as a result of it seems excessively cautious: the truth is that customers could have gained much more.

Given the lack of competition in the industry, the responsibility for making sure that customers received proportionate benefits lay with Offer. Stephen Littlechild is an economist of the Hayekian school, well-known for his belief that the role of regulation is merely to encourage competition. His initial supervision of the RECs was so lenient that 11 out of 12 were allowed to raise their real charges for five consecutive years. In March 1995, only months after Littlechild’s price review, Northern Electric found £560m from its profits to stop a hostile bid from Trafalgar House. Littlechild tried to make amends by reviewing his price controls. Unfortunately, he did this just after the Government had sold its own remaining National Power and PowerGen shares – wiping more than £3.5 billion off the shares’ value. His row last November with National Grid, when he asked it to cut its revenue by £1.2 billion over four years, may be a sign that Littlechild is getting tougher. National Grid eventually accepted the reduction – and then gave notice that it would cut 250 jobs in addition to the 500 already proposed (as well as increasing the pay-out to shareholders).

It is almost certain that the majority of domestic electricity prices will carry on falling (as the regulator’s price reviews become stricter and obligations to buy British coal expire). As long as this goes on, the excessive profits of the companies won’t vex their customers. All markets have losers, however. When competition is introduced into the domestic sector, it is likely that suppliers will target the most profitable customers – a process known as ‘cherry picking’ – and the poor or those with special needs or living in rural areas will suffer. The champions of privatised electricity point to the fall in the number of disconnections since 1990, but the main reason for this has been the introduction for low-income consumers of pre-payment meters, fed by coins, tokens or smart cards. The consequence has been widespread ‘self-disconnection’. A study by the Joseph Rowntree Trust found that pre-payment meters result in people cutting down on cooked meals and baths. The most serious consequences of fuel poverty are obscured by the statistics: only 186 people died of hypothermia in Britain in the winter of 1995-6, but ten thousand died what are called ‘excess winter deaths’, effectively caused by being too cold. With perverse if familiar logic, customers are charged more to pay by meter than by direct debit: those on a lower income are in effect subsidising the better-off.

On 19 February 1996, a little before ten in the evening, millions of people, as always, got up from watching TV and switched on lights and kettles, causing a 400MW peak in electricity demand. On this particular evening, the peak occurred at the moment the interconnector transmitting electricity from France tripped. Of the regional companies, Eastern, London, Southern, Seeboard and SWEB were instructed by the National Grid to reduce voltage. Though the end result was only a slight dimming of the lights, the Grid had come very close to collapse. The previous month, another crisis had been caused when several gas-fired stations stopped generating. In fact, something like this happens quite often. On the principle of ‘interruptibility’, British Gas charges the companies less in return for being able to interrupt their supply in periods when domestic demand is exceptionally high. (The same sort of contract has meant that this winter dozens of hospitals have had their gas cut off, forcing them to rely on expensive alternative fuels.) The planners of privatisation (if ‘planner’ is the right word) seem not to have worked out that peaks in demand for gas and electricity tend to coincide. As a consequence of the several crises in 1995-6, the Government, with an eye on the General Election, has recently announced a scheme to ‘manage’ the electricity market to make sure the lights stay on: generators will be allowed to charge higher prices should they need to switch to more expensive fuels (oil or propane, for example) during periods of high demand. The consumers will pick up the tab.

As with the other privatised utilities, and with the NHS, cost cutting to achieve ‘efficiency’ has meant a reduction in spare capacity. Security of supply is under threat from undermanning as contingency plans are sacrificed. The new companies cannot afford the sort of reserve margin which would cover a major break-down of the system (a storm, for instance, like the one which hit Southern England in 1987). The RECs, unlike the old regional boards, don’t send each other staff to assist in an emergency. Sol Mead, deputy head of energy at Unison, speaks of ‘an erosion of the high standards of the pre-privatisation days’. Greater competition is likely to lead to the further closure of coal-fired and nuclear stations. What will happen to the electricity industry when, in a couple of decades, domestic gas supplies run out?

Clearly there is a need for a more active regulatory system, not only to keep prices down, but also to ensure fair treatment for all and to enforce conditions which guarantee security of supply. The Thatcherite notion that the utilities could operate without strong public control is pernicious. It is claimed that a regulated, privately-owned industry is more transparent and accountable than one owned by the state, but the US multinationals are far from transparent and the regulators themselves act like potentates: they aren’t responsible to Parliament, and give the scantiest of justifications for their idiosyncratic decisions. When a Public Utilities Reform Group launched last year polled 100 MPs, including 50 Tories, two-thirds agreed that ‘a more accountable and fairer system of regulation was required,’ and three-quarters that the utilities needed to ‘strike a better balance between the interests of shareholders, customers and employees’. Last November, Tim Eggar, only weeks after resigning his post as Energy Minister in charge of regulation, called for a radical overhaul of utility regulation. A more democratic alternative to the present system, suggested in Surrey’s volume, would be a Select Committee overseeing regulation of the utilities and tackling issues arising from takeovers and mergers. One way to ensure that customers benefit proportionately from company profits is a ‘sliding-scale’ such that efficiency gains beyond a predetermined level automatically result in lower prices. Nigel Lawson, the original mad scientist of the electricity experiment, did not ‘think that it made sense to have an “Energy Policy”, over and above the application of the Government’s overall supply-side policy to the energy sector of the economy’. He was ‘determined to break the dirigiste mentality that pervaded both the Department of Energy and the nationalised energy industries’. Sure enough, the Department of Energy was dissolved into the Department of Trade and Industry. But co-ordination of the different energy industries is patently needed, as is an economic policy that takes into account the long-term costs both of under-investment, and of the unemployment in the decimated mining communities.

The Government gets round criticism of the utility privatisations by pointing out that, had the Labour Party been in power in the Eighties, state ownership, with its attendant inefficiencies, would have still been in place. The apologists claim that the public, opposed to all the privatisations when they were first proposed, has been won round. Re-nationalisation is not going to happen. All the political parties now agree that internal competition and exposure to market pressures promote efficiency and enterprise. Even thinkers on the Left are beginning to realise that giving people their own stake in capitalism could (if combined with progressive taxation) bring about a dynamic redistribution of wealth and opportunity.

The end of the argument isn’t state v. private – there are alternative forms of privatisation. The Tories argue that privatisation empowers people, and that markets are democratic because anyone can buy shares. It is true that since the flotation of BT in 1984, more than eight million people have bought shares in the utilities, but the number of private shareholders has declined to below pre-Eighties levels. And understanding among the new shareholders remains low: when British Gas paid its first dividend cheque, instead of cashing it, ten thousand investors paid the sum back to BG, thinking it was a bill. Even though many are now buying shares by proxy, as subscribers to pension funds or insurance companies, the idea that British capitalism is democratic, participatory or ‘popular’ is risible.

The Labour Party has promised a more rounded energy policy and tougher regulation, as well as the one-off windfall tax. In other words, it wants to bleed the utilities of their excess profits. This is welcome, but it ignores the question of ownership. Common ownership of industry, the traditional aim of socialism, could remain a central, long-term goal in the form of a genuinely popular capitalism, collectively managed in new ways. It is too late to distribute utility shares free to all, but one suggestion – made by Jeffrey Gates in his Demos pamphlet, Revolutionising Share Ownership – is a fund to redirect profits to customers on a continuous basis in the form of shares. Gradually, more and more of the industry would then be owned by consumers, and we would have a more authentic form of public ownership than was ever the case during the period of state control.