Opinion:
Has the Deregulation of
Electricity Reached its Limit?
Christian Stoffaës(*)
President of CEPII
Circle
of Economists
1.
Mishap?
The
liberalization of the electric industry has reached its limit:
Along
the last years some important incidents in the sector have received
attention from the media.
-
Electricity cutoff in
California in 2001, very harmful to the economy, and the bankruptcy of
the electricity distribution companies of this state caused dramatic
increases of price in the wholesale market;
-
In 2001, the fraudulent
bankruptcy of Enron, enterprise that originally transported gas and that
in 1985, came to the electricity sector and became a leader. The Enron
affair caused the close down of the auditing company responsible for
controlling the accounts and discredited a certain type of speculative
capitalism;
-
The electricity cutoffs
that occurred in 2003 in several countries such as in Italy and in the
Northeast of the United States;
-
More recently the price
increase of electricity in Europe due to the increase of natural gas and
oil price increase, including countries that have production resources
with stable prices (such as the French nuclear);
-
In developing countries
that adopted privatization and the deregulation in the 1990s,
investments in production and transport were reduced and even
interrupted, causing energy shortage with serious consequences regarding
development;
-
There is a lack of public
capital for infrastructure construction;
-
The foreign investors that
were initially attracted by promises of privatization have restricted
their investments due to several litigations with regulating
authorities. They regard themselves robbed and they say that the
criticism on their predatory behavior is demagogic. This situation of
electricity shortage is particularly acute in Latin America, India and
Africa.
2.
Or crisis of the system?
Are these problems simple
mishap or constitute they a
systemic crisis that shaked the competition concept itself regarding
this rather particular sector?
Deficiency concerning the coordination of the different phases from
production to distribution, deficiency of investors, accelerated
development of gas power plants that are not capital-intensive but have
a high fuel cost variation with high risks in terms of supply security:
the common source of these difficulties seems to be the fear of the
private investors to enter a sector in which the rules of the game are
unstable and there is no integration of the sucessive steps of
production, transportation and distribution which constitutes economic
risks for the long-term investments.
Furthermore, after the first price increase and the fragmentation of the
public monopolies that were dismantled by the deregulation, no trends
could be identified in what regards price increase or higher
concentration or cartel formation of the enterprises of the sector. So,
taking advantage of the extinction of geographical demarcation
frontiers, large multinational groups are formed through fusions and
acquisitions that involve huge sums of money and speculative capitals:
oligopolies of multinational private capital that replace the old public
or regional monopolies that existed before the deregulation.
Actually, the present situation is analogous in many aspects to that
before the historical period of imposed public regulation when the
nationalization of the utilities had acute forms in certain countries
such as France, United Kingdom or Italy.
3.
A little of historical memory before regulation
History does not repeat itself, nevertheless it is useful to re-examine
the history of electricity’s industrial economy. This industry was born
at the end of the XIX century from a series of technical inventions that
have brought innovations that were decisive to the economy of that time:
the changes occurred in industry due to electrical engines and
automation, in urbanism (public illumination, subway, and tramway) at in
domestic homes (illumination, domestic appliances, etc.).
The
electric industry was the first case of several production and
distribution enterprises at a local scale that operated according to
numerous technical norms (voltage, frequency). They were gradually
unified in common technical standards in the ambit of public service at
the municipal or local scale.
Next,
due to the long-distance transport through high tension lines, it
concentrated around large groups of regional or national dimensions.
These private capital groups were the center of animated public
controversies. The trade unions and the left-wing parties transformed
them in symbols of abuse of the large capitalist trusts: heavy tariff
charging connected with monopolistic positions; Malthusian behavior
regarding investment – including electrification of rural areas and
hydroelectric equipment whose financial profitability was considered too
weak or of long term for the private capital; influence of lobbies on
the media and on politicians. The concentrations and private monopolies
and the accelerated speculations in the fusion-concentration operations
were denounced.
The
results of these criticisms were public regulation, that is, the control
of tariffs and utilities investments by the public authority.
There
is an evident time coincidence in all countries. It was in 1935 during
Roosevelt’s New Deal, in spite of the fact that the United States is
hostile to the state intervention in the economy, that the anti-trust
law (called PUHCA) that forbids trans-state electric economic holdings
was voted, creates the agencies for the construction of large
hydroelectric dams (among them the notorious Tennessee Valley),
establishes public agencies to bring electricity to rural areas. In the
same year (1935) Germany established the demarcation frontiers that
limit the territory for concessions to the large electricity groups and
reinforces the autonomy of the local distribution enterprises (the
Stadtwerke). And also in 1935 France issued a decree that imposes a
national control on electricity tariffs as well as on price readjustment
adapted to the city and countryside before the public financing programs
to large hydroelectric equipment of the Popular Front government and the
post-war Reconstruction.
It is
not superfluous to remember these circumstances: the industrial
organization of the electric sector dismantle by deregulation – at least
partially in certain countries – was not the one that existed at the
beginning. The present organization was imposed under the pressure of
the circumstances, gave rise to political and social heated discussions
motivated by the pre-existing economic liberalization situation and the
important controversies it gave rise to. The regulation –
nationalization of electricity then became the symbol of Keynesian and
planning policies of the period.
4.
The reforms of deregulation
Since
then the world has changed. From the 1970s on the Keynesian revolution
took the place of the liberal and monetarist counter-revolution under
the effect of public opinion regarding the economic stagnation and
inflation acceleration.
The
start of the contemporary deregulation of the electric sector can be
precisely dated. It started in 1978 in the ambit of the legislation that
permits independent electricity production (the IPP) and requires the
utilities that have the exclusive monopoly in their respective
concession territory to buy electricity produced by the independent
power plants. It is voted the PURPA law conceived by the Jimmy Carter’s
democratic administration in the wake of the consumerism movement
regarding protection to consumers, contrary to the regulated monopolies
and the ecologist movement. Considerable amounts for innovation granted
by the Department of Energy (DOE) were redistributed to nuclear energy,
stimulating the development of new and renewable energies (wind, solar
and geothermal energies, etc.), inclusive in California, the pioneer
state relative to this area. The experience of new energies will end in
an economic semi-failure due to its rather elevated costs. However, the
production liberalization leads to a decisive technological innovation:
high temperature gas turbines and the gas combined cycle will be
successful all over the world due to notable gains in energy efficiency
of both and their low capital cost and have contributed to disseminate
liberalization.
The
most significant experience is doubtless that of the British government
under Margaret Thatcher that voted in 1989 the law that establishes the
vertical disintegration, geographical fragmentation and privatization of
the public monopoly, nationalized in 1945 by the Labor government of
Clement Attlee. The electricity liberalization interfered in the
monetarist and liberal policy implemented after the 1979 elections that
gave majority to the ultra-conservatives. The British public opinion was
tired of the disastrous role of the trade unions and the “closed shop”
regime, of hyperinflation, economic stagnation and unemployment that led
England to decline in the 1970s. In spite of being radicals and
violently fighting the trade unions, Thatcher’s policies and those of
her successor John Major had during fourteen years the constant support
of the public opinion. As a consequence the Labor Party evolved to the
social liberalism personified by Tony Blair in the last ten years.
Before
touching the electric sector between 1983 and 1988, the privatization
measures and openness for competition have been applied to air
transport, telecommunications, gas, water companies, airports, etc. In
the electric sector, where social conflict with mining trade unions
lasted one year, the government decided first to fragment and
disintegrate production, transmission and distribution before
privatization so that the old public monopoly would not be substituted
by the private one. An independent regulator is established to create a
true competing market among the approximately twenty enterprises that
succeeded the old historical operator.
The
immediate economic effect of the daring Tatcher experience is the
rupture of the historical link between coal mines and power plants,
causing the construction of natural gas turbines and combined cycles,
with considerable consequences on low costs and prices. Next, less
positive evolutions occurred such as frequent investor changes, fusions
and concentrations limited by competition legislation, stratagems more
or less proved concerning prices or definition of the maximum share of
the state in the gas power plants market.
Whatever the appreciation on the long-term consequences of the British
reforms and the particular set of circumstances in that country – e.g.
the economic inefficiency of the pre-existing system and the excessive
role of “all coal” and the trade union power – this experience serve as
example to the world. Concerning the pre-existing electric monopolies,
the criticisms were in general less hostile. Therefore the deregulation
measures had very different forms according to the country but no one
went so far as those of the United Kingdom.
In
Europe, the Thatcherian model of electric competition market directly
inspires liberalization guidelines of the electricity internal market
and its transpositions in the national rules. Many countries in Latin
America were inspired by the British reform pressured, by the way, by
the International Monetary Fund and the World Bank that suggested
liberalization policies to everyone.
Certain countries are more reasonable: the United States are satisfied
with imposing independent production in traditional utilities (see
above) and relax the application of anti-trust laws authorizing
concentrations – restructuring like that mentioned above, the Enron
disaster and the supply crisis in California have limited the enthusiasm
of the deregulators. In Europe, France and Germany open their market but
the market structural change remains marginal: autonomy of the French
transport network; creation of independent regulation authorities;
privatization of 15% of EDF’s ((Electricité de France) capital;
connection between German electricity and gas companies (EON - Ruhrgas).
5.
An
aside deregulation
Actually, few countries in the world apply literally the British model
in spite of the fact that it had a good run in the last fifteen years.
Stability prevails over revolution: one should add that they are reforms
along the old public services.
However, in general there have been important changes, the monopolies
have ended, private and new-coming capitals are introduced, and behavior
changes are globally positives.
In
compensation there is a new and increasingly afflicting problem: the
apprehension of investors regarding capital-intensive investments and
the accelerated penetration of natural gas (in developed countries) and
coal ( in emerging economies), two energy sources that present both
serious problems concerning supply security, price stability and
pollution aspects. This occurs in detriment of long-term investments
such as nuclear energy that practically stagnated, the large
hydroelectricity or the renewable energy (that cannot be developed
without large sums of money).
Regarding the liberalization of other old public services, any attempt
to find a parallel seems rather artificial. The opening of aerial
transport, after long rearguard fights, caused profound re-structuring,
elimination of old giants (Pan Am and TWA, for example) and of medium
size companies (Sabena, Swissair, SAS etc.), internationalization of old
regional companies (United, American, Delta etc.), fast development of
the new-comers and of the so called low-costs that defied the
established positions, establishment of alliances at the world level.
The public was very responsive to tariff reduction and the
democratization of aerial transport cause a vicious circle of
accelerated growth and prices decrease. The same occurred in
telecommunications in which liberalization originated technological
innovations and new services: internet, cellular phones, and several
software applications.
On the
other hand, the public demonstrated a certain disregard to the
electricity liberalization because it did not notice large consequences
on tariffs and eventual new services contrary to the other already
mentioned sectors.
After
all, it is probably in the electric sector that the reflux, familiar
characteristics of the political-ideological cycle of economic theories,
seems to be the closer one. It should not be forgotten that the XX
century has successively experienced the Schumpeterian economic
liberalism of the engineers-entrepreneurs, the capitalistic trusts,
centralized planning, Keynesian regulation of policies until it closed
with the monetarist-liberal revolution invented by the America of Regan
and the England of Thatcher.
In
Europe many countries want to preserve a certain social model of public
services. The large emerging economies such as those of China, India and
Brazil, already inspired by the self-centralized planning, have quickly
opened to globalization and economic liberalism and have also realized
that investments in the large infra-structure of public interest demand
pragmatic approaches through public/private partnerships.
A good
bet is that electricity will be, as it was in the mid of the XX century,
a symbolic sector of these new approaches regarding the search of a
“third way”, a practical compromise between competitiveness and public
service.
(*)
Christian Stoffaës is a member of the Concorde Foundation Council and
since July 2006 of Administration Board of the Notre Europe (think-tank)
founded by Jacques Delors in 1996. He went to the École Polytechnique
(France) and engineer of Corps des Mines (France), and he is Head
of the CEPII (Centre d'Etudes Prospectives et d'Informations
Internationales) Board since July 2004 and is associated professor of
the University of Paris-Dauphine and member of the Circle of Economists.
