Service and reliability have declined in privatised electricity systems because the service obligations of government-owned electricity companies are replaced by short-term commercial goals.
Black-outs and price spikes also increase as a result of lower reserve levels of generation capacity brought about by the perverse incentives of the market system which give greater profits to private generating companies in times of electricity shortages. This not only discourages investment in new generation capacity but encourages withholding of electricity in times of peak demand to send prices higher.
Electricity markets that rely on private investment in generation tend to produce a pendulum effect between too much power and too little, with private companies reluctant to invest in new capacity until a prolonged period of shortage pushes average prices up. Then they all rush to build new capacity, usually peak plants, creating a glut for a period when wholesale prices drop (though not necessarily retail prices if the market is vertically integrated). This working of the market creates an unnecessary burden for consumers for long periods of time when prices are high and supply unreliable.
Since deregulation in the US has removed the service obligations from private companies they are able to increase their profits by cutting maintenance schedules and staff and neglecting the upgrading of infrastructure. This is particularly the case for privately-owned transmission companies because it can be cheaper, in the short-term, to replace equipment after it fails than preempting that failure with a timely replacement. If such failures result in blackouts then others bear most of the costs. It might even prompt a government to pay millions of dollars in subsidies.
Consequently massive reduction of the utility workforce in the US with 150,000 people losing their jobs, including those who were responsible for safety and reliability of electricity supplies, as private deregulated utilities shed staff so as to cut costs. It is estimated by the Utility Workers Union of America (UWUA) and the US Department of Energy’s Energy Information Administration (DOE EIA) that utilities now employ less than two thirds of the workers they did in the early 1990s. The UWUA claims that cost-cutting has led to fewer inspections, deferral of repairs, and less worker training, all of which threaten worker and public safety as well as system reliability.
The widespread electricity blackouts in the north-eastern states of the US and Canada was one of the more spectacular consequences of a deregulatory process that aimed at removing government controls and letting the market decide. In a deregulated market no one is responsible for planning or ensuring adequate generation or transmission facilities into the future. This does not matter with some commodities, but it can lead to crises in the case of electricity supply because electricity is so essential to human welfare and economic activity.
A lack of maintenance contributed to the blackouts in New York City as it did in Chicago, Long Island, 62 New Jersey, New England, and Texas. For example, a series of fires in electrical transformers caused power blackouts in New York City during the summer of 2002. These were the result of aging equipment unable to keep up with demand because there was no incentive in the deregulated system to upgrade equipment and no-one held responsible when it fails.
In Victoria, Australia, the frequency of blackouts increased by 32% between privatisation in 1995 and 1999. In 1997 a Coopers and Lybrand survey found 35 percent of the privatised companies believed “previously experienced reliability levels would/may not be provided by the market”. The Victorian Government could not intervene to prevent blackouts, it argued, as that would result in “an unacceptable distortion of the market”. The companies took a cavalier approach to the difficulties blackouts caused consumers, one of them even going so far as to argue that “Customers need to experience some disruptions” so as to appropriately value their electricity supply.
In South Australia fuses and transformers failed across the state and transmission across high-voltage lines was deliberately cut off to avoid potential fires on very hot days. There were 500 outages in January 2001 alone. SA Independent Industry Regulator, Lew Owens, claimed that the network was outdated and neglected and unions claimed that the 900 workers employed to check and repair powerlines in 1991 had been reduced to about 300 after privatisation, whilst maintenance crews were reduced from 270 to 90. According to SA auditor-general Ken McPherson the leasing arrangements did not require private companies leasing generating facilities to upgrade or even maintain those facilities. And certainly the market provided no incentive to do so.
Before privatisation the Electricity Trust of South Australia (ETSA) had maintenance teams which monitored transformers and replaced them before they failed, thus ensuring minimal interruption to the electrical supply. One theory for the increased failure of transformers after privatisation is that these teams were discontinued and instead transformers were left in place till they failed, giving them a slightly longer life of a year or two. This would have saved money at the expense of reliability. Also the lives of transformers can be increased by downrating them, so that they do not run at full load and do not get so hot. This could be done by installing lower-rated fuses in the transformer boxes on suburban power poles. These fuses would blow before reaching full load. The power supply would be cut but the fuse could be replaced rather than the transformer a much cheaper option at $10 per fuse.
Indeed, many of the interruptions to power supply in South Australia in 2000-01 were being caused by transformer fuses blowing. In just one night in February 2001 fuses blew on 45 transformers, cutting electricity to 750 homes which wasn't restored for up to two hours. In the previous summer 270 fuses went in a couple of months, cutting power to 3000 homes. ETSA Utilities responded by blaming air conditioners for placing too big a load on the fuses. Unions claimed that the 900 workers formerly employed to check and repair power lines had been reduced to about 300, while maintenance crews had been cut from 270 to 90.
The Australian Retailers Association executive director, Stirling Griff, argued that shop-owners in South Australia, after privatisation, were having to shut up shop, losing substantial amounts in sales, because of power failures. Hospitals considered the possibility of switching to generator power during peak periods to be sure of a continuous electricity supply. There was “a mini-boom in generator sales to guarantee power supplies” in readiness for the following summer.