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The widespread electricity blackouts in the north-eastern states of the US are merely the latest in a long line of electricity crises caused by electricity privatisation and deregulation. Blackouts have been experienced from California to Buenos Aires to Auckland. They have been experienced in South Australia and predicted for NSW. Government bailouts of electricity companies have been necessary in California and Britain. Electricity has had to be rationed in Brazil and it has become too expensive for millions of people from India to South Africa.
Dozens of governments have embarked on the pathway to electricity deregulation and privatisation since the mid-1990s. It has become the accepted wisdom amongst governments and opinion leaders. It is referred to as ‘liberalisation’ by its advocates who use the term to disguise what is in essence a massive shift of ownership and control of electricity from public to private hands, in the name of economic efficiency and in the cause of private profits.
‘Liberalisation’ has meant that maintenance teams that were once fully staffed have been dramatically cut leading to frequent equipment failures. It has meant that privately owned electricity conglomerates are able to blackmail governments into bailouts and high prices with threats of blackouts. And it has meant that the planning function of electricity authorities that once ensured adequate generating reserves for times of peak demand, and kept infrastructure up to date, have been abandoned to market forces. Because of market forces electricity prices are based, not on the cost of production, but on how desperately consumers want electricity and this has led to sky-rocketing prices whenever private companies have been able to limit supply in times of high demand.
The privatisation of electricity is not something that citizens have demanded nor wanted. In general, there has been very little public participation in electricity reform decisions and as the consequences are observed, there have been many bitter protests against electricity privatisation. Popular uprisings have occurred in Argentina, India, Indonesia and Ghana. Protests have halted privatisation proposals in Peru, Ecuador and Paraguay. In the Dominican Republic several people were killed during protests against blackouts imposed by privatised companies. In South Africa thousands marched during a two day general strike to protest privatisation, which they labelled “born-again apartheid”.
In Korea, workers held a five week strike to protest the sale of the national electricity system. In Papua New Guinea students were killed when thousands rallied against the planned privatisation of government services including Elcom, the electricity authority. Even in China, workers protested the sale of a power plant in Henan province to a private company and threatened to “block the state highway and lie on the railroad while the trains run over us”.
So why are governments around the world ignoring public opinion? How have governments been persuaded that electricity is just a commodity that should be traded in the market place like pork bellies, rather than an essential service that needs to be controlled and supplied by governments to ensure its availability, reliability and affordability?
During the 1970s business interests promoted a combination of neoclassical economic theories and economic or market liberalism (referred to as economic rationalism in Australia). Its basic policy formula involved government spending cuts, privatisation of government services and assets, and deregulation of business activities; all in the name of free markets, competitiveness, efficiency and economic growth. This formula, sometimes referred to as the Washington Concensus, was adopted willingly in many developed nations and imposed on developing nations by the World Bank and the IMF as conditions of their loans.
The public sector was broadly characterised by right-wing think tanks and neoliberal economists as “bloated and inefficient”. Publicly-owned and state-regulated electricity monopolies were claimed to be so wasteful and inefficient that private companies competing in a free market could save enough money to both cut prices and make a profit. But the supposed inefficiency of publicly-owned electricity providers was unfounded rhetoric used to gain and maintain private control. It was belied by the cumulative evidence of one hundred years of electricity provision all over the world. Publicly-owned electricity enterprises have consistently provided electricity at no greater cost than privately-owned enterprises and often for prices that were far less than those charged by private companies.
One of the first countries to adopt market-oriented reform was Chile when General Pinochet ousted the democratically-elected Marxist government of Salvador Allende in 1973, with the support of the Americans. Britain was the first major industrialised country to follow suit in 1990. Both Chilean and British privatisation were experiments driven by business interests and shaped by a mix of neoliberal dogma and, in the case of Britain, pragmatic politics. Yet they became models for countries that followed.
The rise of Thatcherism in Britain can be attributed in large part to the endeavours of two think tanks, the Institute of Economic Affairs (IEA) and its offshoot, the Centre for Policy Studies (CPS) founded in 1974 by Keith Joseph and Margaret Thatcher. The CPS published Privatize Power in 1987 which accused the Central Electricity Generating Board (CEGB) of being inefficient, inflexible and secretive. It recommended the separation of the CEGB into generation, transmission and distribution companies. This is in fact what actually happened in Britain and in countries that followed suit.
In 1979 Margaret Thatcher thought her party’s privatisation plans to be too controversial to mention in the election campaign. However many businessmen were persuaded that government supplied services such as electricity were too expensive because of inefficiencies and because of the social goals that they pursued, such as equity and employment. They believed that the lack of competitiveness of government providers made private industry uncompetitive too.
Deregulation in the US was primarily driven by business interests; in particular, industries that used large amounts of electricity and wanted to be able to reduce costs by doing deals with competing suppliers, and private power companies that wanted an opportunity to make profits from the electricity business previously monopolised by the regulated utilities. For the same reason aspiring electricity traders (who buy power from generators and sell it to consumers and to electricity retailers) also lobbied vigorously for deregulation. The most prominent of them was Enron.
The Center for Responsive Politics points out that “during the first six months of 1996 alone, energy interests spent at least $37 million to lobby Congress and federal agencies on deregulation”. In addition, millions of dollars were spent on “research, polling, television advertising and laying astroturf—developing grassroots organizations”. Most of it was aimed at decision-makers—politicians and bureaucrats—rather than the majority of electricity consumers.
The case for deregulation could not be presented in self-interested terms to the public. It had to be presented as being in the interests of the wider public. Groups such as the large industrial energy users utilised the language of free-market advocates to state their case in terms that were not too obviously self-interested. The neo-conservative think tanks provided that language and marketed the concept of deregulation as being in the public interest. The business media also played an unquestioning part in promoting deregulation.
A plethora of corporate front groups and coalitions were also formed to promote deregulation including the Alliance for Competitive Electricity, Citizens for State Power, Electric Utilities Shareholders’ Alliances, the Alliance for Power Privatization, and the Coalition for Customer Choice in Electricity. Americans for Affordable Electricity coordinated the campaign for deregulation and spent $4 million a year on it on top of what each of its members spent. For example, Enron spent $25 million in just six months and allocated $200 million a year for advertising to win customers and “to persuade Americans to demand faster deregulation”. It also spent many millions more on political donations and lobbying state and federal politicians.
In Australia, privatisation was also driven by business interests and the think tanks they funded. During the 1980s economic rationalism was promoted by business groups, which saw government reform as a way of reducing their taxes, increasing investment opportunities and, in the case of the reform of government enterprises such as electricity, as a way of decreasing the cost of infrastructure provision to themselves.
Businesses were aided in promoting privatisation and deregulation in Australia by “a network of well-funded research institutions, staffed mostly by market-oriented economists” including “the Industries Assistance Commission, the research arms of the Treasury and the Department of Finance, the Bureau of Agricultural Economics, Industry Economics and Labour Market Research”, as well as university-based and private think tanks.
The Industries Assistance Commission (now the Productivity Commission) played a key role in influencing and supporting the reform process through its many reports on issues such as industry protection, microeconomic reform and reform in the public sector. The recommendations of these reports were widely covered in the media.
Its reports claimed that billions of dollars could be saved if the performance of the electricity industry could be improved and although it recognised that the state authorities were in fact improving their efficiency and productivity the Commission did not accept that full efficiency could be achieved without private ownership: “Private ownership brings with it the disciplines of the share and capital markets, the sanctions provided by the possibility of take-over and the risk of insolvency. It also significantly reduces the scope for interference by governments.”
The Commission recommended that generation, transmission and distribution sectors in each state should be separated in preparation for sale to the private sector, as had happened in the UK. The Commission also proposed a power pool for trading electricity and the division of generation capacity into separate competing companies with open access for new private generating facilities as in the UK. These recommendations were subsequently adopted, first in Victoria and then in other states.
In 1990, more than a year before the Kennett Government was elected, 13 business organizations, including the Australian Chamber of Manufacturers, the Business Council of Australia, the State Chamber of Commerce and Industry, the Victorian Employers Federation and the Victorian Farmers Federation, commissioned two think tanks – the Tasman Institute and the Institute of Public Affairs (IPA) – to establish Project Victoria which provided detailed advice on implementing privatisation. The Kennett Government later implemented most of Project Victoria recommendations.
In the second stage of Project Victoria, a report entitled A Restructuring Strategy for Electricity in Victoria, detailed how the electricity industry should be broken up and sold off, and a national grid and power pool should be developed to facilitate competition. It was written by Tasman Institute’s Michael Porter and Wayne Gilbert, a former head of Mercury Energy in NZ. (Gilbert was head at the time Mercury was responsible for the extended blackouts in Auckland.) Gilbert had also been a member of the NZ Business Roundtable, and a member of the H.R. Nicholls Society, formed to oppose labour regulation in Australia. The plan devised by Porter and Gilbert was implemented by Treasurer Alan Stockdale.
Instead of engaging in a public consultation process the Victorian Government spent $1.8 million on an advertising campaign to promote the sale of the electricity industry. Nevertheless an AGB-McNair Age poll found that 60 percent of those surveyed opposed privatisation. A coalition of many church, welfare, environmental groups and unions – Public First — was formed to oppose privatisation of electricity, gas and water.
Similarly electricity privatisation was introduced in South Australia despite solid community opposition. Trade Unions, Friends of the Earth, the SA Council of Social Services and various church and community groups took part in the campaign. In contrast the business community was strongly in favour of privatisation of electricity. The Olsen government had been reelected in 1997 after promising not to privatise electricity. However within weeks it reneged and announced the sale.
The primary political motivation for privatisation in South Australia was debt reduction. However the government lost more in electricity dividends than it saved in interest repayments on its reduced debt. Electricity prices soared and blackouts became a regular fixture. Elsewhere in Australia the national electricity market, based on the discredited UK power pool, has ensured that other states are also suffering from volatile wholesale electricity prices. The supposed disciplines of the market have been eclipsed by price manipulation by electricity companies seeking to boost the price of electricity and maximise profits.
Electricity privatisation and deregulation have all the elements of a successful confidence trick. The deception or trick has involved persuading the public and the politicians who represent them, that a dramatic alteration in the governance of their electricity systems would be in the public interest. Electricity consumers were promised electricity rate cuts, better service and ‘consumer choice’ as a result of the competition that deregulation would foster. Governments were promised reduced budget deficits and less responsibility for an increasingly complex and capital-intensive service sector.
For the confidence trick to succeed, the private electricity companies and their allies have had to foster public trust in themselves and more importantly, enlist trusted social institutions to shore up faith in these flimsy promises and allow people to put aside their critical faculties. They have been able to enrol community leaders, educational institutions, the media, some environmental groups, and experts and professionals, to help make the case for private control of electricity.
In particular, governments, entrusted with carrying out the will of the people and protecting public assets, have been coopted by all manner of devises, ranging from the sophisticated persuasion of well-funded think tanks to the less than subtle pressures exerted by international lending organisations, all combining with frequent and generous financial contributions to the campaign funds of political parties and offers of future career opportunities for retired politicians and bureaucrats.
As a result there has been a massive transfer of ownership and control over electricity assets worldwide from the public to private companies. The companies that have taken over electricity provision in most countries are multinational companies with little interest in the welfare of local citizens. Increasingly these companies are concentrating—through mergers and acquisitions—into a small group of very large conglomerates that dominate national and international electricity provision.
It is clear that the vast majority of people in each country where the great electric confidence trick has been played are its victims rather than its beneficiaries. Jobs have been lost, electricity prices have risen, service and reliability has fallen, pollution has increased, and taxpayers have had to bail out private electricity companies in bad times without receiving any dividends in good times.