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The privatisation scam
Already between January and March 2011, energy charges to British households were increased by approximately 6%.
The announcement was one of a series of recent news items, each treated as a separate story by the media. These included:
* the revelation that Britain’s public subsidy to the railway companies has risen enormously since 1993, while their efficiency has fallen far below that of the (state owned) railway systems in other European countries;
* the likely loss of 3,000 jobs at the last remaining former British Rail Engineering Limited factory in Derby, due to its current owner, the Canadian firm Bombardier Inc., losing contracts to its Japanese rival Hitachi and its German rival Siemens;
* the disgrace of Southern Cross, involving 30,000 elderly and disabled people being put at risk because their homes and care arrangements were used as means of financial speculation and enrichment.
Though treated in the press as separate issues, these scandals are all consequences of privatisation- specifically, they are among the results of the mass privatisation drive under the previous Conservative governments of Margaret Thatcher and John Major; in which, among many other sectors, the country’s energy supply, the railway system including its engineering division, and the care home sector, were ‘divested’ from the state.
Dash for gas
The case of power production and distribution is particularly significant, as unlike in some other areas of the economy, the problems resulting from private ownership were initially disregarded by most commentators.
So, for example, in coal mining and motor manufacturing the sell-offs clearly accelerated the decline of these industries, and the negative impact of privatisation on the railway system also became rapidly evident. But the supporters of privatisation could point to the fact that the energy prices paid by UK consumers after 1990 had- after accounting for inflation, and following an initial rise in prices following privatisation- eventually fallen somewhat by 2003; this, they claimed, was the result of competition and the ‘dynamism’ of the private sector.
In reality, this temporary price fall was caused by a more prosaic factor- the coming on stream of large quantities of gas from the North Sea, at production costs that were much lower than that of the British deep-mined coal which had hitherto been the main fuel for the UK’s power stations. Aligned to this, under Thatcher and Major, government policy moved from the protection of Britain’s coal industry to actively working to close the coal mines.
Thus, in what became known as ‘the dash for gas’, the power production sector rapidly increased its consumption of (at that time very cheap) North Sea gas, and drastically cut its use of (relatively expensive) coal. Further- as a proportion of the fast-diminishing amount of coal used in energy production- imported coal, mined by much lower paid workers in South Africa, Colombia, Russia and Poland, replaced British produced coal; and within that, as UK coal production fell, coal from open cast mines (of which there is less in terms of reserves, but requires only one-third the amount of labour-time to extract per ton) replaced the more expensive deep-mined coal.
As for the overall costs of the almost complete abolition of Britain’s coal industry (in which employment fell from 70,000 in 1990 to 6,000 by 2005), from redundancy payments to the social cost of the loss of jobs in the former mining communities; these were not, of course, put at the door of the privatised power companies.
But from the early 2000s, the apparent gains from the ‘dash for gas’ had started to evaporate. Not only were the UK’s gas reserves in the North Sea beginning to expire, but the price of replacement hydrocarbon energy- which, despite ups and downs in the world market, had held relatively steady from 1991 to 2002- was increasing. The private power firms began a steep climb in their charges to UK households, and by 2008, gas and electricity prices for British consumers (after accounting for inflation) had risen by 60% and 40% respectively from their 2003 level, significantly exceeding pre-privatisation energy costs.
And since then, despite a dip following the financial crisis and then a partial recovery in global hydrocarbon prices to below their 2008 levels, the cost of gas and electricity to people in the UK has risen by a further 20%.
Scottish Power, having been sold off by the state in 1991, was in 2006 acquired by Iberdrola S.A. of Spain, since when a proportion of Scottish Power’s income stream has been used to provide finance for the other operations of the holding company, by means of making internal loans. As the Daily Telegraph reported:
…Scottish Power had so much "surplus liquidity" that it lent £800m to the American operations of Iberdrola, its Spanish parent company.
It handed over the ten-year loan in 2009 and about half the sum has yet to be repaid. The loan was made at market rates, and therefore is not a cross-subsidy…
Back in 2008, Scottish Power had also lent £750m directly to its Spanish parent, which was later repaid.
Although these financial arrangements were made at market rates, they were nevertheless hugely advantageous to the holding company, as the interest on the loans was merely transferred from one part of Iberdrola to another, rather than leaving the company’s coffers.
The power companies claim that they have make steep rises in charges to consumers, due to the increase in global energy prices. In a sense this is true, and this is an aspect of the way that the capitalist system works- if a company does not take maximum advantage of every opportunity to increase its revenues, then relative to other firms it will have lower profits to distribute to shareholders, and its market capitalisation will be negatively affected. Hence privatisation in the energy sector has resulted in a situation in which it is effectively compulsory for the firms in the industry to gouge the consumer to the full extent that they can get away with.
In addition, Scottish Power's CEO Ignacio Galan has sought to justify the firm's recently announced price increase by referring to the investments which are necessary for the industry to renew its equipment. This, however, undermines an argument which is frequently put forward to support privatisation- that private ownership releases additional funds for investment that would otherise be unavailable. In reality it is the public who must always pay for investments by utilities, whatever the nature of ownership. But with privately owned utilities, the public must also pay for the costs of competition and fragmentation, as well, of course for the profits accrued by the firm's shareholders, top executives, and creditors.
Iberdrola S.A. recently declared an annual operating profit of 4.8 billion euros, and the other players in the energy market are not doing too badly either- the profits of British Gas, for example, were a record £742 million in 2010.
The nationalised privateer
But by market share, the most successful operator in Europe’s mainly privatised energy industry is Électricité de France (EDF), which is, ironically, a nationalised company, 87% owned by the French state.
Using the opportunity of privatisation in the UK and many other countries, EDF has taken over a large part of the European energy sector, acquiring 22% of all electricity production in the EU. Via its subsidiary EDF Energy, the French state-owned firm purchased Britain’s nuclear energy company British Energy in 2008, and EDF is now the largest electricity producer in the UK.
Notably, in Britain‘s ‘competitive’ energy industry, EDF charges whatever the market will bear for the power produced by the installations it owns- that is, considerably more than EDF charges its French customers.
Following press criticism of this difference, the Chief Executive of EDF Energy, Vincent de Rivaz, issued a statement:
In France, electricity prices are lower because 80% is generated by nuclear power. By contrast, 75% of electricity generation in the UK is from coal or gas-fired plants. So, for electricity generation, Britain is hugely exposed to volatile fossil fuel prices while France is largely insulated…
There is absolutely no truth in the claim that UK consumers are subsidising their French counterparts. These are different markets and operate independently. EDF's operations in the UK and France are separately profitable in their own right.
But Monsieur de Rivaz was not telling the whole truth. After all, the UK branch of Électricité de France operates eight nuclear power stations, which together provide approximately 60% of EDF’s energy capacity in Britain. According to capitalist ideology, privatisation, competition and deregulation in the UK should lead to more efficiency and lower prices.
But it is in France, where EDF enjoys a virtual monopoly, is publicly owned, and has its charges set by the state, that EDF supplies electricity at the lowest production price in Western Europe.
It is no wonder that the French people have (so far successfully) sought to resist the attempts by governments in France to privatise EDF. This is a parallel, in a different sector, to the refusal of the British to accept the privatisation of the National Health Service.
Yet despite the rising evidence against the ‘efficiency’ of privatisation, it is still the mainstay of economic policy, in the UK, EU, and most of the rest of the world.
In whose interest, and according to whose agenda? According to capitalism, and against the vast majority of the people.