July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
Competition in electricity is part of a general trend toward deregulation (em from airlines to stock markets (em that characterized economic evolution in much of the western world during the 1980s. The move to liberalize electricity in some countries has been spurred on by the disenchantment of politicians and large customers with the traditional monopolistic arrangements. Monopoly not only prevented customer choice, but was increasingly seen as inefficient and paternalistic.
In some instances, the monopoly privilege was abused by managements and unions to institutionalize overemployment and bureaucratic behavior. In other cases, politicians used electricity customers to featherbed and subsidize national suppliers of equipment and fuel, and to subsidize particular customer groups. All of this occurred ostensibly in the name of "energy policies," but in reality to buy political support.
There are currently only four operating competitive power markets (em Argentina, Chile, England and Wales, and Norway (em and none has functioned for long. Caveats notwithstanding, the beginnings are promising. Generation efficiency in Argentina has improved. Competition has made the electricity supply industry (ESI) in England and Wales more efficient, more customer responsive, and more difficult to manipulate politically. But the experience of these countries attests to the complexity involved in creating a competitive market.
South America Leads the Way
The Allende government of 1971-74 nationalized much of Chilean industry, including the ESI. The government kept tariffs down and imposed currency restrictions, making plant spares difficult to buy. Demand increased, plant availablity decreased, and the lights flickered.
On the advice of Chilean economists from the Chicago School, the generals who killed Allende began to liberalize and privitize the economy. In 1978, the government began to restructure the ESI to remove it from political control and commercialize it. They fragmented the industry vertically, created a quasi-competitive generation market with a pool based on audited costs, and gave distributors and customers on the high-voltage grid access to seek competitive supplies. Then between 1984 and 1989, the government privatized most of the industry.
Following near hyperinflation in 1989 and the threat of power shortages, a new government began to liberalize Argentina's economy and privatize state industries. Starting in 1991, it separated transmission, split the state generation holdings into 22 generating companies, and created a novel generation market. The government then privatized what it owned, attracting many foreign investors, including Duke Power, Entergy Corp., The National Grid Co., Dominion Resources, lectricit‚ de France, and Chilean companies. It is too early to judge results, but the new businesslike atmosphere appears to have brought benefits. In generation, plant availability increased from 47 to 70 percent between 1992 and 1994, no power shortages threaten, productivity per employee has increased from 1.1 megawatts (MW) to 1.7 MW, and private investment is on the rise. Distribution productivity has increased from 1.2 gigawatt-hours (Gwh) to 1.8 Gwh per employee, theft has declined, and prices appear stable.
Urged on by The World Bank, Peru, Columbia, and Bolivia are now restructuring in a similar manner to Argentina, for similar reasons, and looking for foreign investment.
Europe Embraces a New Order
Restructuring in England and Wales