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 began with efforts in the Thatcher government to "roll back the frontiers of the state." "Conventional" commercial enterprises were privatized first, followed by British Telecom in 1984 and British Gas in 1986, both privatized as virtual monopolies. At the time, the Central Electricity Generating Board (CEGB) was poorly run, overmanned, and politically manipulated. The CEGB launched ill-conceived policies for building large and expensive nuclear and coal plants, and compiled a poor track record in time spent completing projects.
Competition seemed the best way to reduce industry inefficiencies and government interference. The electric industry was privatized by creating an independent grid as a common carrier, splitting the CEGB's generation capacity into five competing fossil fuel generators that would be privatized (but leaving the nuclear plant in public ownership), and creating a pool as a real-time spot market.
As a result, the significant political power of the electricity supply industry has dissolved. The industry has also become more efficient. The CEGB employed 48,000 people; its successor companies employ 25,000. Plans for three nuclear plants and six 900-MW coal units were scrapped in favor of 13 gigawatts of combined-cycle gas turbines, which were built economically and speedily. A major cultural change has occurred within the electric companies. Now that they are commercially oriented rather than engineering dominated, they think.
In the 1980s, the Norwegian government encouraged rationalization of the ESI into vertically integrated undertakings. Norway's 1990 Energy Act introduced competition "to run distribution more efficiently . . . to make power production more efficient . . . to achieve more efficient development and on the right scale." Although it did not privatize Norway's mainly state- and municipally owned industry, the Act opened all the wires to access by any generator or customer. It also introduced a new regulatory framework that requires accounting unbundling of generation, transmission, distribution and supply, and incorporates provisions for price control over the wires (but not over generation or the supply of electricity). In 1991, the government created a separate government-owned grid company, Statnett SF. Norway's pool (which was created in 1971 with membership limited to generators) was also opened to all parties, including traders. Wholesale prices now range about a fifth lower, exerting considerable pressure on some companies to increase efficiency. Tariffs have also been rebalanced to reduce the subsidy to domestic customers.
Lukewarm Followers
The Swedish and Finnish governments quickly determined to follow Norway's suit, although prices in both countries are low. In 1991, the Swedish government created a separate grid, Svenska Kraftnat. In June 1994, Sweden's parliament passed an act opening access, but the recently elected government has decided to wait until 1996. Finland's state power company Imatran Voima Oy (IVO) put its grid into a separate subsidiary; in September 1994, the government introduced a bill to open access. The government may privatize IVO in due course.
The evolution of change in continental Europe has made interesting politics. The 1985 Single Act extended the concept of the internal market to include energy. Then, in 1988, the European Commission tried to sell member states on the idea of an "internal market in energy by the end of 1992." To the electricity industry, this seemed tantamount to introducing "third-party access" (em that is, allowing large customers and distribution companies to shop for power. Continental utilities manned the barricades.
On behalf of German utilities, the Vereiningung Deutscher Elektrizitatswerke expressed its opposition to what it regarded as a "violation" of the property right of exclusive use of wires. It further argued a need for franchises to ensure that "new power plant and system capacity can be built to allow for future need." Eurelectric, the association of European electric utilities, repeated the discredited arguments that the CEGB had used against competition (em empty rhetoric about "energy policy" clothing naked political interests and fear of change.
Political cracks began to appear as Dutch distributors argued for competition. The current state of play is a proposal for phased access at an undefined future date, when many of those in management will have retired. The German Minister of Economic Affairs has declared himself in favor of deregulating the system, but the change raises difficult legal and constitutional issues. In November, Italy's Trade and Industry Ministry and Treasury published an agreement to introduce competition and to sell part of the generation capacity of the state power company (ENEL) separately from the grid and distribution. But given its unstable government, what will happen and when is anyone's guess. Even "socialist" Spain is fielding proposals that would allow independent power producers to sell to customers, which could lead to the breakup of its current state mechanism for controlling the largely privately owned monopoly electric companies. That leaves lectricit‚ de France (EDF) effectively blocking change in Europe by advocating a mechanism that emasculates proposals for an integrated energy market. (This so-called "single buyer" approach would create a national power procurer that invites bids from competitive independent power projects and effectively precludes retail bypass.) Other countries are understandably reluctant to open their markets to EDF without reciprocity.
Clearly, the competitive story is far from over. And while change is inevitable, progress is not. Time alone will tell whether competition in power is merely a passing fashion or part of an enduring trend toward greater customer choice and less political control.
Alex Henney is director of European Energy Economics Limited and the author of A Study of the Privatisation of the Electricity Supply Industry in England & Wales.
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