Privatisation of Energy -New

8/9/2019 Privatisation of Energy -New

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BP 9, F-01211 Ferney-Voltaire Cedex FRANCE - Tel : 33 4 50 40 12 14 - Fax : 33 4 50 40 73 20 - [email protected]

PSIRU

Business School, University of Greenwich, Park RowLondon SE10 9LS, U.K.

www.psiru.org [email protected]

Tel: +44 (0)208-331-9933 Fax: +44 (0)208-331-8665

Director: David Hall

Researchers: Robin de la Motte, Jane Lethbridge, Emanuele Lobina, Steve Thomas, Violeta Corral

Public Services International Research Unit (PSIRU) is part of the Business School at the University of Greenwich (www.gre.ac.uk). PSIRUs

research is centred on the maintenance of an extensive database on the economic, political, social and technical experience with privatisation and

restructuring of public services worldwide, on the multinational companies involved, and on the impact of the policies of international nancial institutionsand the European Union, especially in water, energy and healthcare. This core database is nanced by Public Services International (www.world-psi.

org), the worldwide confederation of public service trade unions. PSIRU is the coordinator of the Watertime project (www.watertime.org), funded by the

European Commission research directorate under FP5: Energy, Environment and Sustainable Development, Contract No: EVK4-2002-0095.

Resistance and alternatives

to energy privatisation

by David Hall [email protected]

Steve Thomas [email protected]

andKate Bayliss [email protected]

December 2002

A report commissioned by Public Services International


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Resistance and alternatives to energy privatisation

1 INTRODUCTION...................................................... ................................................................ .............................. 3

1.1 ELECTRICITY PRIVATISATION/LIBERALISATION AND ITS PROBLEMS.......................................................... ......... 31.2 REFORMS AND ALTERNATIVE REFORMS....................................................... ................................................... 3

2 RESISTANCE............................ ................................................................ .............................................................. 5

2.1 COMPOSITION AND TECHNIQUES OF RESISTANCE...................................................... ......................................... 52.2 RANGE OF COUNTRIES............................................................... ................................................................ ......... 5

3 ALTERNATIVES...................... ................................................................ .............................................................. 6

3.1 THE PRAYAS CRITIQUES AND THE ALTERNATIVETAP APPROACH ............................................................ ......... 63.1.1 TAP in practice participative democracy .......................................................... ........................................ 63.1.2 TAP and trade unions - proposed reforms for MSEB ............................................................... ................... 7

3.2 WRI APPROACH: GLOBAL SUSTAINABLE AND SOCIAL DEVELOPMENT OF ENERGY............................................. 73.3 THE MONOPOLY ELECTRICITY SUPPLY MODEL.......................................................... ......................................... 8

3.3.1 Private ownership improves efficiency ...................................................... ................................................... 83.3.2 Government interference ................................................................ .............................................................. 93.3.3 Corruption ...................................................... ................................................................ .............................. 93.3.4 Financing investment needs............................................................ .............................................................. 93.3.5 Inefficient pricing....................................................... ............................................................... .................. 103.3.6 Summary ......................................................... ................................................................ ............................ 103.3.7 What other issues does the privatised model of electricity supply industry raise? ..................................... 11

4 CASES .............................................................. ............................................................... ....................................... 134.1 AUSTRALIA .......................................................... ................................................................ ............................ 134.2 SOUTH KOREA ................................................................ ............................................................... .................. 134.3 CANADA .............................................................. ................................................................ ............................ 134.4 USA........................................................... ............................................................... ....................................... 144.5 INDIA ......................................................... ............................................................... ....................................... 15

4.5.1 Withdrawal of AES from Orissa ................................................................ ................................................. 154.6 SOUTH AFRICA................................................................ ............................................................... .................. 16

4.6.1 Eskom and the successful extension of rural electrification ...................................................... ................. 164.6.2 Trade union development of alternatives through education...................................................................... 17

4.7 MEXICO ............................................................... ................................................................ ............................ 184.7.1 The Mexican electricity industry........................................... ............................................................... ....... 18

4.7.2 The privatisation of the electricity industry .......................................................... ...................................... 184.7.3 Assessment ...................................................... ................................................................ ............................ 194.8 BRAZIL....................................................... ............................................................... ....................................... 19

4.8.1 The Brazilian electricity industry.............................................................. .................................................. 194.8.2 The privatisation of the Brazilian electricity ........................................................ ...................................... 194.8.3 Assessment ...................................................... ................................................................ ............................ 204.8.4 Consumer prices ........................................................ ................................................................ ................. 204.8.5 Conclusions........................................................................... .............................................................. ........ 21

4.9 SENEGAL.............................................................. ................................................................ ............................ 214.10 BOTSWANA .......................................................... ................................................................ ............................ 214.11 NAMIBIA .............................................................. ................................................................ ............................ 22

5 NOTES.............................. ............................................................... ................................................................ ....... 23

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1 Introduction1

1.1 Electricity privatisation/liberalisation and its problemsThe privatisation and liberalisation of electricity has been happening in many countries for over a decade.There are three key elements, which may be combined in various ways:

Privatisation effective ending of public (state, municipal, regional) ownership

Deregulation weakening of public authority powers to control prices, service levels

Liberalisation opening market to public/private companies to sell electricity as a commodity

This global trend has been implemented in various ways in different countries. For example: deregulationlaws (USA); unbundling public monopolies and liberalisation (EU directive); privatisation of state-ownedoperations (UK, Spain, Hungary, Brazil, Georgia, Dominican Republic); licensing of IPPs (Thailand,

Indonesia, Pakistan, India etc).

Governments have been heavily influenced in adopting these policies by three important international forces: The expansion of multinational energy companies into new markets The conditionalities of the IFIs eg World Bank privatisation as a condition of WB loans International trading rules, including the EU trading rules, the free trade provisions in NAFTA, the

Energy Charter Treaty, the GATS provisions of the WTO

The multinationals have grown from bases in both Europe and the USA. In Europe, ownership of energycompanies has become rapidly concentrated in the hands of three major companies, EdF, RWE and E.on,and a few smaller ones Tractebel (Suez), Vattenfall, Endesa, and Enel. In the USA, two of the most activeMNCs, Enron and AES, did not start as electricity companies, but gas companies. Enron has now collapsed,and AES is in major difficulties. Other USA companies have expanded abroad, and subsequently sold theiroperations and retreated to the USA: these companies include Mirant (Southern), Reliant, GPU, Entergy,TXU, and others.

Privatised and liberalised electricity systems have encountered many problems in many countries. Theseinclude the creation of private monopolies or oligopolies (eg Germany, EU) , wholesale price hikes andpower shortages (eg California), higher retail prices (eg Georgia), governments carrying risks (eg India).These have been presented in other PSIRU papers, notably on IPPs 2, distribution companies3, California 4,Africa5 , Enron6 , AES (forthcoming) , a series of papers on the Uk experience 7, the EU in general andcentral and eastern Europe 8 . This paper refers to these problems but does not repeat a comprehensiveassessment of them

1.2 Reforms and alternative reforms

Developments in electricity are often presented in a simple moral fashion - the liberalisers advocate areform process, while their critics are resisting this reform. This kind of presentation assumes thatliberalisation and privatisation are the only possible solution to all the issues facing the industry, whateverthey are. A more realistic approach is to ask simply, what are the public policy objectives of the electricitysystem, and how can they best be met? This allows for a range of possible answers, which may or may notinvolve changing the ownership or governance structures, may or may not involve private finance, and so on.

So the rest of this paper looks at a range of examples of how reforms based on liberalisation andprivatisation have been resisted, and the range of alternatives that have been proposed. It looks at thecountries where there has been resistance, the types of campaigns and at what has happened where

privatisation programmes have been abandoned or collapsed. In all cases the process has been a political one,

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in which various groups are engaged, both from the country in question and internationally. There are veryfew examples of successful resistance or alternatives without engaging political allies.

In some cases, these alternatives have consisted of simply defending the existing system which, dependingon the objectives and the actual performance of the system, may be a reasonable option. For example, wherea new IPP is proposed, which may cause environmental damage and for which there may be no demand, thebest alternative may be simply no new power station at all. But in many cases, the alternatives beingexplicitly or implicitly advanced include changes but different changes from the liberalisers.

It also looks at alternative policies for running electricity system, because there are very definitelyalternatives to privatisation, liberalisation, IPPs etc. The electricity systems of nearly all countries have beendeveloped historically by a model based on public ownership and cross-subsidy, implemented in a range ofways. By contrast, the neo-liberal political programmes which brought in these policies are less than 20 yearsold, and still owe more to theory than practice. Different policy concerns have also been raised morerecently, notably for environmental issues pollution, nuclear risk, the desirability of renewables and forgreater transparency, openness and public participation. So privatisation and liberalisation are not the onlysolution and their concerns are not the only agenda.

Privatisation and liberalisation are supposed to address a number of issues, including:

investment in new (or modernized) generating capacity needed to meet demand dealing with inefficiency: eg reducing costs (diagnosed as too high), improving administration eg of

billing; sounder pricing policies (diagnosed as distorted by political factors)

These issues of investment and inefficiency need to be addressed , regardless of the solution proposed.There may be disagreement about the diagnoses, however: for example, evidence does not support the claimthat private energy companies are more efficient than public ones; the forecast demand for electricity mayfail to take account of the possibilities of energy-saving efficiencies, and, if tied to a long-term powerpurchase agreement, may make it impossible to take advantage of future technical advances.

And there are other issues, not usually addressed by the pro-liberalisers, which are seen as important bymany people. These include:

Social and development issueso Extension of the network to connect the unconnectedo Affordable and sustainable prices for energyo Employment levels and conditions

Environmental issueso Pollution and emissions in generation (coal etc)o Problems of nuclear powero Renewable sources of energyo Energy efficiency scope for reducing consumption of energy

Democratic issueso Public accountability - of policies, delivery, prices, reliabilityo Transparencyo Public participation

This democratic dimension is of particular importance. The neo-liberals usually identify politicalinterference as one of the problems with electricity systems, and usually point to examples of politiciansimposing tariff policies to maintain their electoral popularity rather than to improve the public electricitysystem.

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2 Resistance

2.1 Composition and techniques of resistance

Resistance to energy privatisation has come from a wide range of civil society groups, including: tradeunions, community organisations, environmentalists, consumer organisations, and political parties. In some

cases there have been widespread public protests by people as consumers or citizens.

The issues involved include: prices, reliability, jobs, local impact of IPPs, environmental policy, publicaccountability, national control, corruption.

The techniques used have included: strikes, community mobilisation, demonstrations, electoral campaigns,court cases, research, publicity, international pressure.

2.2 Range of countries

Resistance has taken place in many countries, both developed and developing. The examples shown in thetable include campaigns for alternatives to privatisation which could be described as successful in terms of

their own objectives. In some cases these were local issues, concerning one power station eg the Cogentrixcampaign in southern India - or a single citys utility, such as the Emcali campaign in Colombia; in othercases they covered a whole country, such as the campaigns in Mexico. They include cases where existingsystems have been successfully defended so far, while developing and extending services, such as SouthAfrica. And they include cases where privatisations have failed to take place or rolled back, such as Senegal.

Country Year Location Issue Techniques Actors

Australia 1999 NSW Corporatise not privatizestate utility

Electoral activity, publicity Unions, political parties,NGOs

Brazil Ongoing Nationaland local

Oppose privatization ofutilities, generators

Electoral activity, publicity,strikes

Unions, political parties,NGOs, consumers

Canada 2002 Ontario Court rules against

privatization of utilityOntario Hydro

Court action, publicity Union, NGOs

Colombia 1997-date

Cali Oppose privatization ofmunicipal utility Emcali

International publicity, strikeaction

Unions, communityNGOs, internationalNGOs,

France Ongoing National Keep unified state companyEdF

Publicity, electoral activity, Unions, political parties

India 1996-date

Maharashtra Oppose Dabhol IPP (Enron) International publicity,research, demonstrations,strikes

Community NGOs,environmentalists,energy NGO

India Ongoing Maharashtra Democratisation notprivatization of state utilityMSEB

Research, publicity, publichearings

Energy NGO,community NGOs,unions,

India 2000 Karnataka Opposition to Cogentrix IPP

plan

Research, publicity,

demonstration etc

Environmentalists,

community NGOsIndonesia Ongoing National Prosecution of IPPs for

corruptionNegotiation, publicity, courtcases

Public authorities,unions, international

Mexico Ongoing National Oppose privatization ofelectrical utility

Strikes, research, publicity,demonstration, internationalpublicity

Unions, political parties,NGOs, international

Pakistan Ongoing National Prosecution of IPPs forcorruption

Strikes, research, publicity Unions, political parties,NGOs, international

Senegal 2001 National Termination/collapse ofprivatization plans

Negotiation, Strike action Political party, unions

South Africa Ongoing National Keep unified public utilityEskom

Strikes, demonstrations Community NGOs,unions,

USA 2000 California Los Angeles utility avoidspower crisis

Electoral activity, publicity Political parties,consumers, unions,

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3 Alternatives

3.1 The Prayas critiques and the alternative TAP approach

An extremely interesting critique and alternative approach has been developed by the Indian energy groupPrayas, whose reports can be seen at www.prayaspune.org .

Prayas agrees that there is a crisis in the power sector in India, but identifies it differently.9 Firstly, theyassess the achievements of the existing model, based on state ownership, self-sufficiency, and cross-subsidyto agriculture and households. In 50 years, capacity has increased 55 fold, with 78 million customers, andhalf a million villages connected. There are however limits to these achievements, and real problems in thesector: half the population is still unconnected, and there are power shortages, weak accounting andmetering, and huge financial losses.

Prayas criticises the WB policies introduced in India for a number of reasons: . their preoccupation with the

financial crisis, and sole emphasis on "State-Control" & "Public Ownership" as the root causes; itssusceptibility to capture by economic interests; its negative impact on development, by treating electricitysimply as a commodity; taking energy out of the sphere of democratic debate.

Prayas sees a threefold crisis: a financial crisis , a crisis of performance, and a crisis of governance withvested interests controlling decision-making, and a breakdown of mechanisms for transparency,accountability, and participation (TAP). Prayas reinforces the importance of TAP in its lessons from theEnron debacle (which hit Maharashtra through the Dabhol power plant):

This leaves us no choice but to give centrality to the public-friendly TAP provisions in our efforts to reformand restructure the Indian power sector. This is necessary to permanently stem out the possibility of take-over of the sector by the unholy alliances. This, in turn, would require that all the governance functions and

governance agencies are made amenable, on mandatory basis, to full transparency to the public, directaccountability to public, and meaningful participation of public. This task of democratizing the sectorthrough public-friendly TAP - which, prima-facie, appears to be a Herculean task - needs to be handled in asystematic manner. The three major governance agencies - the state, the utilities, and the regulatorycommissions - could be TAPed in a variety of ways. However, the space and capabilities of civil societyinstitutions will be the important determinants of successful TAPing of these agencies. Improving on boththese counts in a rapid manner is the main challenge facing the civil society in this country. Anotherchallenge before the civil society in this country is to resist the attempts by the vested interests to urgentlybulldoze major and irreversible changes in the structure and frameworks (including the ownership patterns)in the sector.10

Prayass alternative sets out a Desirable Path , with the key elements of :

TAP (complete Transparency, direct Accountability to public, and meaningful public Participation)

Effective, Public-Controlled, Sabotage-Safe, Regulation

Energy as a developmental input, not a commodity

State-Support

Capacity to deal with fundamental issues (such as environmental sustainability, price-stability,technological upgrading, sectoral efficiency

3.1.1 TAP in practice participative democracy

Prayas has been involved in actively creating participative policy-making processes, firstly through theengagement with the Maharashtra public debate over price rise proposals in 2000.

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http://www.prayaspune.org/http://www.prayaspune.org/


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The Maharashtra Electricity Regulatory Commission (MERC) followed the TAP principle to facilitate a hikein the electricity tariff during 1999-2000. The MERC published a gist of the proposal for tariff hike in scoresof newspapers all over the State. In response, it got a total of 468 objections, in the form of affidavits orplain letters. This is the stage at which the Commission made a vital move. Instead of internally processingthese objections, it launched a process of public hearings all over Maharashtra - five hearings at divisionalheadquarters and three in Mumbai.

Prayas and other groups, like the Mumbai Grahak Panchayat, got intensely involved in providinginformation and pushing for rigorous transparency. Thus the open-to-public proceedings produced a wealthof detailed information which compelled the MSEB to admit the errors in its own data, projections andanalysis. Over a period of six months the MERC, the MSEB and the public virtually worked together toformulate a tariff hike of 6.5 per cent, instead of the original MSEB proposal for 18 percent. Apart from thisdirect monetary benefit to the consumers, there are other vital gains from this exercise. According toShantanu Dixit, this process showed how the MSEB had for years maintained that there was a 17 per centloss in transmission and distribution, but the public process compelled the MSEB to accept that these lossesare actually around 30 per cent. These variances were so great that eventually the MSEB had to go back tothe drawing board and formulate a whole new proposal. Even this revised tariff hike proposal was thrownopen to public scrutiny and only then approved in May 2000.

Shirish Deshpande, of the Mumbai Grahak Panchayat, is confident that this process has established valuableprecedents for TAP to become a way of life in Maharashtra and in other States. But, he is quick to point out,the picture is not entirely rosy. There could be attempts by narrow vested interests to dilute the autonomy ofbodies like MERC. These dangers can be warded off only by vigorous and systematic intervention ofcitizens.11

3.1.2 TAP and trade unions - proposed reforms for MSEB

In 2002, Prayas developed an alternative plan for the restructuring of MSEB, along with the trade unions12.The plan outlined a new Public Control Model for the MSEB, involving 3 key parties the StateGovernment, MSEB itself, and the unions and a set of agreed elements:

Concrete & Quantitative Targets for Performance Improvement (bill recovery, reduction intransmission and distribution losses, availability etc)

Operational & Procedural Measures (TAP Participatory Process, regulation)

Commitments about Duties & Obligations (government to pay subsidy on time)

Disincentives and Penalties .

3.2 WRI approach: global sustainable and social development of energy

A report from the World Resources Institute in 2002 looked at the recent experience of six countries Argentina, Bulgaria, Ghana, India, Indonesia and South Africa. The report examined how the process ofreforming the electricity sector can support rather than hinder promotion of sustainable development, and

achieving social and environmental goals.13

It identified major problems with the goals and processes of electricity reform in nearly all the countrieswhich they studied: By focusing on financial health, reforms in the electricity sector have excluded a rangeof broader concerns also relevant to the public interest. In this study, we have examined the social andenvironmental concerns at stake in these reforms. We have found that not only are they inadequatelyaddressed, but that socially and environmentally undesirable trajectories can be locked-in throughtechnological, institutional, and financial decisions that constrain future choices. The report put forwardfour clear recommendations for what it calls a progressive politics of electricity sector reform:

1. Frame reforms around the goals to be achieved in the sector. A narrow focus on institutionalrestructuring driven by financial concerns is too restrictive to accommodate a public benefits agenda. To

build a framework that includes such an agenda requires an articulation of the services that a reformed sectoris intended to provide and the means by which it should do so. While donor agencies often play a central role

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in initiating reform, they must step back during the process of defining goals to allow a nationally-drivenvision of reform to emerge.

2. Structure finance around reform goals, rather than reform goals around finance. Reform processes havecatered to a need to attract private capital. Since sustainable development may not always be aligned withshort-term profit motives, reform processes must move beyond the imperative of attracting capital. Whilethis may seem a farfetched notion in capital-constrained developing countries, the time may now beopportune to change the terms on which private capital enters a country. Efforts to attract capital through riskmitigation and tariff increases have not won popular backing, and as a result have not been politicallysustainable. A broader vision of reform and a public consensus supporting that vision could lower theserisks. Private capital may be willing to accept more realistic financial returns, if they are combined with lessrisk. Political legitimacy in a reform program, tied to some innovation in mechanisms for raising finance,may be a more promising route than tailoring reforms to short-term profit horizons.

3. Support reform processes with a system of sound governance. An open-ended framing of reforms willreflect public concerns only if it is supported by a robust process of debate and discussion. Hence, a thirdimperative is to embed debate over electricity sector reforms in a sound process of decision-making guided

by transparency, openness, and participation. Such an approach is more likely to provide the political spacefor articulation of a range of public concerns than have the closed processes prevalent thus far. It is also morelikely to build public consensus in support of reforms, making for a more politically sustainable process.

4. Build political strategies to support attention to a public benefits agenda. It is important that publicbenefits advocates strengthen political coalitions supporting sustainable development and counter thosefavouring parochial interests. In particular, the case studies suggest that social concerns carry far morepolitical weight in a national context than do either local or international environmental issues. Efforts toexploit links between social and environmental agendas would likely be a useful political approach.

3.3 The monopoly electricity supply model

There have been a variety of motives for restructuring electricity industries, but these motives have often hadlittle to do with the electricity industry as such. For example, motives include raising revenue from the saleto pay for tax cuts or to repay loans from international financial institutions (IFIs), or reducing trade unionpower. However, a number of specific issues are frequently cited as justifying the restructuring andprivatisation of publicly-owned electricity industries. These include:

Privately owned companies are more efficient than publicly owned companies;

Governments inevitably interfere counterproductively in the operation of publicly owned companies;

Particularly in developing countries, publicly owned companies are susceptible to corruption bypublic officials;

Public spending restrictions mean that publicly owned companies are not able to finance system

expansion, particularly in developing countries where demand is still growing rapidly; and Pricing is inefficient, for example, providing power at unsustainably low levels for poor consumers.

3.3.1 Private ownership improves efficiency

For many free market economists, especially those of the Chicago School, one of the key inspirations forprivatisation, privately owned companies are inevitably more efficient than publicly owned companiesregardless of whether the system they operate under is competitive or monopoly. However, there is noempirical evidence to support this hypothesis. Comparing the efficiency of electricity industries in differentcountries is notoriously difficult, but evidence from about a decade ago suggests that prices in publiclyowned companies may, on average, be somewhat lower than those of privately owned companies.

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Amongst the electricity industries that have been restructured under competitive lines, by common consent,the Nordic countries have been most successful so far. However, this has been with minimal change inownership, with public ownership, both national and local, as the dominant form of control.

3.3.2 Government interference

Government intervention in publicly owned utilities is often characterised as interference, with the negative

connotations that go with that. Clearly, repeated and arbitrary intervention in electricity industries bypoliticians can have detrimental effects on the management of the companies, but in many cases, interventionis both justifiable and desirable. As owner of the company, government has the right to exercise control overits investments if things are going wrong. Shareholders in private companies are often quick to respond topoor company performance by requiring changes in the management of the company or strategic changes indirection. This is not generally characterised as interference even though private investors are frequentlycharacterised as short-termist because of their demands for quick returns at the expense of pursuing long-term strategies.

Governments might also intervene to achieve broader policy aims, for example, controlling inflation,promoting local capabilities or reducing environmental impacts. While the effect of such policies on theelectric utility might, on balance, be negative, if the net effect on the economy as a whole is positive, suchinterventions would appear justifiable. This is not to argue that all such interventions are justifiable, andgovernments do need to consider very carefully the cost-benefits .

3.3.3 Corruption

It is clear that corruption of public officials does occur and equally, it is clear that officials in privatecompanies can also be corrupt or that companies might operate policies that at best are ethically dubious tomaximise shareholder value. None of these practices is desirable. There is however evidence thatprivatisation increases the opportunity and the incentive for companies to pay bribes in order to get contractson the most favourable terms.

3.3.4 Financing investment needs

This is one of the most commonly used justifications for privatisation and is one that requires careful

consideration. Particularly in developing countries with rapidly growing economies, the investment needs tofinance a system that might be growing at seven per cent per year (doubling in size every decade) areconsiderable. This raises two questions: Can publicly owned utilities finance expansion? And wouldprivately-owned companies provide a reliable source of investment?

In most developed countries, electricity demand grew at about seven per cent per annum for 60 years ormore, in many cases with investment being funded by publicly-owned utilities. Clearly for countries thathave limited access to investment capital, for example due to restrictions imposed by the IMF, this maycomplicate the issue. However, in countries such as Mexico and Brazil, there is evidence that the problem isnot so much externally imposed restrictions as internal restrictions perhaps with a covert aim of apparentlyproving publicly owned companies could not do the job, opening the way for ideologically inspiredprivatisation.

The evidence that private companies will be more reliable suppliers of investment capital than publiccompanies is equally contentious. The first obvious point to make is that privatisation, by its nature,channels foreign investment into purchase of existing assets. If the priority is really to stimulate newinvestment, it would seem to make more sense to design a system to channel foreign investment into thisarea, not simply to transfer ownership of existing assets.

The extent to which companies are obliged to invest depends on how far monopoly powers are retained.Monopoly utilities operate under a tacit regulatory bargain. The companies that own and operate the systemare given monopoly privileges that guarantee their market and their income, and in return they are obliged toinvest sufficiently to ensure the continuing reliability of the electricity supply system. However, mostelectricity reforms do not overtly aim to change electricity supply from a publicly owned monopoly to aprivate monopoly owned by foreign investors.

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While investment needs to expand the network are not negligible, it is investment in new power plants thatrepresents the majority of investment in the electricity industry. Most restructurings entail the creation ofsome form of wholesale electricity market and, in a market, competitors have no obligation to invest. Aswas amply demonstrated in Brazil and California, if there are no requirements on generation companies toinvest, companies will not do so unless investing in new generating capacity improves their profitability.Ironically, in a market, shortages lead to high prices, so existing generators have a strong incentive not toinvest, because investment in new capacity will tend to reduce prices and hence profits.

3.3.5 Inefficient pricing

From a theoretical economics perspective, consumer prices should be based on the costs the consumerimposes on the system and cross-subsidies should be avoided. This should give consumers accurate pricesignals on which to base their electricity purchasing decisions. If electricity prices are too low, consumerswill consume at higher levels than is sustainable and if they are too high, consumers will spend more than is

justified to avoid electricity consumption. Prices should also reflect long-run marginal costs (LRMC), togive consumers signals about the direction prices are likely to take.

While the theory is simple, even in an ideal system, practice is not. In a network industry where facilities areshared it is difficult to allocate demand to a particular customer, and so pricing is inevitably not an exactscience. LRMC pricing is equally contentious and forecasts of the technological direction of industry and ofthe price of fuels have seldom been accurate. For example, for decades, it was assumed that cheap nuclearpower would be the future for the electricity industry. It is now clear that nuclear power is neither cheap, norwill it inevitably represent the dominant future source of electricity. While cross-subsidies are economicallyinefficient, they have been successfully used throughout the world to allow connection of new consumers tothe network. If new consumers always had to pay the full economic cost of being connected to the network,the coverage of the electricity industry would be much less than it is today.

In theory, a monopoly system has advantages in price-setting. A monopoly electric utility is generallyguaranteed its income and therefore has no a priori incentive not to price efficiently. In practice, there arepolitical pressures that may mean that an ideal pricing strategy is not followed. Electricity-intensive

industries are highly dependent for their survival on having access to electricity at low prices and they areoften able to exert pressure, either directly on the utility or indirectly via politicians to get access to power atsub-economic prices. Politicians may also require poor consumers to have access to cheap electricity as ameasure to alleviate poverty. Typically, this cheap electricity for electric-intensive industries or for poorconsumers is paid for by cross-subsidies from other consumers.

Market economists argue that in a perfect market, prices would tend towards the ideal. However, given thatno market, much less the wholesale electricity market, has ever achieved the requirements for a perfectmarket, i.e. atomistic competition, perfect information, negligible barriers to entry and exit, etc, it cannot beassumed that opening the sector to competition will result in efficient prices.

Barriers to entry for new generators are high and, if unchecked, generators will be able to exploit this to

make excessive profits. In most areas, having a sufficient number of generators to achieve atomisticcompetition is unrealistic and the industry will be in danger of being an oligopoly. The lowest prices willtend to go to those with most negotiating power, which means large consumers. Small consumers do nothave the information or the incentive to force electricity suppliers to supply at the lowest prices.

3.3.6 Summary

Overall, there are clearly issues that arise from organising the electricity industry as a publicly ownedmonopoly. However, it is far from clear that transforming the industry into one owned by internationalprivate companies operating in market (or pseudo-market) conditions will necessarily solve these problems.In many cases, the change will introduce a new set of problems, no less intractable than the old problems, butwithout the advantage of democratic control.

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There is no evidence that private ownership,per se, is more efficient than public ownership, while corruptionof public officials needs to be tackled directly, not by reducing the areas in which corrupt officials canoperate.

Many of the problems of publicly owned monopoly utilities are related to the relationship betweengovernment and utility, and the need to provide a proper framework within which the electric utility ismanaged. Government intervention is not wrong as such, but there needs to be a framework that preventsarbitrary and disruptive interference. Equally, cross-subsidies can be easy and effective ways of meetingwider policy goals, but they need to be under continual review to ensure that they do not become fossilisedand no longer meet their objectives.

3.3.7 What other issues does the privatised model of electricity supply industry raise?

In the previous section, we examined the problems that are commonly attributed to publicly ownedelectricity industries organised under monopoly lines and the extent to which privatising and introducingcompetition would solve these problems. It concluded that on issues such as corruption, efficiency, securityof investment funding, efficiency of pricing and interference in the management, it was far from clear thatthe privatised competitive model would solve these issues. However, privatisation and introducingcompetition raises a whole new set of issues. These include:

Protection of poor consumers

Will the benefits of competition outweigh the costs?

What other risks are introduced? And

Loss of local skills and capabilities.

3.3.7.1 Protection of poor consumers

In a monopoly industry, ensuring the protection of poor consumers is administratively easy. A well-regulated monopoly utility is ensured that it will be able to recover its costs and so it therefore has noincentive not to serve poor consumers. If necessary, the cost of power can be subsidised by central

government or by cross-subsidies from other classes of consumer. In theory, direct subsidies by governmentare more efficient because they do not distort the pricing structure for other classes of consumer. However,in practice, government subsidies may be subject to budgetary pressure and may not be as reliable as cross-subsidies.

If retail competition is introduced, ensuring that small consumers, and poor consumers in particular, benefit,becomes more difficult. If part of the market, large consumers, is open to competition, retail suppliers willtend to offer them lower prices than to those offered to their captive consumers in an attempt to retain thismarket. In Britain in 1997, medium and large industrial consumers were able to choose their electricitysupplier, but small consumers were still captive to their regional company. Regional companiessystematically allocated their cheap wholesale electricity purchases to industrial consumers and their

expensive purchases to the captive market. As a result, small consumers paid about 30 per cent more forgeneration (about 50 per cent of the overall bill) than large consumers. This discrimination between classesof consumer could have been overcome with more rigorous regulation, but cross-subsidies to poorconsumers would have been difficult to arrange.

However, the problem becomes much more severe if competition is extended to all classes of consumer. Insuch a free market, no one supplier can easily be given the responsibility to supply poor consumers. In a freemarket, retail suppliers cannot be forced to serve all classes of consumer and prices will be set by the market.Retail suppliers will target the most profitable consumers and poor consumers, with low bills and who oftenhave accumulated debt will not be attractive to suppliers and will have to pay higher prices.

3.3.7.2 The costs of competition

It is often (unknowingly) assumed that competition is a free good and that as a result of the effect ofcompetition forcing down prices, a competitive market will always produce lower prices than a monopoly

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market. For many goods and services, the costs of competition may be relatively low and easily paid for bythe benefits of competition, but for electricity the costs of competition are diverse and substantial.Inevitably, they will tend to fall on consumers. They include:

3.3.7.2.1 A risk premium on investment.

In a competitive market, investment is risky and the cost of borrowing will be correspondingly higher to payfor this risk. In a capital-intensive industry like electricity, increasing the cost of capital is bound to have asignificant impact on prices. In Britain, the monopoly National Grid Company is allowed to make an annual6.25 per cent real rate of return on investment, while investment in new power stations typically has to makea real annual rate of return of 15 per cent or more.

3.3.7.2.2 Advertising and marketing

In a monopoly market, advertising and marketing costs need not be incurred. However, in a competitivemarket, the cost of acquiring new consumers is substantial. For example, in Britain, retail supply companiesare prepared to pay up to 200 to acquire a new residential consumer, equivalent perhaps to the entire annualcost of electricity.

3.3.7.2.3 Economies of scale and avoidance of duplicationA primary justification for the nationalisation of many electric utilities was that by centralising andconcentrating the industry, scale economies would be achieved and wasteful duplication of facilities wouldbe avoided. In a competitive market, by definition, scale economies are not achieved and there willinevitably be duplication of facilities.

3.3.7.2.4 System development costs

In a monopoly system, billing costs are low, but in a competitive market, costs can be substantial. This ispartly because of the difficulty of measuring consumption. For example, in Britain, the cost over five yearsthat will be passed on to consumers for introducing retail competition for small consumers is about 720m.The new wholesale electricity market implemented in Britain in 2001 may cost in excess of 1bn over five

years. These costs cover mostly the development and operation of computer systems to record and allocateeach consumers consumption and also the cost of collecting consumption data.

3.3.7.3 Other risks

Allowing the electricity sector to be fragmented and to fall into international hands introduces risks that donot arise or which are minimal if the industry is owned by local companies. A major risk, particularly forcountries that do not have stable economies and currencies is the risk premium that international investorswill put on investment there. In many developing countries, economic growth rates and hence electricitydemand growth rates are unstable. This will make income from the electricity industry unpredictable.International investors will also want protection against the risk of devaluation of the local currency and willgenerally require that profits be guaranteed in US dollar terms. For example, in Brazil and Argentina, thelocal currencies fell in value to less than a half of their previous value against the dollar in recent years, butwithout a major increase in local inflation. This means that to maintain the value of profits in real dollarterms, profit margins will have to more than double. Where local companies are subsidiaries of internationalcompanies, there may be disruption if the parent company runs into difficulties elsewhere. For example, thecollapse of Enron caused difficulties in a number of countries where it owned subsidiaries.

3.3.7.4 Loss of local capabilities

In countries where the electric supply industry was dominated by a nationally owned company, this companywas generally one of the largest companies in the country. This often allowed a range of capabilities andskills to be developed. Within the electricity industry, the company could develop training programmes thatwould increase the level of local skills. It could also favour local suppliers of fuel, equipment or services tostimulate local capabilities and skills. An international company operating in a competitive environment willinevitably choose to buy at the lowest cost and unless the economics of local products or services are very

favourable, this will lead to the loss of these local capabilities to be replaced by products and services boughton international markets often from multinational companies. Thus, the UK coal and power station

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equipment supply industries have both been lost following the privatisation and restructuring of theelectricity industry there. While there may be justifiable criticisms of specific arrangements favouring localsuppliers, if well managed, such arrangements can be a useful tool to develop local skills and capabilities andimprove trade balances.

4 CasesThe cases given here illustrate a variety of aspects of resistance and alternatives, including:

Campaign strategies (Australia, Korea, Canada, India, South Africa)

Development of alternatives (Australia, India),

Strength of state or municipal models (South Africa, Botswana, Namibia, Mexico)

State capacity after privatization failure (Senegal, India (Orissa), California)

4.1 Australia

Elections in New South Wales, Australia, in March 1999 rejected the Conservative party, which wasproposing privatisation of electricity. New South Wales instead now has public sector corporatised EnergyCompanies, which now have a long future. 14 This follows similar election results in Tasmania, where the

Labour party defeated Conservatives proposing electricity privatisation; and electricity privatisation has alsobeen rejected in South Australia and Queensland, leaving Victoria as the only state which has privatisedpower.

4.2 South Korea

South Korean unions waged a long campaign against privatisation of electricity, gas and other utilities. Thecampaign included parliamentary pressures, general strikes and research, but not until recently did the unionsmake serious attempts to collaborate with environmental groups and others. The privatisation of theelectricity utility Kepco has started, at the end of 2002: the first generating subsidiary has been put up forsale to industrial investors. The opposition to gas privatisation has been successful so far.

However, South Koreas state-owned electricity companies already have solid international credit ratings andare able to raise money through international bond issues at favourable rates. In December 2002, KoreaWestern Power Co., a distribution company owned by Korea's state electricity company, sold $150 millionof five-year bonds yielding 1.65 percentage points more than U.S. government bonds of like maturity. KoreaElectric's 4.25 percent bonds due 2007 are yielding about 1.3 percentage points more than U.S. treasuries.The Korea Western bonds are rated BBB+ by Standard & Poor's, one grade below its parent. 15

4.3 Canada

In a landmark ruling on April 19, 2002, the Ontario Superior Court (in the province of Ontario, Canada)ruled that the provincial government has no authority to privatize the provincial electricity utility, known asOntario Hydro. The ruling came just one week after the CEP Canada and CUPE [Canadian Union of Public

Employees] first appeared in court to argue that the government was acting unlawfully by offering toabandon control of the second largest transmission company in North America to private and foreigninvestors.

In December 2001 the provincial premier, Mike Harris, announced that the government planned to sellHydro One. On March 28th 2002, the details of the proposed transaction were made public for the first time.CEP and CUPE went to court, arguing that the Electricity Act authorizes the Minister to "acquire" and "hold"shares in Hydro One on behalf of the Province of Ontario, but is silent on the question of selling them; andso specific statutory authorization is required before the government can sell Hydro One, which is estimatedto have assets worth $11.1 billion, and last year alone generated a net cash flow of almost $1 billion for thebenefit of Ontarians.

After closely reviewing the provisions of the Electricity Act, the Court concluded that the legislature did notintend to embark of a privatization program at this stage in the reorganization and corporatization of Ontario

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Hydro. the Court also noted that the purposes of the Electricity Act are set out in detail in the Act andprivatization is not among them. The Court concluded: I would have thought that the notion ofprivatization should have been set out in clear and unequivocal terms in the purposes portion of theElectricity Act, as were a whole range of other important social and economic matters. Privatization of along-standing important public institution, such as Ontario Hydro, is not something I would have thoughtwould or should occur without addressing the issue head on. The fact that it wasnt set out as a statedpurpose is consistent with the conclusion that the Electricity Act, as comprehensive a piece of legislation asit is, is not intended to deal with privatization, as such, let alone through any implied ability to alienatepersonal property as a natural person."

The Court also rejected the governments arguments that CEP and CUPE did not have standing to bring theapplication, holding that, while the unions and their members may not have a direct personal interest in thesale of Hydro One, they did meet the test for public interest standing. In this regard, the Court noted that theinterests of trade unions extend beyond the immediate economic interests of their members:"It has long since been recognized that unions have an interest in matters which transcends the realm ofcontract negotiation and administration... To borrow [from a case of the Supreme Court of Canada] theinterests of labour do not end at some artificial boundary between the economic and political. Inherent in

this proposition is the notion that interests of labour are expansive and are meant to include more that mereeconomic gain for workers. 16

4.4 USA

In 2000 in California there was a major crisis as a result of liberalisation. Wholesale prices were suddenlyforced upwards by a small group of companies which dominated the market. Prices to industrial consumerssoared, distribution utilities made huge losses, there were cutoffs and blackouts throughout California. Oneof the few areas to escape was Los Angeles, where the city had opted out of liberalisation and retained avertically integrated public utility.

The Municipal Utilities fared much better. Refusing to take part in the deregulation experiment, the LADWP [Los Angeles Department of W ater and Power] actually brought some generating plants out ofmothballs, foreseeing a power crunch. With careful planning, they have been able to keep prices to theirown consumers at reasonable levels and sell excess power on the PX to the other energy-starved, divestedprivate utilities. And of course on the PX they have been getting the same prices that the other generatorshave. The result has been a great surplus in their accounting, and they are considering passing on thebenefits of this by dropping their retail prices to consumers.17

The DWP has turned around the usual assumptions about the supposed superiority of private sector and freemarket approaches, and is now being treated as a model of a vertically integrated, municipally-owned utility.An article in the LA Times, entitled The Unexpected Hero set out the main features of this success.18

The contrast with other cities has been striking: ., by this summer, as San Diego Gas & Electric'sratepayers, the first to be exposed to market forces, faced a doubling, even tripling of their electric bills, theDWP's 3.8 million customers basked in low rates and a large power surplus. More remarkable, the DWP is

even being touted today as a model for proposed municipal utilities in cities hard-hit by escalating

electricity-rate increases.

The DWP's position is a product of longer-term policy and investment decisions. Since its creation nearly100 years ago, the department has made low-cost water-and-power reliability its policy cornerstone,originally through cheap hydroelectric power - by 1940, L.A. boasted the nation's lowest power rates.

By staying out of the market, the DWP has benefited its own finances as well as its customers. The DWPhas halved its debts since 1996, over the same period as the investorowned utilities have gone to the edge ofbankruptcy. It now sells surplus power to other utilities, accelerating debt payoff. It has added 960

megawatts of capacity by restarting mothballed plants, and has a 10-year, $1.7-billion capital program whichwill provide a further 2,900 MW of capacity.

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The DWP and other municipal companies have given their cities a competitive advantage over others : theDWP and other public utilities are the state's lowest-cost providers of electricity. They possess the reserves

needed to provide ultrahigh reliability to an electricity-dependent economy The high cost of electricity,

and the associated uncertainty, in deregulated regions will result in business and job losses to oases of low-

cost, reliable public power such as Los Angeles, Pasadena, Glendale, Burbank, Anaheim, Azusa, Vernon,

Riverside, Colton and Sacramento.

The success of the DWP in Los Angeles has now sparked a wave of demands for municipalisation ofelectricity in other cities. In San Diego, the San Marcos municipality has decided to create a municipalutility, and Chula Vista is considering one. A grass-roots movement for municipal ownership has started inthe San Francisco Bay Area, which faces the deregulated marketplace in 2002.

Contrary to conventional assumptions, the private operators have received subsidies while the municipaloperations have managed without any such subsidy: Under the 1996 law, investor-owned utilities receivedmassive state and ratepayer subsidies to pay off past debts. Today, these same utilities are petitioning state

officials for subsidized rate relief. Yet, L.A.'s Department of Water and Power and other municipal utilities

have not received one cent of state assistance for debt relief or rate stabilization. By staying the course ofreliability and foresaking deregulation, the DWP furnishes a valuable lesson in the tangible benefits of

public ownership.

New proposals for restructuring Californias electricity around public ownership and accountable planninghave emerged in the wake of the crisis. At the beginning of 2002, The Foundation for Taxpayer & ConsumerRights produced an analysis of the crisis that included proposals for reform of the system 19:

In the short term, the new California energy system should become a hybrid of regulated and publiclyowned power..California should have a plan to become the standard bearer of an efficient energysystem. The California agencies responsible for the energy system the PUC, the Power Authority and theEnergy Commission should develop an integrated resource and procurement plan, which will develop a

guide for Californias energy future. This plan will provide a publicly accountable system under which eachof the agencies, and the private entities that it regulates or otherwise oversees, will operate. The plan willidentify procurement guidelines to be followed by any entity (public or private) that buys power for utilitycustomers. . The plan will also be used to assess the energy needs for the state from a public interestperspective to ensure that the state maintains the appropriate mix of peaker and base load plants as well asrenewable and non-renewable resource powered plants. Through a combination of tax incentives andregulatory mechanisms, this plan should increase California's energy efficiency standards and its supply ofrenewable electricity sources. To ensure, for example, that the states electric grid is not dependent on onefuel source, such as natural gas, the plan should require that at least 20% of the electricity sold to retailconsumers must be from plants generating electricity using renewable sources.

4.5 India

4.5.1 Withdrawal of AES from Orissa

Orissa has been at the forefront of electricity privatisation in India. From 1994 a series of internationalconsultants recommended reform vertical unbundling, splitting of distributors, creation of IPPs, andprivatisation of the resulting companies.20

However, the initial euphoria that followed the start of privatisation in Orissa has started to wane as the statehas faced significant problems in the electricity sector resulting in wide-spread power cuts and priceincreases. 21

AES took over control of CESCO, one of Orissas four distribution companies, in September 1999. Itbought a 49% stake, with the other 51% owned by the grid company. In 2001 AES pulled out, and the state

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government took back control of the distribution utility CESCO. As a detailed report showed, AES presencehad worsened the problems of the distribution utility.

AES first test, a month after taking over, was the cyclone which devastated Orissa in 1999 which killed tensof thousands of people, destroyed homes and villages. The AES network (CESCO) was severely damaged,but AES said it had not insured the network and so either the Indian government should compensate AES forthe $60 million cost of rebuilding the network, or the people of Orissa should pay three times as much fortheir electricity. Dennis Bakke, CEO of AES, reportedly said "People have to bear the cost if thegovernment does not share the burden", he reportedly cautioned.22

Although the point of privatisation was to deal with financial crisis in the system, AES started defaulting intheir payments to the state-owned Grid Corporation of Orissa (Gridco) for bulk supply, which in turn meantGridco had no funds to buy the electricity. In early 2001Gridco initiated criminal proceedings but then thestate government stepped in and held discussions with the different parties. Power supplies remained poor,and a CESCO, office was attacked by demonstrators in Bhubaneshwar, the capital of Orissa , on 26th May2001 in protest at irregular power supplies. By July 2001, the chairman of AES had made it clear that theywere not interested in continuing with the management of Cesco. By then Cesco owed Rs. 577 crore.

The AES-appointed MD and other directors resigned in July 2001. They had left no instructions regardingbank accounts or paying of employees. In-house billing (and hence collection) came to a standstill since thecomputers in the corporate office were kept under lock and key. AES management pulled out at a time whenthe area had just suffered damages from heavy rain and flood in July 2001 and progess of restoration worksuffered as a result of uncertainty. Unrest and agitation among the workforce were aggravated by non-payment of salaries..23

By the end of August 2001, the electricity sector was in a disastrous state with employees threatening tostrike because they had not been paid and consumers taking to the street to protest against growing powercuts.24 On 29th August 2001 a new CEO was appointed by the regulator to take over CESCO, with noopposition from AES. According to a Gridco spokesman, "He has commenced the job of bringing order tothe company, restarting the energy distributing process and organizing payroll to pay salaries to CESCOemployees." 25 On 3rd September 2001 he reported that provisionally the liabilities of Cesco were to the tuneof Rs. 653 crores with Rs.577 crores payable to Gridco for bulk power purchase. The liabilities includedsubstantial amounts not paid to Pension Trust, Provident Trust, suppliers and contractors.

In June 2002, the Orissa Electricity Regulatory Commission (OERC) blamed AES and Indian companyBSES Ltd for the problems in the power sector in Orissa which caused power cuts for about two and a halfmonths. The commission threatened to revoke their licences if they fail to improve the situation. A reviewof performance in 2001-02 revealed that performance in three of the companies (Cesco, Wesco and Northco)had deteriorated compared with the previous year. The aggregate transmission & commercial (AT&C)losses increased. Cesco has recorded a 67.2 per cent loss as against 58.7 per cent in the previous year. 26

4.6 South Africa

4.6.1 Eskom and the successful extension of rural electrification

The South African electricity utility Eskom is a state-owned company serving the whole country. Asapartheid ended, it played a key role in implementing a massive programme of rural electrification, followingclear developmental objectives: 27

At the end of 1999, Eskom had made 2,135,661 new connections since the start of the electrification

programme in 1991. This target has been achieved a year ahead of schedule and a further three year target

of 600 000 has been set. Prior to 1994, only 12% of our rural population had access to electricity compared

to current levels of 42% as at end 1999. To date, 1500 schools have been electrified with photovoltaicsystems. When viewed from a sustainable development perspective, Eskoms electrification programme is

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closely aligned with the three pillars of sustainable development, namely, environment, economic and social.

Some examples are as follows:Environment: clear health benefits from a reduction in respiratory disease

and other health aspects as a result of decreased use of fuels such as wood and coal are evidentEconomic:

job creation through the use of local contractors for the projects and also promotes diversification into new

industries and sectors that are driven by electricity Social: Women in the community have more time for

other activities, as they do not have to spend a large proportion of their day gathering firewood or walking

great distances to collect water. Water borne diseases can also be minimised through access to

pasteurisation techniques, as well as improved health care from clinics that are better able to sterilise

equipment.

Eskoms role in this programme was driven by a clear set of social and development objectives, thatextended even beyond the challenge of rural electrification itself to include development of its ownworkforce, public health programmes, and local enterprise development:

Emphasis on enhancing the skill base goes beyond our organisational border. Some of our initiatives in this

area include the Adult Basic Education and literacy training of our employees and the provision of bursaries

and trainees. The success of our employment equity programme has progressed from 4% in 1992 to a 45%

black staff complement, including our senior and executive management. Eskom and the trade unionscontinue to seek effective ways of partnering through participative negotiating structures including

representation at the highest level - our Electricity Council. Support for the development of emerging black-

owned businesses has moved from strength to strength with our targeted drive for the procurement and

supply of goods from black businesses.. This is further enhanced through the Eskom Development

Foundation, a company that carries out our social investment, community development, small business

development, predominantly rural woman development and electrification of schools and clinics. The right

to information on the HIV and AIDs infection and efforts towards a cure continues to receive priority

effort.

However the government of South Africa has passed legislation which provides for the unbundling andpossible future privatization of parts of Eskom. This has been met with strong opposition from many groups,

including the trade unions. In the view of WRI: At the same time, the reform process is nascent in SouthAfrica in comparison to many other countries. The countrys experience with its foreign consultants [PWC

who ignored development issues in their recommendations] reflects that despite political will, public

benefits advocates still have to convince some key stakeholders of the link between social and environmental

concerns and the need to implement concrete programs to address those concerns. It is too soon to evaluate

whether and how the reform process has served individual public benefits so farparticularly environmental

benefits. Yet, there is tangible progress toward the inclusion of such benefits in the reform process.

4.6.2 Trade union development of alternatives through education

The South African government is still trying to implement a process of restructuring the public sector at bothnational and municipal level. In Johannesburg, for example, a plan for restructuring local services, including

energy, through commercialization and liberalisation.28

The public sector union, SAMWU, not only ran acampaign of action to oppose these developments, nationally and loacally. It also ran a series of workshopsfor its members to address the issue developing alternatives, which addressed both international dimensionsand local issues:The workshop was designed to encourage participants to reflect on how to transform services to the benefit

of the communities. This was done through two activities. The first involved groups reading and analysing

cases of successful public sector restructuring. Two international examples were used: the participatory

local government budgeting process in Porto Alegre, Brazil, and a union-led internal restructuring of local

government departments in Malung, Sweden. The third case study dealt with SAMWUs own public-public

partnership for water services in Odi. The international examples were included for two reasons. Firstly,

supporters of privatisation, such as the World Bank, argue that international experience demonstrates the

necessity of enhancing the role of business in service delivery. The case studies offer an alternative view.

Moreover, carefully chosen international case studies can be an effective way of emphasising that publicsector workers around the world face similar problems.

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A number of key issues and debates emerged. The question arose whether outsourcing that does not affect

existing jobs and conditions of service is a problem. This was particularly controversial when the

municipality provided jobs for the unemployed. How does SAMWU build alliances with community

structures to promote local economic development without undermining union gains for members? Another

important issue, which surfaced in nearly every province, was the unions involvement in integrated

development plans (IDPs). 29

4.7 Mexico

4.7.1 The Mexican electricity industry

The Mexican electricity industry has a generating capacity of about 40GW, and about three quarters of itspower comes from fossil fuels, with most of the rest hydro-power. Demand is growing rapidly, generallyabout 2 percentage points faster than GDP growth, so even when the economy is doing relatively poorly,demand is still growing significantly. The government expects to need to add about 28GW of new plant by2010 if demand is to continue to be met.

Until 1992, the nationally-owned electricity company, CFE (Comision Federal de Electricidad), was, underMexicos Constitution, the only company allowed to generate power for public supply. The law wasamended then to allow Independent Power Producers (IPPs) selling their power to CFE to enter the market.There has continued to be dispute about whether these IPP arrangements are constitutional and in 2002, theSupreme Court ruled that they were not. CFE also operates the transmission and distribution network andsells power to final consumers over all of Mexico, except for most of Mexico City. There, LFC (Luz yFuerza del Centro) operates the distribution network and supplies power to final consumers. LFC is alsopublicly owned through central government.

4.7.2 The privatisation of the electricity industry

The first serious proposals to privatise the Mexican electricity industry were introduced under President

Zedillos government by the Energy Secretary, Luis Tellez in 1999. These were based on therecommendations of international consultants, NERA. They followed closely the structure and mechanismsadopted in Britain in 1990, despite the fact that some of the features, such as the Power Pool had, by then,been rejected in Britain. There was substantial opposition to these proposals both on technical grounds andalso at a political level. The SME union, the main union in LFC, was a particularly powerful voice arguingagainst the reforms. No substantive progress was made on implementing the proposals before thepresidential elections in July 2000. At these elections, the Institutional Revolutionary Party (PRI) wasdefeated for the first time in 71 years. The winner was Vicente Fox of the National Action Party (PAN),although his party does not have an absolute majority in either House. PRI is the largest party in the upperhouse, while in the lower house, PRI and PAN are nearly equal. The third party is the Party of theDemocratic Revolution (PRD).

After two years, a number of proposals were on the table, the most important of which were those ofPresident Fox, PRI and PRD. All were committed to amend the Constitution to clear up the situation ofIPPs. More significantly, all professed to want to strengthen public ownership. However, the Fox proposalsdiffered in important respects from those of PRI and PRD, requiring de-integration of CFE and introducingcompetition for large consumers. This would require further changes to the Constitution. IPPs would bebuilt to supply large consumers allowing foreign investment into the market. Both PRI and PRD did notpropose to break up CFE and there was a much more restricted role for private investment. The lack of amajority in either House for the PAN Party means that the Fox government may find it difficult to achievethe majority needed to get his proposals through. Constitutional changes require a two thirds majority in boththe Senate and Congress. The PRI and PRD proposals also do not have universal backing in their parties, sosome form of compromise is likely to emerge.

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4.7.3 Assessment

The need for change to the Mexican electricity industry is based on a perception that, as currently operating,CFE will not be able to finance the investment necessary to keep pace with Mexicos rapidly growingelectricity demand. The PRI and PRD proposals tackle this issue by attempting to strengthen CFEs financesso it can finance much of the investment itself. The Fox proposals remove large consumers from CFEs

obligation to provide a public service to consumers. The success of these proposals would depend on theextent to which international investors would be prepared to build power plants to supply this market. Giventhat few large electricity consumers would be prepare to sign a long enough term electricity supply contractto underwrite the construction of a large new power plant, this must be in doubt. Large electricity consumerscannot afford to tie themselves to rigid terms for long periods and typically are prepared only to sign a powersupply contract for about a year forward, far too short a period to justify construction of a new power plant.If the Fox proposals are adopted and investment is not forthcoming, this might is likely to be presented as a

justification of full privatisation of the electricity industry.

4.8 Brazil

Campaign against electricity privatisation wins state elections 1998 Minas Gerais sacks US companiesOctober 1999

4.8.1 The Brazilian electricity industry

The Brazilian electricity is almost entirely based on hydro-electricity and was, until the privatisationprogramme, almost entirely publicly owned. The total generating capacity is about 70GW, but demand isgrowing rapidly, typically at 6 per cent a year. At that rate of growth, the system-size will double everydecade.

Most of the generation plant was owned by a nationally-owned holding company, Eletrobras, through fiveregional generation companies, such as Furnas (Rio de Janeiro) and Chesf (based in Recife). About a quarterof Brazils power comes from the giant Itaipu plant (13GW) situated on the Brazil-Paraguay border. This isa joint Paraguay-Brazil project constructed under a bilateral government treaty and cannot be privatised. Thevast majority of the power is supplied to Brazil at prices indexed to the US dollar.

The distribution sector was primarily owned at state level (Brazil is a federal republic with 26 states), withtwo notable exceptions, the Escelsa (Espirito Santo) and Light (Rio de Janeiro) companies which wereowned by the federal government.

4.8.2 The privatisation of the Brazilian electricity

The first serious attempts to privatise the Brazilian electricity industry came after the election of PresidentFernanado Enrique Cardoso. A privatisation programme of state assets was a part of his anti-inflationarystrategy and in July 1995, Escelsa was privatised, followed by Light in 1996. Escelsa was bought byBrazilian interests, while Light was bought by a consortium including EDF (France), HLP and AES (bothUSA). There was no policy at that time on what the structure of the industry would be, how it would beregulated and what mechanisms would be used.

However, in 1995, the consultants Coopers & Lybrand were hired by the Brazilian government to advise ona privatised competitive structure for the industry. Coopers & Lybrand had already advised the Ukrainianand Colombian governments on electricity reforms, recommending systems very closely modelled on theBritish privatisation of the electricity industry in 1990. The World Bank was also instrumental in the choiceof Coopers & Lybrand.

The initial recommendations, again a close copy of the British Model, were not thought to be viable by theBrazilian experts and the recommendations were modified to take account of the particular circumstances ofBrazil, especially the dominance of hydro-power. The resulting model incorporated a new regulatory body,ANEEL, a wholesale electricity market (MAE), and choice of supplier for large consumers. There was alsoa commitment to privatise the sector where possible: Itaipu and the nuclear power plants could not beprivatised.

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The privatisation programme continually slipped and none of the federally owned generation companieswere sold, but, eventually, most of the distribution companies were. The buyers were mostly Europeanutilties, such as Endesa and American utilities, such as the Southern Company. As a result of the seriouspower shortages of 2001/02, blamed on failings in the new model, and also the election of the socialistcandidate Luis Inacio da Silva (Lula) it seems unlikely now that there will be any attempt to privatise theremaining publicly owned companies. However, it is not yet clear what model will be adopted.

4.8.3 Assessment

Many of the companies were sold off before there was any clear idea of what the model for the Brazilianelectricity industry would be and before even the regulatory body had been set up. The results have beenpoor particularly with respect to investment in new generating plant and to prices.

4.8.3.1 Generating plant

The wholesale electricity market has never functioned as was hoped and for the five years after theprivatisation programme began, there was underinvestment in new generating plant. The existing publiclyowned companies were subject to government restrictions which made it difficult for them to build newplants, while private investors chose not to invest. By 1999, it was clear that the next year in which rainfallwas significantly below average would lead to power shortages. Many of the hydro-electric dams have

capacity to store up to the equivalent of three years of water, so the existing plants are designed to be able tocope with dry years, but the reserves were progressively drawn down. At the beginning of the wet season in1998/99, the reservoirs were only at 19 per cent capacity, very near critical levels, but the next two yearswere wetter than average. In 2000/01, the reservoirs were at 29 per cent capacity, but the year was a dry onein the South East of Brazil where much of the capacity draws its water. By May 2001, it was clear thatunless drastic economy efforts were made, the reservoirs would effectively run dry.

As a result, restrictions were put in place aimed at reducing demand by about 20 per cent. These efforts weresuccessful, the following summer was wetter than average and new plants were ordered, and as a result, itwas possible to remove restrictions on consumption in early 2002. The power shortages had a significantrecessionary effect on the economy and the new plant, only possible because of strong guarantees on theprice and volume of power sales, was often extremely expensive.

4.8.4 Consumer prices

A particular problem has been the linkage of prices to dollars. The Cardoso administration was able toovercome inflation by creating a new currency in 1994, the Real (R$), the value of which was tied to thedollar. This parity was largely held until January 1999, when the pressure became to strong to hold. Thevalue of the Real declined sharply and has continued to fall so that by December 2002, the exchange rate wasUS$1=R$3.75, despite inflation in Brazil remaining low. This devaluation affects consumers in a number ofways. The price of power from the Itaipu dam is fixed in dollars because it is covered by an internationalagreement and this inevitably has an impact on the price consumers pay. However, this would have occurredregardless of changes to the electricity industry. The devaluation of the Real feeds directly into the price ofnatural gas, which is denominated in dollars. Nearly all the plant ordered since the privatisation programmewas started will burn natural gas, so the cost of power from these plants will increase dramatically.

The main impact comes from the privatisation of the distribution companies. These generally are allowed tolink their profits to the dollar exchange rate so in the four years since the Real was devalued, their profits, inReal terms will have increased by a factor of nearly four.

The contribution of public money has been restricted by the Brazil governments agreements with the IMF,which restrict public spending, but Brazil was a member of a group of countries that negotiated a looseningof controls for investment of public money in productive resources. Brazils government argued that whilethere might be a case for restricting public expenditure going towards operating public agencies, there wasno sense in preventing government from investing in productive assets. A deal concluded in April betweenthe Brazilian government and the IMF has allowed Eletrobras to invest an additional R$4bn (US$1.2bn) peryear and Petrobras R$7bn for a test period. This could approximately double the amount Eletrobras is able

to invest. The changes will also allow BNDES to increase its lending and this might result in a furtherR$2.6bn going to electricity projects.

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4.8.5 Conclusions

The Brazilian privatisation programme was misconceived on a number of grounds. The first was to use amodel, the British Model, which was designed for very different circumstances. The priority in the Britishsystem was to improve the efficiency of a mature, reliable system in which growth was minimal. The priorityfor Brazil was clearly to ensure that investment would be available to meet rapidly growing demand. The

second failing was the lack of recognition of the special nature of hydro-electric dominated systems. Theserequire coordination and central planning to ensure that water resources are used efficiently, using firstresources where there are ample stocks and saving water in dams where levels are low. In a competitivemarket, they represent a severe risk to competitors trying to enter the market using fossil fuels. The marginalcost of hydro generation is essentially zero, so it is always more efficient to use hydro-power when it isavailable. This means that those building gas plants will essentially be gambling on the weather. In a wetyear, their plants will not be required.

4.9 Senegal

Senegal originally privatised electricity in 1999 despite extensive protests which led to members of the

electricity union being jailed.

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However, some 18 months into the contract with Hydro-Quebec and Elyo(part of Tractebel, itself part of the Suez group) a new government terminated the contract stating that theconcession had failed to improve supply. Power cuts of four to five hours a day were common, despiteprivatisation.

In July 2001 the privatisation was retendered, on the basis of selling 51% of the utility. Howevernegotiations with Vivendi broke down when the company failed to secure the required finance. Thegovernment turned to the second ranked bidder, AES. However, again negotiations failed and theprivatisation of Senelec was called off. One reason for the collapse of the negotiations was the investmentprogram that Senegal wanted the two to assume. Both Vivendi and AES were intent on minimizing the costof upgrading Senelec's equipment.

Following this second failed attempt at privatisation, the national utility is beginning to renew its equipment.In September 2002, Senelec acquired two 15 MW generators to help make up for its production deficitestimated at 60 MW. The generators, costing 19 million Euros ($ 18 million), were financed by the WestAfrican Development Bank, which put up 9.1 million Euros, and by the Banque de la CommunauteEconomique des Etats d'Afrique de l'Ouest (Ecobank), which contributed 6.8 million Euros. The remaining 3million came out

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