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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Corbyn Seeks To Renationalize Britain’s Utilities

utiltiies

The socialist leader of Britain’s Labor Party, Jeremy Corbyn, wants to renationalize the nation's electric, gas and water utilities—the same utilities Prime Minister Thatcher sold off to the private sector more than a quarter century ago.

A year ago, few would have cared about Mr. Corbyn's thoughts on the appropriate roles of public versus private ownership of Britain's utilities. But with Theresa May’s leadership in question and the Conservative government in meltdown, it’s no longer absurd to think that Corbyn might become the UK’s next prime minister.

If he's elected, it's reasonable to expect a re-nationalization of Britain's utility sector, especially its electric utilities. This would reverse only one small part of Thatcher's privatization program. But it would signify an intellectual retreat from the reigning neo-liberal economic ideology and the return to government ownership of essential utility services.

The debate about government versus private ownership of utilities is a pendulum swinging in favor first of public ownership, then private ownership, and then back again. In 1947, the post-war Labor Party nationalized the utility sector. Forty years later Thatcher's Conservatives privatized it. There must have been some reasons to take such drastic steps. What do present day Laborites hope to gain from re-nationalization?

Ostensibly, the Labor government of 1947 nationalized the electric industry to reap the benefits of so-called scientific socialism (a popular economic idea at the time) and to correct certain perceived defects of the industry.

Defect #1: many of the existing utility franchises were set to expire, and that would split utility service areas into parts too small to provide economic service. Defect #2: a clause in the Electricity Supply Act of 1926 allowed certain utilities to use bogus cost estimates that permitted them to game pricing in the generating market and, essentially, cheat the wholesale marketer big time and, more importantly, legally.

Either problem could have been solved by an act of Parliament. However, utility nationalization was part of the Labor Party platform since 1917. Perhaps it was a solution that preceded the problem. Ironically, the electricity industry was pretty much socialized before its actual nationalization.

A government corporation owned the national transmission network and ran a wholesale market for the entire country (an achievement that the U.S. still can’t boast). Many of the biggest utilities were owned by municipalities, as was the case in the U.S. in the early 20th century. Not exactly a private sector business.

Margaret Thatcher, who came into power in the 1980s, led an ideologically driven Conservative government that followed the ideas of economist F. A. Hayek. He argued government ownership of economic entities constituted a threat to democracy. Following the dictates of Hayek, Thatcher sold off government owned businesses with a will. Vast sections of the economy were privatized, with the electricity industry being the last, and for good reason.

This last privatization occurred without substantial analysis of how Britain's electricity consumers might derive any benefit whatsoever. Like the industry prior to nationalization, the nationalized version certainly had defects.

Labor costs were quite high and the industry operated with too many employees. Fuel costs were also high due to overpriced coal purchased from a nationalized coal industry, thereby ignoring cheaper alternative fuels.

You can find Leonard Hyman's lastest book ‘Electricity Acts’ on Amazon

The electric utility industry determined its capital budget based on the needs of the government rather than those of the consumers. It plunged into a nuclear new-build program at the behest of the government, despite knowing that nuclear power would be uneconomical for the industry.

The government could have cured those relatively minor defects through parliamentary legislation or by giving its senior managers more latitude to actually manage. Instead the Thatcher regime chose to sell Britain's entire electricity industry and let the new owners sort out the difficulties. Related:The Permian Boom Is Coming To An End

So why does Jeremy Corbin want to re-nationalize a quarter-century later? Or create publicly-owned competitors to compete with existing investor-owned suppliers? Or perhaps put a cap on prices?

Critics of the present utility regulatory regime point out instances of price gouging, lax regulation and confused consumers. But since the Conservatives’ return to government, the big decisions that affect prices, technologies and operations (such as the choice of renewables and the backing for expensive nuclear power) have been government-made.

Capping power prices, for example, without capping costs at the same time, will produce shortages in the UK as it has elsewhere. This policy failed when Richard Nixon was the U.S. president, and led to several high-profile utility bankruptcies. Why should it produce better results in the UK?

The power generating technologies, as well as operating and choices, that ultimately determine prices have the same impact on investor and publicly-owned enterprises. What policies would Corbyn impose that would reduce costs? At this point it's not clear.

Let’s take a look at a rough indicator of what transpired for UK consumers as opposed to the US in both the nationalized (Figure 1) and privatized (Figure 2) periods. (All data from Leonard S. Hyman, Electricity Acts, 2017).

Figure 1. Nominal average price of electricity (¢ ) in 1947-1989

 

(Click to enlarge)

The divergence in electricity prices between the UK and the US in the 1970s can be attributed to the substantially higher rate of inflation in the UK economy (twice the U.S. rate), possibly the greater impact of the Energy Crisis on the UK industry (they burned more oil to generate power) and frequent British coal strikes. The gap in prices subsequently narrowed.

Figure 2. Nominal average price of electricity (¢) in 1990-2016

 

(Click to enlarge)

In the early years, the UK government forced the electric companies to pass on savings from staff reductions and reduced fuel costs. Then the UK government pared back its supervision of the market, allowed oligopolies to take control, and then pushed an expensive renewable resource program on the industry. In short, when privatization began, UK electricity consumers paid 45 percent more than American consumers. And 26 years later they pay 48 percent more. It seems despite privatization not much has happened to lower consumer prices, at least relatively speaking. Related: U.S. Oil Rig Count Falls As Prices Falter

There are two distinct aspect of the electric utility business—its high fixed costs and fuel costs are often beyond the control of even the most competent managements. As a result, forms of ownership of utility assets matter less than sensible business decisions, application of appropriate technology and government policies like regulation.

Jeremy Corbyn may someday have the power to once again restructure Britain's electric industry’s ownership. Call us cynical, but we expect the near-term financial benefits of any restructuring to result in a temporary windfall for the usual suspects: the engineers, bankers and consultants required to do the deed, so to speak.

But consumers aren’t likely to see a dramatic decrease in prices. Regardless of who owns the utility system, the same economic, technical and environmental challenges remain for the industry.

However, the one significant action that a new Corbyn administration could take that would significantly reduce price pressure for future electricity consumers would be a wholesale repudiation and abandonment of the UK's present nuclear new-build program. All of the successful nuclear new build programs, like France's and South Korea, were based on single reactor designs constantly improved and revised through successive iterations. The UK's present nuclear new-build program reminds us of an old saying: "They wanted it in the worst possible way. And that's just the way they got it."

You can find Leonard Hyman's lastest book ‘Electricity Acts’ on Amazon

By Leonard Hyman and William Tilles

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