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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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Three Quarters Of British People Want To Re-Nationalize Utilities

Hinkley Point

According to a poll taken late last year, 77 percent of respondents in the UK wanted to re-nationalize all of Britain’s energy utilities. In addition, 83 percent of those surveyed wanted to renationalize the water utilities as well.

To a degree this seems like a repudiation of Margaret Thatcher’s great privatization experiment of the 1980s. She and her Conservative government privatized large swathes of the economy including the nation's electric, gas and water utilities.

Unlike other industries which could become genuinely competitive, utilities remained monopolies. As a result they required something to protect the public against unlimited corporate pricing power. Prime Minister Thatcher, taking the optimistic view of good corporate intentions, sought to introduce genuinely competitive markets with way too few legitimate participants. Even Adam Smith wrote about what would inevitably happen.

We could call it "light handed competition". This goes along with their pro-business policy of "light handed regulation." Whether right or wrong, this corporate friendly concept swept the world of public policy on both sides of the Atlantic during this period. These ideas informed California’s reorganization of its electric utility sector. (Ugh!) And has influenced American utility policy ever since. Globally even an august institution like the World Bank genuflects at the shrine of light handed regulation and extols the virtues of public-private partnerships.

Maybe the UK privatization sentiment poll was wrong. But we see other signs.

When does it become clear that a particular public policy has begun to "hit the skids" so to speak? First sign: widespread public dissatisfaction, complaints about the level prices or the uneven delivery of services. Eventually this dissatisfaction reaches the politicians. Related: The Unstoppable Oil Rally

The present Conservative government UK, whose incoherent policies have helped mightily to push up energy prices, has at an inopportune time decided to forsake its adherence to competition and market-based solutions and advocate for price controls. It's the only way they can pay for their planned fleet of high priced nuclear power stations.

The Labor opposition, also hewing to its traditional roots, has offered its solution: renationalize the utilities. This represents a marked departure from previous Labor government’s policies of accommodation with Thatcherite policies and a return to old time Labor orthodoxy.

Now we're at the stage were the intellectual adherents are all almost about to say they were misinterpreted or whatever tiptoeing towards the exits looks like in these circles. Political support starts to peel away. A noted energy economist recently wrote a report for the government highly critical of the electricity in-dustry and its rather lax regulatory structure. An ex-regulator even went so far as to accuse the regulatory establishment of not being adequately pro consumer.

Then follows the fatal cut, possibly. Well, maybe that is too dramatic for a full page exposé in the Financial Times, Britain’s (and maybe the world’s) most prestigious financial paper, a stalwart of old-style liberal (i.e. conservative) economics.

The article (on January 23) was entitled THE BIG READ: PRIVATISATION REVISITED. The not so subtle conclusion? “Britain was once the pioneer in privatisation but now many people believe that investors have run rings around regulators. That has prompted a rethink about how public utilities should be managed.”

Let’s begin with the admission. The intellectual linch pin of price cap regulation, the incentive regulation formula, was devised in only two days. And, contrary to more than a century of prior regulatory practice, the Thatcher government would not countenance any limit on utility corporate profits because that was "socialism".

The academic, Prof. Steven Littlechild, who devised the performance based ratemaking scheme now says that efficiency gains could be split with customers. This is what his formula was always supposed to do on a somewhat delayed basis. Related: This World Class Gas Field Is About To Start Producing

The Financial Times article criticizes utility financial policies and then ends up asking whether existing utilities could be replaced by local non-profit organizations. These would have lower profitability requirements and would be required to reinvest profits back into the utility business. It's a sad day for capitalism when even the staunchly neoliberal editorial board of the FT advocates for government ownership of the means of electric utility production. That is the real news.

Neither political party, right or left seems to like the existing energy policy. And the public is becoming increasingly restive. Worse yet, neither party has much grasp of energy economics. Which is both typical and regrettable.

How long will the UK's now privately-owned utilities continue to prosper, or even stay private? Will American policy makers, who recently demonstrated a rather shaky grasp of economics and electric grid opera-tion (but a seemingly solid grasp of short term political expediency), begin to follow suit if British Conservatives admit defeat and reconsider public or governmental ownership of their utility industry? And if so, what is the time line?

As devotees of opera and Wall Street trading floors both know, 'It ain’t over till the fat lady sings.” For utility investors, the question is whether Brunhilde is in the wings just offstage waiting her cue.

By Leonard Hyman and Bill Tilles

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  • Coffeeguyzz on January 28 2018 said:
    Absent clearly defined, identifiable goals, free market delivery of an essential service - in this case electricity - will never achieve its full potential.
    Competing generators using common carriers (transmission lines) to customers - local utilities - who provide this necessity to the broader market - residences and commercial - should, in theory, be possible to do all this with maximal economy.

    The market is heavily influenced by other forces causing great distortions to the idealized optimum.

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