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Electricity deregulation in Europe
the transnational corporations observatory - 15.03.2002 22:04

1. EU parliament backs measures to aid energy liberalisation
2. Effect of the privatisation of public utilities in Europe
3. and in the United-States
4. The driving force: relevant lobbies and companies


1. EU parliament backs measures to aid energy liberalisation

The European parliament yesterday prepared the way for tomorrow´s Barcelona summit by supporting energy reform measures and passing postal liberalisation plans into law.
(Financial Times, 14 March 2002)


2. Effect of the privatisation of public utilities in Europe

The data for the European Union countries show that there have been job losses across the electricity and gas sectors for most countries which have been more far-reaching in electricity. Between 1990 and 1995 there was an overall decline by around 15 per cent, 127 751 jobs have been lost.

There have been large job losses in the British gas industry since privatization began in 1986, when the number of employees was 91,599. By 1992 the figure had fallen to 78,300 and is currently 36,500. In Spain, where electricity and gas are privatized and water is in the process of being privatized, employment reductions have been particularly marked in the electricity sector. Between 1990 and 1996 the number of electricity employees fell from 51,899 to 44,000. In the coming years it is expected that up to 12,000 more jobs will be lost, representing more than 25 per cent of the current workforce.
(In Managing the Privatization and Restructuring of Public Utilities :The impact on employment and human resource development, International Labour organisation, April 1999)

Tables:
Changes in employment in CEE privatized water companies
Changes in employment in electricity and gas in Europe, 1990-95
Electricity companies: Average number of employees in the United Kingdom (1990-91/1995-96)
Difference between domestic and industry electricity prices
 http://www.transnationale.org/anglais/dossiers/finance/dereglementation_1.htm


3. in the United-States:

Rising electricity cost for consumers:
Timeline: California Energy Costs
 http://www.transnationale.org/anglais/dossiers/finance/dereglementation_1.htm


Speculation: Enron

"The business of trading in energy was cultivated upon a speculative model of business similar to those that flourished during the years of the now disgraced New Economy.

It specialised in risk-swapping contracts that enable companies to hedge their exposure to changing energy prices and supply fluctuations. Enron was able to capitalise on the newly deregulated US market in electricity and natural gas, making much of its profit buying and selling energy many times over, capturing the difference between buyers´ bids and sellers´ offers.

But unlike traditional commodities exchanges, gas and electricity are traded privately, with many transactions involving just two players. By last year, Enron was in the middle of about one quarter of the electricity and natural-gas deals done by energy producers, traders and utilities.

Throughout the late nineties, Enron enjoyed ever-higher earnings. Fortune magazine called it the most innovative company in America and ranked it number seven on the Fortune 500. For a time Enron´s revenue of $100bn eclipsed IBM and AT&T.

But the company also borrowed heavily. Employing unusual accounting methods, it recorded debts on separate operations off Enron´s balance sheets, obscuring liabilities. It used the money to invest in new markets, buying utilities as far afield as India, Bolivia and China, and began trading in everything from commodities to exotic financial businesses, such as ´weather derivatives´.
(...)
In California, where officials blamed Enron for the state´s energy crisis two years ago, many regard Enron´s rapid downfall as long overdue and may hasten the state´s ill-conceived experiment in energy deregulation. ´Enron was the flagship for deregulation,´ said Carl Wood, a member of California´s energy commission. Enron, he said, proved to be ´all hat and no cattle - that´s their Texas expression, and it applies here´. "
(Towers of steel, feet of clay, The Observer, December 2, 2001)

Enron´s exotic subsidiaries
Enron Corp. was asked by the Securities and Exchange Commission in 1998 to explain its finances, including a partnership designed to take debt off its books. The 23-page document included 138 questions that asked about the Jedi II partnership, Enron cash flows, hedging policies and accounting for energy reserves. The agency this month began to probe Enron´s relationship to limited partnerships run by former Chief Financial Officer Andrew Fastow. (...) In its most recent inquiry, the SEC has asked Enron about the two partnerships, LJM Cayman and LJM2 Co-Investment, that were run by Fastow and dealt in Enron assets and shares.
 http://www.transnationale.org/anglais/forums/finance__speculation/showmessage.asp?messageID=4

A Guide to the Enron Collapse : A Few Points for a Clearer Understanding (The Polaris Institute, February 4, 2002)
Enron, a very complex company heavily involved in energy trading and distribution, was the 7th largest corporation in the U.S. (16th largest in the world). Despite its enormity and its massive profits before last year´s fall, it managed to pay no taxes in 4 of last 5 years.
 http://www.polarisinstitute.org/corporateprofiles_files/enronguide.htm

Enron´s profile (list of offshore partnerships):
 http://www.transnationale.org/anglais/fiches/817512280.htm


Cartel and price-fixing:
How Deregulation Let the Power Industry Steal $71 Billion From California (The Foundation for Taxpayer and Consumer Rights, January 17, 2002)
Using government and industry data, the report shows that the California electricity system did not fail according to the laws of supply and demand, as it has been widely portrayed. The California energy crisis, instead, was a hoax orchestrated by a power industry freed from price regulation that will cost $2,200 for every Californian.
 http://www.consumerwatchdog.org/utilities/rp/rp002193.pdf

The Manufactured Energy Crisis (The Foundation for Taxpayer and Consumer Rights, March 2001)
Do you think it was just a coincidence that (1) the 48 hours of rolling blackouts last January followed an announcement by the utilities that they would no longer pay their energy bills; and (2) the blackouts ended once the Governor signed legislation to authorize taxpayers purchases of electricity from the energy companies? Do you also believe that you caused the "energy crisis" because you use too much electricity and you wouldn´t let anybody build any power plants in California? And do you really think that deregulation would be a good thing but state officials screwed it up by trying to protect consumers? If you are skeptical about the energy crisis that will cost Californians US$ 60 billion or more, read on.
 http://www.ftcr.org/utilities/bailout21.pdf


Debunking the Ten Myths of Utility Deregulation (Public Citizen, January 2001)
If the purpose of deregulation is really to improve the quality of people s lives by lowering the cost of a critical commodity, it is obviously failing miserably as demonstrated in California. To understand what has happened, we must begin with the past.
 http://www.transnationale.org/anglais/sources/finance/dereglementation__debunking0.htm

Myth #1: Deregulation does not work because California did not deregulate enough.
Advocates for deregulation say that if the rate freeze was removed and consumers paid for the real cost of electricity through a free market, there would not be a problem. But they fail to mention that over the past few months, the cost of wholesale electricity has at times been almost 4,000 percent higher than before deregulation because of the speculative nature of the electricity market. If all the costs were passed on to consumers, the average residential monthly consumer, who paid approximately $55 a month before deregulation, would have paid approximately $600 a month when prices spiked in California this winter.
 http://www.transnationale.org/anglais/sources/finance/dereglementation__debunking1.htm

Myth #2: Deregulation will lower costs for consumers.
Deregulation has been sold to the public as a way to lower prices. Unfortunately, the inverse is often true, with deregulation resulting in higher prices over time. When deregulation legislation sailed through the California legislature with unanimous bipartisan support in 1996, proponents claimed that consumers would see at least a 20 percent reduction in their electric rates eventually. Now, as wholesale prices have skyrocketed since last year, proponents argue that consumer rates will have to increase to encourage more competition. Long-term contracts are being promoted as the antidote for the crisis. But, the price being quoted for electricity under these contracts is at least three times more expensive than under regulation. What happened to lower rates under deregulation?
 http://www.transnationale.org/anglais/sources/finance/dereglementation__debunking2.htm

Myth #3: Prices for electricity are being driven up because the demand for electricity is increasing.
Planning for new power plants is based on the need for electricity at the time of year that maximum usage of power occurs the time of peak demand. Indeed, California s Independent System Operator (CAISO), the traffic cop for the transmission of electricity under the deregulated market, has records showing that the CAISO peak demand for electricity in 2000 occurred on July 12 and was approximately 45,600 megawatts. (For comparison, a large nuclear power plant is approximately 2000 megawatts.) California uses the most electricity in the summer, when air conditioners run.
 http://www.transnationale.org/anglais/sources/finance/dereglementation__debunking3.htm

Myth #4: The problems are being caused because there is not enough power to supply California.
So, why are suppliers short? Because under deregulation, power producers have no incentive to run plants at full capacity. As noted above, California has 55,500 megawatts of power generating capacity and 4,500 megawatts of power on contract. Following is a breakdown of plant ownership:
 http://www.transnationale.org/anglais/sources/finance/dereglementation__debunking4.htm

Myth # 5: California s environmental laws are preventing new power plants from being built in the state.
It is untrue that California s environmental laws have prevented new plants from being built and are responsible for the current crisis. As noted earlier, there is enough existing capacity tied into the state s grid to meet even summertime peak demand. And while the state s sensible environmental laws get the blame for the lack of new construction, it is important to note that California s utilities did not want to make investments in new power plants. The state s utilities blocked decisions by the CPUC to build new capacity because under deregulation, the utilities realized they would have assumed the economic risk for bad decisions rather than consumers who paid for past mistakes as part of rates.
 http://www.transnationale.org/anglais/sources/finance/dereglementation__debunking5.htm

Myth #6: Deregulation is good for the environment.
While deregulation creates short-term incentives to gouge consumers by artificially ensuring low supplies of electricity, in the long run deregulation creates economic incentives for power suppliers to sell more electricity. As prices rise, suppliers push to build new plants in an attempt to maximize profit. At the same time, deregulation provides an incentive to keep cheap, dirty coal power plants running longer. The market forces driving deregulation will not shut down old plants and replace them with cleaner ones. Instead, the old plants will run, and new plants will be built as well, because deregulation encourages more energy use.
 http://www.transnationale.org/anglais/sources/finance/dereglementation__debunking6.htm

Myth #7: California s energy crisis is best resolved through state, not federal, actions (as stated by President Bush). (Public Citizen, January 2001)
Unfortunately, the Clinton Administration promoted electricity deregulation relentlessly, and now the new Republican Administration is supporting the same reckless deregulation scheme that we are seeing unfold in California today.
 http://www.transnationale.org/anglais/sources/finance/dereglementation__debunking7.htm

Myth #8: California s three big utilities were forced, against their will, to sell their power plants.
As described in the introduction, California s three big utilities lobbied intensely to pass the 1996 deregulation bill, which provided incentives for them to sell their power plants. Some nuclear and hydropower facilities were retained by the utilities. The California utilities believed that they would thrive from electric utility deregulation and become international energy companies.
 http://www.transnationale.org/anglais/sources/finance/dereglementation__debunking8.htm

Myth #9: California s utilities are close to bankruptcy and need to be bailed out.
California s two major utilities, Southern California Edison (SCE) and Pacific Gas & Electric, claim to have racked up such significant losses under deregulation that they are threatening to file for bankruptcy. In 1996, when the promise of huge profits loomed large, they agreed to assume some risk. Now that the market has failed they are demanding that the state provide direct assistance, or else (they claim) they will no longer be able to afford to supply their customers with electricity.
 http://www.transnationale.org/anglais/sources/finance/dereglementation__debunking9.htm

Myth #10: Electricity deregulation is working in other states.
Electricity deregulation has passed (or been adopted by a regulatory process) in 23 states plus the District of Columbia. However, because of the situation in California, Utah has repealed its deregulation bill and New Mexico has delayed implementation of its deregulation legislation. Of the states that passed bills, only a handful of them have begun changing their energy supply systems. Some places, like Washington, D.C., negotiated long-term contracts at reasonable rates, which will put off by several years the disasters of a truly deregulated market. And in almost all states, deregulation is to be phased in over a period of years. To make the legislation politically viable, price caps, mandated rate reductions and other benefits that will be sunset were included.
 http://www.transnationale.org/anglais/sources/finance/dereglementation__debunking10.htm

Conclusion
Electricity is an absolute necessity that should not be a speculated product. Consumers have a right to affordable energy, produced in the most environmentally sustainable fashion possible. But, when treated as a speculative commodity, the cost and supply of electricity becomes uncertain. This situation invites price-gouging and profiteering, as we are witnessing today in California.

We must critically analyze the intentionally perpetuated myths by the proponents of deregulation, because it is clear that what many pro-deregulation politicians are saying just is not true. We need to carefully look at their assertions, or we will not only continue to bailout utilities, we will higher prices, less reliability, and a threatened environment. It is time to hold policymakers accountable for the mess they have created, and roll back dangerous electric utility deregulation schemes.

4. The driving force: relevant lobbies and companies

In Europe: the European Roundtable of Industrialists
"The EU´s Spring Summit in Stockholm, March 23-24, gave fresh momentum to the neoliberal restructuring of European societies which was launched at last year´s ´Jobs Summit´ in Lisbon. Like the European Commission, the ERT works hard to ensure that reluctant EU governments do not step back from implementing sweeping deregulation and privatisation commitments made in Lisbon. "
Corporate Europe Observer - Issue 9
 http://www.xs4all.nl/~ceo/observer9/stockholm.html

ERT list of members
 http://www.transnationale.org/anglais/transnationale/institutions/europe.htm

In the United States: the Business Roundtable
"The California Business Roundtable supports:
Continued deregulation - As energy supply increases, electric rates will stabilize and market competition will finally be able to work."
 http://www.cbrt.org/energy.html

List of members
 http://www.transnationale.org/anglais/transnationale/institutions/etatsunis_br.htm


- E-Mail: tech@transnationale.org Website: http://www.transnationale.org/anglais/
 

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