Record profits by privatized electric utilities in Britain raise many questions
Douglas J. Smith
Although privatization of the UK`s electric utilities has encouraged its management to become more commercially orientated, there is concern that privatization has benefited the managers and shareholders more than the consumer. In 1994, Professor Littlechild, Britain`s Director General of Electricity Supply, told the country`s two major electric generating companies, National Power and PowerGen, to sell 6,000 MW of generating capacity by early 1995.
A recent issue of London`s Financial Times reports that National Power and PowerGen have not sold any capacity as requested by Littlechild. Both electric utilities argue that the reason for not selling is that the prices offered have been inadequate. However, the bidders respond by saying the asking prices are too high.
According to Littlechild, wholesale prices of electricity have reached record levels. With record prices and profits by National Power and PowerGen, Littlechild believes that the present system of regulating the country`s privatized electricity companies is not working.
Lord Wakefield, Britain`s former Secretary of State for Energy and the minister responsible for privatization of the electric supply and transmission systems, does not agree and said that increased competition in the electric industry has fully justified the government`s decision to privatize the industry.
Clearly, privatization of the electricity industry has benefited the shareholders and senior management. However, the other side of the equation is the companies are now lean and mean.
At privatization PowerGen was left with many old and inefficient coal-fired power plants that were, as an investment, not particularly attractive. Because of this, PowerGen`s management was forced to take aggressive action right from the beginning. Today, PowerGen is a strong and well managed electric utility.
The British government`s 40 percent stake in National Power and PowerGen is in the process of being divested. However, the prospectus which sets the terms for the sale of the government`s remaining share warns that National Power and PowerGen could be referred to the Monopolies and Mergers Commission because of the lack of progress in divesting of some of its capacity to competitors.
Obviously, there is a need for a competitive electric power industry but just because the British government failed to achieve this when the industry was initially privatized does not mean that the industry can be returned to government ownership. Nonetheless, management of the privatized electric companies must realize that electricity is a necessity and not a luxury and as such must be subjected to regulation. Good management will certainly pay dividends. Unfortunately, unless electric utilities have a good relationship with their customers and the regulators growth will be difficult.