Privatisation of Energy - New

BP 9, F-01211 Ferney-Voltaire Cedex FRANCE - Tel : 33 4 50 40 12 14 - Fax : 33 4 50 40 73 20 - psi@world-psi.
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Resistance and alternatives

to energy privatisation
by David Hall d.j.hall@gre.ac.uk
Steve Thomas s.d.thomas@gre.ac.uk
and Kate Bayliss k.bayliss@gre.ac.uk
December 2002
A report commissioned by Public Services International
PSIRU
Business School, University of Greenwich, Park Row
London SE10 9LS, U.K.
www.psiru.org — psiru@psiru.org
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). PSIRU’s
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 financial institutions
and the European Union, especially in water, energy and healthcare. This core database is financed 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
1 INTRODUCTION.................................................................................................................................................... 3
1.1 ELECTRICITY PRIVATISATION/LIBERALISATION AND ITS PROBLEMS ................................................................... 3
1.2 REFORMS – AND ALTERNATIVE REFORMS .......................................................................................................... 3
2 RESISTANCE .......................................................................................................................................................... 5
2.1 COMPOSITION AND TECHNIQUES OF RESISTANCE ............................................................................................... 5
2.2 RANGE OF COUNTRIES ........................................................................................................................................ 5
3 ALTERNATIVES .................................................................................................................................................... 6
3.1 THE PRAYAS CRITIQUES AND THE ALTERNATIVE TAP APPROACH ..................................................................... 6
3.1.1 TAP in practice – participative democracy .................................................................................................. 6
3.1.2 TAP and trade unions - proposed reforms for MSEB .................................................................................. 7
3.2 WRI APPROACH: GLOBAL SUSTAINABLE AND SOCIAL DEVELOPMENT OF ENERGY ............................................. 7
3.3 THE MONOPOLY ELECTRICITY SUPPLY MODEL ................................................................................................... 8
3.3.1 Private ownership improves efficiency ......................................................................................................... 8
3.3.2 Government interference .............................................................................................................................. 9
3.3.3 Corruption .................................................................................................................................................... 9
3.3.4 Financing investment needs.......................................................................................................................... 9
3.3.5 Inefficient pricing........................................................................................................................................ 10
3.3.6 Summary ..................................................................................................................................................... 10
3.3.7 What other issues does the privatised model of electricity supply industry raise? ..................................... 11
4 CASES .................................................................................................................................................................... 13
4.1 AUSTRALIA ...................................................................................................................................................... 13
4.2 SOUTH KOREA ................................................................................................................................................. 13
4.3 CANADA .......................................................................................................................................................... 13
4.4 USA................................................................................................................................................................. 14
4.5 INDIA ............................................................................................................................................................... 15
4.5.1 Withdrawal of AES from Orissa ................................................................................................................. 15
4.6 SOUTH AFRICA................................................................................................................................................. 16
4.6.1 Eskom and the successful extension of rural electrification ....................................................................... 16
4.6.2 Trade union development of alternatives through education...................................................................... 17
4.7 MEXICO ........................................................................................................................................................... 18
4.7.1 The Mexican electricity industry................................................................................................................. 18
4.7.2 The privatisation of the electricity industry ................................................................................................ 18
4.7.3 Assessment .................................................................................................................................................. 19
4.8 BRAZIL............................................................................................................................................................. 19
4.8.1 The Brazilian electricity industry................................................................................................................ 19
4.8.2 The privatisation of the Brazilian electricity .............................................................................................. 19
4.8.3 Assessment .................................................................................................................................................. 20
4.8.4 Consumer prices ......................................................................................................................................... 20
4.8.5 Conclusions................................................................................................................................................. 21
4.9 SENEGAL .......................................................................................................................................................... 21
4.10 BOTSWANA ...................................................................................................................................................... 21
4.11 NAMIBIA .......................................................................................................................................................... 22
5 NOTES.................................................................................................................................................................... 23
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1 Introduction 1
1.1 Electricity privatisation/liberalisation and its problems
The 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: deregulation
laws (USA); unbundling public monopolies and liberalisation (EU directive); privatisation of state-owned
operations (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 energy
companies 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 active
MNCs, 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 their
operations 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. These
include the creation of private monopolies or oligopolies (eg Germany, EU) , wholesale price hikes and
power 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 companies 3 , California 4 ,
Africa 5 , Enron 6 , AES (forthcoming) , a series of papers on the Uk experience 7 , the EU in general and
central and eastern Europe 8 . This paper refers to these problems but does not repeat a comprehensive
assessment of them
1.2 Reforms – and alternative reforms

Developments in electricity are often presented in a simple moral fashion - the liberalisers advocate a
‘reform’ process, while their critics are ‘resisting’ this reform. This kind of presentation assumes that
liberalisation and privatisation are the only possible solution to all the issues facing the industry, whatever
they are. A more realistic approach is to ask simply, what are the public policy objectives of the electricity
system, and how can they best be met? This allows for a range of possible answers, which may or may not
involve 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 and
privatisation have been resisted, and the range of alternatives that have been proposed. It looks at the
countries 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 very
few examples of successful resistance or alternatives without engaging political allies.
In some cases, these alternatives have consisted of simply defending the existing system – which, depending
on the objectives and the actual performance of the system, may be a reasonable option. For example, where
a new IPP is proposed, which may cause environmental damage and for which there may be no demand, the
best alternative may be simply no new power station at all. But in many cases, the alternatives being
explicitly 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 definitely
alternatives to privatisation, liberalisation, IPPs etc. The electricity systems of nearly all countries have been
developed historically by a model based on public ownership and cross-subsidy, implemented in a range of
ways. By contrast, the neo-liberal political programmes which brought in these policies are less than 20 years
old, and still owe more to theory than practice. Different policy concerns have also been raised more
recently, notably for environmental issues – pollution, nuclear risk, the desirability of renewables – and for
greater transparency, openness and public participation. So privatisation and liberalisation are not the only
solution – 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 claim
that private energy companies are more efficient than public ones; the forecast demand for electricity may
fail to take account of the possibilities of energy-saving efficiencies, and, if tied to a long-term power
purchase 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 by
many people. These include:
Social and development issues

o Extension of the network to connect the unconnected
o Affordable and sustainable prices for energy
o Employment levels and conditions
Environmental issues
o Pollution and emissions in generation (coal etc)
o Problems of nuclear power
o Renewable sources of energy
o Energy efficiency – scope for reducing consumption of energy
Democratic issues
o Public accountability - of policies, delivery, prices, reliability
o Transparency
o Public participation
This democratic dimension is of particular importance. The neo-liberals usually identify ‘political
interference’ as one of the problems with electricity systems, and usually point to examples of politicians
imposing tariff policies to maintain their electoral popularity rather than to improve the public electricity
system.
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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: trade
unions, 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, public
accountability, 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 the
table 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 Cogentrix
campaign in southern India - or a single city’s utility, such as the Emcali campaign in Colombia; in other
cases they covered a whole country, such as the campaigns in Mexico. They include cases where existing
systems have been successfully defended so far, while developing and extending services, such as South
Africa. 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 privatize Electoral activity, publicity Unions, political parties,
state utility NGOs
Brazil Ongoing National Oppose privatization of Electoral activity, publicity, Unions, political parties,
and local utilities, generators strikes NGOs, consumers
Canada 2002 Ontario Court rules against Court action, publicity Union, NGOs
privatization of utility
Ontario Hydro
Colombia 1997- Cali Oppose privatization of International publicity, strike Unions, community
date municipal utility Emcali action NGOs, international
NGOs,
France Ongoing National Keep unified state company Publicity, electoral activity, Unions, political parties
EdF
India 1996- Maharashtra Oppose Dabhol IPP (Enron) International publicity, Community NGOs,
date research, demonstrations, environmentalists,
strikes energy NGO
India Ongoing Maharashtra Democratisation not Research, publicity, public Energy NGO,
privatization of state utility hearings community NGOs,
MSEB unions,
India 2000 Karnataka Opposition to Cogentrix IPP Research, publicity, Environmentalists,
plan demonstration etc community NGOs
Indonesia Ongoing National Prosecution of IPPs for Negotiation, publicity, court Public authorities,
corruption cases unions, international
Mexico Ongoing National Oppose privatization of Strikes, research, publicity, Unions, political parties,
electrical utility demonstration, international NGOs, international
publicity
Pakistan Ongoing National Prosecution of IPPs for Strikes, research, publicity Unions, political parties,
corruption NGOs, international
Senegal 2001 National Termination/collapse of Negotiation, Strike action Political party, unions
privatization plans
South Africa Ongoing National Keep unified public utility Strikes, demonstrations Community NGOs,
Eskom unions,
USA 2000 California Los Angeles utility avoids Electoral activity, publicity Political parties,
power crisis 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 group
Prayas, 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, they
assess the achievements of the existing model, based on state ownership, self-sufficiency, and cross-subsidy
to agriculture and households. In 50 years, capacity has increased 55 fold, with 78 million customers, and
half a million villages connected. There are however limits to these achievements, and real problems in the
sector: half the population is still unconnected, and there are power shortages, weak accounting and
metering, 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; its
susceptibility to ‘capture’ by economic interests; its negative impact on development, by treating electricity
simply 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 – with
vested 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 the
Enron 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 reform
and 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, direct
accountability to public, and meaningful participation of public. This task of democratizing the sector
through public-friendly TAP - which, prima-facie, appears to be a Herculean task - needs to be handled in a
systematic manner. The three major governance agencies - the state, the utilities, and the regulatory
commissions - could be TAPed in a variety of ways. However, the space and capabilities of civil society
institutions will be the important determinants of successful TAPing of these agencies. Improving on both
these counts in a rapid manner is the main challenge facing the civil society in this country. Another
challenge before the civil society in this country is to resist the attempts by the vested interests to urgently
bulldoze major and irreversible changes in the structure and frameworks (including the ownership patterns)
in the sector.” 10
Prayas’s 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 the
engagement with the Maharashtra public debate over price rise proposals in 2000.
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The Maharashtra Electricity Regulatory Commission (MERC) followed the TAP principle to facilitate a hike
in the electricity tariff during 1999-2000. The MERC published a gist of the proposal for tariff hike in scores
of newspapers all over the State. In response, it got a total of 468 objections, in the form of affidavits or
plain letters. This is the stage at which the Commission made a vital move. Instead of internally processing
these objections, it launched a process of public hearings all over Maharashtra - five hearings at divisional
headquarters and three in Mumbai.
Prayas and other groups, like the Mumbai Grahak Panchayat, got intensely involved in providing
information and pushing for rigorous transparency. Thus the open-to-public proceedings produced a wealth
of detailed information which compelled the MSEB to admit the errors in its own data, projections and
analysis. Over a period of six months the MERC, the MSEB and the public virtually worked together to
formulate a tariff hike of 6.5 per cent, instead of the original MSEB proposal for 18 percent. Apart from this
direct monetary benefit to the consumers, there are other vital gains from this exercise. According to
Shantanu Dixit, this process showed how the MSEB had for years maintained that there was a 17 per cent
loss in transmission and distribution, but the public process compelled the MSEB to accept that these losses
are actually around 30 per cent. These variances were so great that eventually the MSEB had to go back to
the drawing board and formulate a whole new proposal. Even this revised tariff hike proposal was thrown
open to public scrutiny and only then approved in May 2000.
Shirish Deshpande, of the Mumbai Grahak Panchayat, is confident that this process has established valuable
precedents 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 of
bodies like MERC. These dangers can be warded off only by vigorous and systematic intervention of
citizens. 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 unions 12 .
The plan outlined a new ‘Public Control Model’ for the MSEB, involving 3 key parties – the State
Government, MSEB itself, and the unions and a set of agreed elements:
• Concrete & Quantitative Targets for Performance Improvement (bill recovery, reduction in
transmission 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 of
reforming 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 countries
which they studied: “By focusing on financial health, reforms in the electricity sector have excluded a range
of broader concerns also relevant to the public interest. In this study, we have examined the social and
environmental concerns at stake in these reforms. We have found that not only are they inadequately
addressed, but that socially and environmentally undesirable trajectories can be locked-in through
technological, institutional, and financial decisions that constrain future choices.” The report put forward
four 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 institutional
restructuring 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 sector
is 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-driven
vision of reform to emerge.
2. Structure finance around reform goals, rather than reform goals around finance. Reform processes have
catered to a need to attract private capital. Since sustainable development may not always be aligned with
short-term profit motives, reform processes must move beyond the imperative of attracting capital. While
this may seem a farfetched notion in capital-constrained developing countries, the time may now be
opportune to change the terms on which private capital enters a country. Efforts to attract capital through risk
mitigation and tariff increases have not won popular backing, and as a result have not been politically
sustainable. A broader vision of reform and a public consensus supporting that vision could lower these
risks. Private capital may be willing to accept more realistic financial returns, if they are combined with less
risk. 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 will
reflect public concerns only if it is supported by a robust process of debate and discussion. Hence, a third
imperative 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 space
for articulation of a range of public concerns than have the closed processes prevalent thus far. It is also more
likely 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 public
benefits advocates strengthen political coalitions supporting sustainable development and counter those
favouring parochial interests. In particular, the case studies suggest that social concerns carry far more
political weight in a national context than do either local or international environmental issues. Efforts to
exploit 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 had
little to do with the electricity industry as such. For example, motives include raising revenue from the sale
to pay for tax cuts or to repay loans from international financial institutions (IFIs), or reducing trade union
power. However, a number of specific issues are frequently cited as justifying the restructuring and
privatisation 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 by
public 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 for
privatisation, privately owned companies are inevitably more efficient than publicly owned companies
regardless of whether the system they operate under is competitive or monopoly. However, there is no
empirical evidence to support this hypothesis. Comparing the efficiency of electricity industries in different
countries is notoriously difficult, but evidence from about a decade ago suggests that prices in publicly
owned 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 in
ownership, 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 by
politicians can have detrimental effects on the management of the companies, but in many cases, intervention
is both justifiable and desirable. As owner of the company, government has the right to exercise control over
its investments if things are going wrong. Shareholders in private companies are often quick to respond to
poor company performance by requiring changes in the management of the company or strategic changes in
direction. This is not generally characterised as interference even though private investors are frequently
characterised 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 the
electric utility might, on balance, be negative, if the net effect on the economy as a whole is positive, such
interventions would appear justifiable. This is not to argue that all such interventions are justifiable, and
governments 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 private
companies can also be corrupt or that companies might operate policies that at best are ethically dubious to
maximise ‘shareholder value’. None of these practices is desirable. There is however evidence that
privatisation increases the opportunity and the incentive for companies to pay bribes in order to get contracts
on 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 to
finance a system that might be growing at seven per cent per year (doubling in size every decade) are
considerable. This raises two questions: Can publicly owned utilities finance expansion? And would
privately-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 or
more, in many cases with investment being funded by publicly-owned utilities. Clearly for countries that
have limited access to investment capital, for example due to restrictions imposed by the IMF, this may
complicate the issue. However, in countries such as Mexico and Brazil, there is evidence that the problem is
not so much externally imposed restrictions as internal restrictions perhaps with a covert aim of apparently
proving publicly owned companies could not do the job, opening the way for ideologically inspired
privatisation.
The evidence that private companies will be more reliable suppliers of investment capital than public
companies 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 new
investment, it would seem to make more sense to design a system to channel foreign investment into this
area, 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 system
are given monopoly privileges that guarantee their market and their income, and in return they are obliged to
invest sufficiently to ensure the continuing reliability of the electricity supply system. However, most
electricity reforms do not overtly aim to change electricity supply from a publicly owned monopoly to a
private 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 that
represents the majority of investment in the electricity industry. Most restructurings entail the creation of
some form of wholesale electricity market and, in a market, competitors have no obligation to invest. As
was amply demonstrated in Brazil and California, if there are no requirements on generation companies to
invest, 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 to
invest, 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 consumer
imposes on the system and cross-subsidies should be avoided. This should give consumers accurate price
signals on which to base their electricity purchasing decisions. If electricity prices are too low, consumers
will 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), to
give 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 are
shared it is difficult to allocate demand to a particular customer, and so pricing is inevitably not an exact
science. LRMC pricing is equally contentious and forecasts of the technological direction of industry and of
the price of fuels have seldom been accurate. For example, for decades, it was assumed that cheap nuclear
power would be the future for the electricity industry. It is now clear that nuclear power is neither cheap, nor
will it inevitably represent the dominant future source of electricity. While cross-subsidies are economically
inefficient, they have been successfully used throughout the world to allow connection of new consumers to
the 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 generally
guaranteed its income and therefore has no a priori incentive not to price efficiently. In practice, there are
political 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 are
often able to exert pressure, either directly on the utility or indirectly via politicians to get access to power at
sub-economic prices. Politicians may also require poor consumers to have access to cheap electricity as a
measure to alleviate poverty. Typically, this cheap electricity for electric-intensive industries or for poor
consumers 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 that
no market, much less the wholesale electricity market, has ever achieved the requirements for a perfect
market, i.e. atomistic competition, perfect information, negligible barriers to entry and exit, etc, it cannot be
assumed 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 atomistic
competition is unrealistic and the industry will be in danger of being an oligopoly. The lowest prices will
tend to go to those with most negotiating power, which means large consumers. Small consumers do not
have 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 owned
monopoly. However, it is far from clear that transforming the industry into one owned by international
private 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, but
without 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 corruption
of public officials needs to be tackled directly, not by reducing the areas in which corrupt officials can
operate.
Many of the problems of publicly owned monopoly utilities are related to the relationship between
government and utility, and the need to provide a proper framework within which the electric utility is
managed. Government intervention is not wrong as such, but there needs to be a framework that prevents
arbitrary and disruptive interference. Equally, cross-subsidies can be easy and effective ways of meeting
wider policy goals, but they need to be under continual review to ensure that they do not become fossilised
and 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 owned
electricity industries organised under monopoly lines and the extent to which privatising and introducing
competition would solve these problems. It concluded that on issues such as corruption, efficiency, security
of investment funding, efficiency of pricing and interference in the management, it was far from clear that
the privatised competitive model would solve these issues. However, privatisation and introducing
competition 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 no
incentive 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 government
are 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 will
tend to offer them lower prices than to those offered to their captive consumers in an attempt to retain this
market. In Britain in 1997, medium and large industrial consumers were able to choose their electricity
supplier, but small consumers were still captive to their regional company. Regional companies
systematically 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 for
generation (about 50 per cent of the overall bill) than large consumers. This discrimination between classes
of consumer could have been overcome with more rigorous regulation, but cross-subsidies to poor
consumers would have been difficult to arrange.
However, the problem becomes much more severe if competition is extended to all classes of consumer. In
such a free market, no one supplier can easily be given the responsibility to supply poor consumers. In a free
market, 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 often
have 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 of
competition forcing down prices, a competitive market will always produce lower prices than a monopoly
Page 11 of 24
market. For many goods and services, the costs of competition may be relatively low and easily paid for by
the 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 pay
for this risk. In a capital-intensive industry like electricity, increasing the cost of capital is bound to have a
significant impact on prices. In Britain, the monopoly National Grid Company is allowed to make an annual
6.25 per cent real rate of return on investment, while investment in new power stations typically has to make
a 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 competitive
market, the cost of acquiring new consumers is substantial. For example, in Britain, retail supply companies
are prepared to pay up to £200 to acquire a new residential consumer, equivalent perhaps to the entire annual
cost of electricity.
3.3.7.2.3 Economies of scale and avoidance of duplication

A primary justification for the nationalisation of many electric utilities was that by centralising and
concentrating the industry, scale economies would be achieved and wasteful duplication of facilities would
be avoided. In a competitive market, by definition, scale economies are not achieved and there will
inevitably 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 is
partly because of the difficulty of measuring consumption. For example, in Britain, the cost over five years
that 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 allocate
each consumer’s 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 do
not arise or which are minimal if the industry is owned by local companies. A major risk, particularly for
countries that do not have stable economies and currencies is the risk premium that international investors
will put on investment there. In many developing countries, economic growth rates and hence electricity
demand 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 will
generally require that profits be guaranteed in US dollar terms. For example, in Brazil and Argentina, the
local currencies fell in value to less than a half of their previous value against the dollar in recent years, but
without a major increase in local inflation. This means that to maintain the value of profits in real dollar
terms, profit margins will have to more than double. Where local companies are subsidiaries of international
companies, there may be disruption if the parent company runs into difficulties elsewhere. For example, the
collapse 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 company
was generally one of the largest companies in the country. This often allowed a range of capabilities and
skills to be developed. Within the electricity industry, the company could develop training programmes that
would increase the level of local skills. It could also favour local suppliers of fuel, equipment or services to
stimulate local capabilities and skills. An international company operating in a competitive environment will
inevitably 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 bought
on international markets often from multinational companies. Thus, the UK coal and power station
Page 12 of 24
equipment supply industries have both been lost following the privatisation and restructuring of the
electricity industry there. While there may be justifiable criticisms of specific arrangements favouring local
suppliers, if well managed, such arrangements can be a useful tool to develop local skills and capabilities and
improve trade balances.
4 Cases
The 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 was
proposing privatisation of electricity. New South Wales instead now has public sector corporatised Energy
Companies, 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 also
been rejected in South Australia and Queensland, leaving Victoria as the only state which has privatised
power.
4.2 South Korea

South Korean unions waged a long campaign against privatisation of electricity, gas and other utilities. The
campaign included parliamentary pressures, general strikes and research, but not until recently did the unions
make serious attempts to collaborate with environmental groups and others. The privatisation of the
electricity utility Kepco has started, at the end of 2002: the first generating subsidiary has been put up for
sale to industrial investors. The opposition to gas privatisation has been successful so far.
However, South Korea’s state-owned electricity companies already have solid international credit ratings and
are able to raise money through international bond issues at favourable rates. In December 2002, Korea
Western Power Co., a distribution company owned by Korea's state electricity company, sold $150 million
of five-year bonds yielding 1.65 percentage points more than U.S. government bonds of like maturity. Korea
Electric'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 as
Ontario 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 to
abandon control of the second largest transmission company in North America to private and foreign
investors.
In December 2001 the provincial premier, Mike Harris, announced that the government planned to sell
Hydro 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; and
so specific statutory authorization is required before the government can sell Hydro One, which is estimated
to have assets worth $11.1 billion, and last year alone generated a net cash flow of almost $1 billion for the
benefit of Ontarians.
After closely reviewing the provisions of the Electricity Act, the Court concluded that the legislature did not
intend to embark of a privatization program at this stage in the reorganization and corporatization of Ontario
Page 13 of 24
Hydro. …the Court also noted that the purposes of the Electricity Act are set out in detail in the Act and
privatization is not among them. The Court concluded: “I would have thought that the notion of
privatization should have been set out in clear and unequivocal terms in the ’purposes’ portion of the
Electricity Act, as were a whole range of other important social and economic matters. Privatization of a
long-standing important public institution, such as Ontario Hydro, is not something I would have thought
would or should occur without addressing the issue head on. The fact that it wasn’t set out as a stated
purpose is consistent with the conclusion that the Electricity Act, as comprehensive a piece of legislation as
it is, is not intended to deal with privatization, as such, let alone through any implied ability to alienate
personal property as a natural person."
The Court also rejected the government’s arguments that CEP and CUPE did not have standing to bring the
application, holding that, while the unions and their members may not have a direct personal interest in the
sale of Hydro One, they did meet the test for public interest standing. In this regard, the Court noted that the
interests 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 of
contract negotiation and administration’... To borrow [from a case of the Supreme Court of Canada] ’the
interests 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 ’mere
economic gain for workers’. “ 16
4.4 USA
In 2000 in California there was a major crisis as a result of liberalisation. Wholesale prices were suddenly
forced upwards by a small group of companies which dominated the market. Prices to industrial consumers
soared, distribution utilities made huge losses, there were cutoffs and blackouts throughout California. One
of the few areas to escape was Los Angeles, where the city had opted out of liberalisation and retained a
vertically integrated public utility.
“The Municipal Utilities fared much better. Refusing to take part in the deregulation experiment, the LA
DWP [Los Angeles Department of W ater and Power] actually brought some generating plants out of
mothballs, foreseeing a power crunch. With careful planning, they have been able to keep prices to their
own consumers at reasonable levels and sell excess power on the PX to the other energy-starved, divested
private utilities. And of course on the PX they have been getting the same prices that the other generators
have. The result has been a great surplus in their accounting, and they are considering passing on the
benefits 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 free
market 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's
ratepayers, the first to be exposed to market forces, faced a doubling, even tripling of their electric bills, the
DWP'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 nearly
100 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 DWP
has halved its debts since 1996, over the same period as the investor–owned utilities have gone to the edge of
bankruptcy. 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 which
will provide a further 2,900 MW of capacity.
Page 14 of 24
The DWP and other municipal companies have given their cities a competitive advantage over others : “the
DWP 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 of
electricity in other cities. In San Diego, the San Marcos municipality has decided to create a municipal
utility, and Chula Vista is considering one. A grass-roots movement for municipal ownership has started in
the San Francisco Bay Area, which faces the deregulated marketplace in 2002.
Contrary to conventional assumptions, the private operators have received subsidies while the municipal
operations have managed without any such subsidy: “Under the 1996 law, investor-owned utilities received
massive 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 of
reliability and foresaking deregulation, the DWP furnishes a valuable lesson in the tangible benefits of
public ownership.”
New proposals for restructuring California’s electricity around public ownership and accountable planning
have emerged in the wake of the crisis. At the beginning of 2002, The Foundation for Taxpayer & Consumer
Rights 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 publicly
owned power……..California should have a plan to become the standard bearer of an efficient energy
system. The California agencies responsible for the energy system – the PUC, the Power Authority and the
Energy Commission – should develop an integrated resource and procurement plan, which will develop a
guide for California’s energy future. This plan will provide a publicly accountable system under which each
of the agencies, and the private entities that it regulates or otherwise oversees, will operate. The plan will
identify procurement guidelines to be followed by any entity (public or private) that buys power for utility
customers. …. The plan will also be used to assess the energy needs for the state from a public interest
perspective to ensure that the state maintains the appropriate mix of peaker and base load plants as well as
renewable and non-renewable resource powered plants. Through a combination of tax incentives and
regulatory mechanisms, this plan should increase California's energy efficiency standards and its supply of
renewable electricity sources. To ensure, for example, that the state’s electric grid is not dependent on one
fuel source, such as natural gas, the plan should require that at least 20% of the electricity sold to retail
consumers 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 international
consultants recommended reform – vertical unbundling, splitting of distributors, creation of IPPs, and
privatisation of the resulting companies. 20
However, the initial euphoria that followed the start of privatisation in Orissa has started to wane as the state
has faced significant problems in the electricity sector resulting in wide-spread power cuts and price
increases. 21
AES took over control of CESCO, one of Orissa’s four distribution companies, in September 1999. It
bought a 49% stake, with the other 51% owned by the grid company. In 2001 AES pulled out, and the state
Page 15 of 24
government took back control of the distribution utility CESCO. As a detailed report showed, AES’ presence
had 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 tens
of 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 for
the $60 million cost of rebuilding the network, or the people of Orissa should pay three times as much for
their electricity. Dennis Bakke, CEO of AES, reportedly said "People have to bear the cost if the
government 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 in
their payments to the state-owned Grid Corporation of Orissa (Gridco) for bulk supply, which in turn meant
Gridco had no funds to buy the electricity. In early 2001Gridco initiated criminal proceedings but then the
state 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 May
2001 in protest at irregular power supplies. By July 2001, the chairman of AES had made it clear that they
were 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 regarding
bank accounts or paying of employees. In-house billing (and hence collection) came to a standstill since the
computers in the corporate office were kept under lock and key. AES management pulled out at a time when
the area had just suffered damages from heavy rain and flood in July 2001 and progess of restoration work
suffered 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 to
strike because they had not been paid and consumers taking to the street to protest against growing power
cuts. 24 On 29th August 2001 a new CEO was appointed by the regulator to take over CESCO, with no
opposition from AES. According to a Gridco spokesman, "He has commenced the job of bringing order to
the company, restarting the energy distributing process and organizing payroll to pay salaries to CESCO
employees." 25 On 3rd September 2001 he reported that provisionally the liabilities of Cesco were to the tune
of Rs. 653 crores with Rs.577 crores payable to Gridco for bulk power purchase. The liabilities included
substantial amounts not paid to Pension Trust, Provident Trust, suppliers and contractors.
In June 2002, the Orissa Electricity Regulatory Commission (OERC) blamed AES and Indian company
BSES Ltd for the problems in the power sector in Orissa which caused power cuts for about two and a half
months. The commission threatened to revoke their licences if they fail to improve the situation. A review
of 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. As
apartheid ended, it played a key role in implementing a massive programme of rural electrification, following
clear 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 photovoltaic
systems. When viewed from a sustainable development perspective, Eskom’s electrification programme is
Page 16 of 24
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 evident Economic:
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.”
Eskom’s role in this programme was driven by a clear set of social and development objectives, that
extended even beyond the challenge of rural electrification itself to include development of its own
workforce, 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 unions
continue 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 and
possible 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 South
Africa in comparison to many other countries. The country’s 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 far—particularly 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 both
national 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 a
campaign of action to oppose these developments, nationally and loacally. It also ran a series of workshops
for its members to address the issue developing alternatives, which addressed both international dimensions
and 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 SAMWU’s 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 public
sector workers around the world face similar problems….
Page 17 of 24
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 union’s 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 its
power comes from fossil fuels, with most of the rest hydro-power. Demand is growing rapidly, generally
about 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 by
2010 if demand is to continue to be met.
Until 1992, the nationally-owned electricity company, CFE (Comision Federal de Electricidad), was, under
Mexico’s Constitution, the only company allowed to generate power for public supply. The law was
amended 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, the
Supreme Court ruled that they were not. CFE also operates the transmission and distribution network and
sells power to final consumers over all of Mexico, except for most of Mexico City. There, LFC (Luz y
Fuerza del Centro) operates the distribution network and supplies power to final consumers. LFC is also
publicly 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
Zedillo’s government by the Energy Secretary, Luis Tellez in 1999. These were based on the
recommendations of international consultants, NERA. They followed closely the structure and mechanisms
adopted 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 and
also at a political level. The SME union, the main union in LFC, was a particularly powerful voice arguing
against the reforms. No substantive progress was made on implementing the proposals before the
presidential elections in July 2000. At these elections, the Institutional Revolutionary Party (PRI) was
defeated 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 upper
house, while in the lower house, PRI and PAN are nearly equal. The third party is the Party of the
Democratic Revolution (PRD).
After two years, a number of proposals were on the table, the most important of which were those of
President Fox, PRI and PRD. All were committed to amend the Constitution to clear up the situation of
IPPs. More significantly, all professed to want to strengthen public ownership. However, the Fox proposals
differed in important respects from those of PRI and PRD, requiring de-integration of CFE and introducing
competition for large consumers. This would require further changes to the Constitution. IPPs would be
built to supply large consumers allowing foreign investment into the market. Both PRI and PRD did not
propose to break up CFE and there was a much more restricted role for private investment. The lack of a
majority in either House for the PAN Party means that the Fox government may find it difficult to achieve
the majority needed to get his proposals through. Constitutional changes require a two thirds majority in both
the Senate and Congress. The PRI and PRD proposals also do not have universal backing in their parties, so
some form of compromise is likely to emerge.
Page 18 of 24
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 Mexico’s rapidly growing
electricity demand. The PRI and PRD proposals tackle this issue by attempting to strengthen CFE’s finances
so it can finance much of the investment itself. The Fox proposals remove large consumers from CFE’s
obligation to provide a public service to consumers. The success of these proposals would depend on the
extent to which international investors would be prepared to build power plants to supply this market. Given
that few large electricity consumers would be prepare to sign a long enough term electricity supply contract
to underwrite the construction of a large new power plant, this must be in doubt. Large electricity consumers
cannot afford to tie themselves to rigid terms for long periods and typically are prepared only to sign a power
supply 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 companies
October 1999
4.8.1 The Brazilian electricity industry
The Brazilian electricity is almost entirely based on hydro-electricity and was, until the privatisation
programme, almost entirely publicly owned. The total generating capacity is about 70GW, but demand is
growing rapidly, typically at 6 per cent a year. At that rate of growth, the system-size will double every
decade.
Most of the generation plant was owned by a nationally-owned holding company, Eletrobras, through five
regional generation companies, such as Furnas (Rio de Janeiro) and Chesf (based in Recife). About a quarter
of Brazil’s power comes from the giant Itaipu plant (13GW) situated on the Brazil-Paraguay border. This is
a joint Paraguay-Brazil project constructed under a bilateral government treaty and cannot be privatised. The
vast 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), with
two notable exceptions, the Escelsa (Espirito Santo) and Light (Rio de Janeiro) companies which were
owned 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 President
Fernanado Enrique Cardoso. A privatisation programme of state assets was a part of his anti-inflationary
strategy and in July 1995, Escelsa was privatised, followed by Light in 1996. Escelsa was bought by
Brazilian interests, while Light was bought by a consortium including EDF (France), HLP and AES (both
USA). There was no policy at that time on what the structure of the industry would be, how it would be
regulated and what mechanisms would be used.
However, in 1995, the consultants Coopers & Lybrand were hired by the Brazilian government to advise on
a privatised competitive structure for the industry. Coopers & Lybrand had already advised the Ukrainian
and Colombian governments on electricity reforms, recommending systems very closely modelled on the
British privatisation of the electricity industry in 1990. The World Bank was also instrumental in the choice
of Coopers & Lybrand.
The initial recommendations, again a close copy of the British Model, were not thought to be viable by the
Brazilian experts and the recommendations were modified to take account of the particular circumstances of
Brazil, 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 also
a commitment to privatise the sector where possible: Itaipu and the nuclear power plants could not be
privatised.
Page 19 of 24
The privatisation programme continually slipped and none of the federally owned generation companies
were sold, but, eventually, most of the distribution companies were. The buyers were mostly European
utilties, such as Endesa and American utilities, such as the Southern Company. As a result of the serious
power shortages of 2001/02, blamed on failings in the new model, and also the election of the socialist
candidate Luis Inacio da Silva (Lula) it seems unlikely now that there will be any attempt to privatise the
remaining 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 Brazilian
electricity industry would be and before even the regulatory body had been set up. The results have been
poor 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 the
privatisation programme began, there was underinvestment in new generating plant. The existing publicly
owned companies were subject to government restrictions which made it difficult for them to build new
plants, while private investors chose not to invest. By 1999, it was clear that the next year in which rainfall
was 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 to
cope with dry years, but the reserves were progressively drawn down. At the beginning of the wet season in
1998/99, the reservoirs were only at 19 per cent capacity, very near critical levels, but the next two years
were wetter than average. In 2000/01, the reservoirs were at 29 per cent capacity, but the year was a dry one
in the South East of Brazil where much of the capacity draws its water. By May 2001, it was clear that
unless 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 were
successful, the following summer was wetter than average and new plants were ordered, and as a result, it
was possible to remove restrictions on consumption in early 2002. The power shortages had a significant
recessionary effect on the economy and the new plant, only possible because of strong guarantees on the
price 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 to
overcome inflation by creating a new currency in 1994, the Real (R$), the value of which was tied to the
dollar. This parity was largely held until January 1999, when the pressure became to strong to hold. The
value of the Real declined sharply and has continued to fall so that by December 2002, the exchange rate was
US$1=R$3.75, despite inflation in Brazil remaining low. This devaluation affects consumers in a number of
ways. The price of power from the Itaipu dam is fixed in dollars because it is covered by an international
agreement and this inevitably has an impact on the price consumers pay. However, this would have occurred
regardless of changes to the electricity industry. The devaluation of the Real feeds directly into the price of
natural gas, which is denominated in dollars. Nearly all the plant ordered since the privatisation programme
was 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 to
link their profits to the dollar exchange rate so in the four years since the Real was devalued, their profits, in
Real terms will have increased by a factor of nearly four.
The contribution of public money has been restricted by the Brazil government’s agreements with the IMF,
which restrict public spending, but Brazil was a member of a group of countries that negotiated a loosening
of controls for investment of public money in productive resources. Brazil’s government argued that while
there might be a case for restricting public expenditure going towards operating public agencies, there was
no sense in preventing government from investing in productive assets. A deal concluded in April between
the Brazilian government and the IMF has allowed Eletrobras to invest an additional R$4bn (US$1.2bn) per
year 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 further
R$2.6bn going to electricity projects.
Page 20 of 24
4.8.5 Conclusions
The Brazilian privatisation programme was misconceived on a number of grounds. The first was to use a
model, the British Model, which was designed for very different circumstances. The priority in the British
system was to improve the efficiency of a mature, reliable system in which growth was minimal. The priority
for 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. These
require coordination and central planning to ensure that water resources are used efficiently, using first
resources where there are ample stocks and saving water in dams where levels are low. In a competitive
market, they represent a severe risk to competitors trying to enter the market using fossil fuels. The marginal
cost of hydro generation is essentially zero, so it is always more efficient to use hydro-power when it is
available. This means that those building gas plants will essentially be gambling on the weather. In a wet
year, 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. 30 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 the
concession had failed to improve supply. Power cuts of four to five hours a day were common, despite
privatisation.
In July 2001 the privatisation was retendered, on the basis of selling 51% of the utility. However
negotiations with Vivendi broke down when the company failed to secure the required finance. The
government turned to the second ranked bidder, AES. However, again negotiations failed and the
privatisation of Senelec was called off. One reason for the collapse of the negotiations was the investment
program that Senegal wanted the two to assume. Both Vivendi and AES were intent on minimizing the cost
of 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 deficit
estimated at 60 MW. The generators, costing 19 million Euros ($ 18 million), were financed by the West
African Development Bank, which put up 9.1 million Euros, and by the Banque de la Communaute
Economique des Etats d'Afrique de l'Ouest (Ecobank), which contributed 6.8 million Euros. The remaining 3
million came out of Senelec's coffers, and the two units are to be put into service at the beginning of 2003.
In addition to new generators, the new Manantali dam will help make up for Senegal's production deficit.
Since early August it has been generating 18 MW. 31
This government has nevertheless not ruled out a future tender for the privatised management of the utility.
4.10 Botswana
The Botswana Power Corporation (BPC) is a parastatal formed in 1970 which generates, transmits and
distributes electricity in Botswana under the provisions of the Botswana Power Corporation Act. BPC reports
to the Ministry of Mineral Resources and Water Resources which has overall responsibility for power.
Almost all of Botswana's nationally generated power comes from the coal-powered Morupule Power Station.
A small Independent Power Producer (IPP), Bemco, supplies the town of Ghanzi in Western Botswana. BPC
has a three year contract to buy power from Bemco. 32 BPC also imports electricity from ESKOM, from the
Zimbabwe Electricity Supply Authority and, since 1991, from Zambia. 33 .
The rural electricification programme, to expand access, is a priority for the BPC with a target of access for
all be 2016. So far 22 percent of Botswana's population have access to electricity, surpassing the SADC
average of 17 percent. Under a new scheme introduced in 2000, customers no longer have to pay the bulk of
the connection fee up front but customers using power less than 35 KW will be required to pay a deposit of 5
Page 21 of 24
percent of the connection fee. The remainder of the sum will be paid over an 18-month period at zero
interest. For those who consumer more that 35KW, the deposit would be at least 10%. Previously all those
seeking power connections in Botswana were required to pay up-front. The new scheme will first be piloted
in Gaborone and Palapye, a town 240 km north-east of the capital, before it is rolled out to the rest of the
country. It was reported that that the corporation customer base recorded a 12- percent growth in 1999
mainly due to the stepping up of the rural electrification programme. 34
Electricity tariffs in Botswana are the highest in the southern African region. 35 ABB Transmission and
Distribution, has undertaken numerous projects in Botswana, building power lines. 36
The corporation is also exploring alternative sources of power, including solar energy and a technology
called the Single Wire Earth Return system, which is currently serving five villages in the country's central
district. 37
4.11 Namibia
In August 2002, National utility NamPower has reportedly raised more than R570m (US$53m) of debt
financing for two new electricity transmission projects, R220m of which is said to have come from South
Africa-based Development Bank of Southern Africa (DBSA). The remaining R350m came from the
European Investment Bank, which has previously provided funding to NamPower. The first project is a
400kV line to supply power to the new Skorpion Zinc Mine and to southern Namibia. This line has been
operational since 11 April. The second, 220kV line runs from Windhoek, the capital, to the new indoor
Kuiseb substation near Walvis Bay, providing power to the country's west coast. Financial services firm
Investec (South Africa) advised NamPower in securing the funding. 38
Page 22 of 24
5 Notes
1 This report was commissioned by PSI. It also arises from discussions at a Transnational Institute (www.tni.org ) conference in
May 2002 and a subsequent discussion paper prepared by TNI “Toward a Equitable, Sustainable, and Democratic Electricity
Future: Power Liberalization or Power Transformation? As is apparent from the text, it also draws on the work of Prayas
(www.prayspune.org ) in this area; Prayas has also carried out reviews for PSI.
2 See www.psiru.org/reportsindex.asp : Independent Power Producers: A review of the issues December 2000; Electricity
restructuring, privatisation and liberalisation: some international experiences October 1999
3 See www.psiru.org/reportsindex.asp : Privatisation of Electricity Distribution: some economic, social and political
perspectives April 2001
4 See www.psiru.org/reportsindex.asp USA, California: Lessons to be Learnt from Liberalisation December 2001; The California
Electricity Crisis- overview and international lessons February 2001
5 See www.psiru.org/reportsindex.asp Privatisation of water and energy in Africa September 2000
6 See www.psiru.org/reportsindex.asp Enron profile December 2001
7 See www.psiru.org/reportsindex.asp Regulation in a deregulated energy market: British experience September 2002 ; Why
retail electricity competition is bad for small consumers: British experience September 2002 ; The Impact of Privatisation on
Electricity Prices in Britain August 2002 ; Sustainability and the British Electricity Reforms July 2002 ; The Impact on Small
Consumers of Retail Electricity Competition June 2002 ; The Electricity Wholesale market in the UK 1990-2001
September 2001
8 See www.psiru.org/reportsindex.asp : The Nordic Energy Market December 2000 ; Impact of electricity privatisation - lessons
from the UK (and Hungary) ;November 2000 EU Electricity Directive: a note on the requirements September 2000 ; Energy
restructuring in Albania, Bosnia, Croatia, Slovenia, former Yugoslavia July 2000; Energy trends in EU March 1999 ; Trends
in Energy privatisation in central and eastern Europe, 1998 June 1998 ; Restructuring and Privatisation in the Public Utilities -
Europe July 1997
9 Prayas, Aug. 2000 Reforms in the Indian Electricity Sector : Resisting the World Bank Model
Dr. Subodh Wagle Prayas, Energy Group Pune, India. For Prayas energy reports and other publications see
http://www.prayaspune.org/energy/engpub.htm
10 Lessons of the Enron Debacle http://www.prayaspune.org/energy/24_INFRA_Rep_01.pdf
11 Excerpt from Subodh Wagley, “Tapping Consumer Power,” The Hindu–India, September 11, 2000. Quoted in Transnational
Institute (TNI) paper on energy reforms, unpublished, 2002: Discussion Paper Toward a Equitable, Sustainable, and Democratic
Electricity Future: Power Liberalization or Power Transformation? (version 1.0)
12 Prayas powerpoint presentation.
13 “Power politics: Equity and environment in electricity reform” ed. Navroz K. Dubash. WRI August 2002.
http://pdf.wri.org/powerpolitics_execsumm.pdf
14 News item 3441. Sources : ASU, 29/03/99
15 Bloombergs December 12, 2002 Thursday Korea Western Power Sells $150 Mln of 5-Year Bonds
16 http://www.cupe.ca/issues/privatization/showitem.asp?ID=5162&cl=1
17 Ibid : The LA Times, The Unexpected Hero in a Deregulated Electricity Market –See footnote 11
18 L.A. Times “The Unexpected Hero in a Deregulated Electricity Market” By STEVEN P. ERIE, ROBERT V. PHILLIPS. Steven
P. Erie Is Director of Uc San Diego's Urban Studies and Planning Program and a Senior Consultant to the L.a. County Economic
Development Corporation. Robert V. Phillips Is a Former General Manager of the Department of Water and Power
19 HOAX: How Deregulation Let the Power Industry Steal $71 Billion From California. January 2002.
20 Report of the Committee on Power Sector Reform of Orissa October 2001
21 The Economic Times May 21, 2002 Orissa Sweats As Grid Corp Fails To Clear Ntpc Dues by Nageshwar Patnaik
22 Financial Express, www.financialexpress.com Storm over AES plan to up rates in Orissa Dilip Bisoi November 16, 1999
23 Energy Daily September 4, 2001 Orissa State Throws Out AES Management At Indian Power Company by Mohammed
Ahmedullah
Ahmedullah
Page 23 of 24
Ahmedullah
26 Financial Express June 28, 2002 OERC BLAMES BSES, AES FOR ORISSA POWER CRISIS
27 “Eskom As A Global Change Agent In Africa” Global Compact Meeting United Nations Headquarters New York, 26 July 2000
http://Www.Un.Org/Partners/Business/Gcevent/Companies/Pdf/Eskom.Pdf
28For a PSIRU critique and suggestions for an alternative approach see Some world-class questions : critique of Igoli
restructuring proposals for Johannesburg (February 2000) PSIRU. www.psiru.org/reportsindex.asp
29 A public sector alternative: SAMWU's efforts, August 2001 by John Pape, ILRIG. South African Labour Bulletin, Volume 25,
Number 4, August 2001 pp. 45-50
30 REUTERs 08/12/1998
31 Africa Energy Intelligence September 24, 2002 Senelec Buys Generators
32 www.mbendi.com
33 www.mbendi.com
34 Africa News November 9, 2000 Botswana Plans Electricity For All By 2016
35 www.mbendi.com
36 www.mbendi.com
37 Panafrican News Agency (PANA) Daily Newswire October 12, 2000 Botswana Power Sector Performs Well by Wene Owino
38 World Markets Analysis August 23, 2002 NamPower Raises R570m to Fund Electricity Transmission Projects by Gbenga Alaran
Page 24 of 24

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Resistance and alternatives

A report commissioned by Public Services International

Director: David Hall

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

1.2 Reforms – and alternative reforms

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

investment in new (or modernized) generating capacity needed to meet demand

Social and development issues

2.2 Range of countries

Country Year Location Issue Techniques Actors

3.1 The Prayas critiques and the alternative TAP approach

3.1.1 TAP in practice – participative democracy

3.1.2 TAP and trade unions - proposed reforms for MSEB

3.2 WRI approach: global sustainable and social development of energy

3.3 The monopoly electricity supply model

3.3.1 Private ownership improves efficiency

• Protection of poor consumers

3.3.7.1 Protection of poor consumers

3.3.7.2 The costs of competition

3.3.7.2.1 A risk premium on investment.

3.3.7.2.2 Advertising and marketing

3.3.7.2.3 Economies of scale and avoidance of duplication

3.3.7.2.4 System development costs

3.3.7.4 Loss of local capabilities

4.2 South Korea

4.5.1 Withdrawal of AES from Orissa

4.6 South Africa

4.6.2 Trade union development of alternatives through education

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