December 2012        

Privatisation does not equal efficiency

Northern Ireland’s small electricity sector was privatised in 1992–93. To date it has not brought many of the benefits it promised. Electricity prices are now rising in real terms while elsewhere in the UK they are falling. ESB tariffs are now 30 per cent lower than those of NIE. This paper examines the privatisation model adopted in Northern Ireland and highlights the anomaly that while the distributor, NIE, is heavily regulated, the Generators are not. To a large extent efficiency savings by the privatised generators have not been passed on to consumers . . . The Government’s rationale for privatising the electricity industry was ostensibly to introduce efficiency through competition and to give consumers more choice and hence lower electricity prices.
—Michael Smyth (University of Ulster), “Electricity after privatisation in Northern Ireland,” Irish Banking Review, summer 1996.
      This is the rationale of neo-liberals and the IMF. The lower prices do not necessarily follow.
      “The remainder of the business—transmission, distribution, supply and systems—was vested in Northern Ireland Electricity PLC which was floated in June 1993.” The measure of efficiency was the price compared with the prices of other companies in Britain and Ireland.

Table 1: Concentration in the Northern electricity-generating industry

Power stationOwnerCapacityMarket share
BallylumfordBritish Gas1,067 MW48%
KilrootNigen578 MW26%
Belfast WestNigen240 MW11%
CastlereaghManagement buy-out358 MW16%
Total  2,243 MW 

Table 2: Irish and British domestic tariffs, 1995–96

  Cost per unitQuarterly standing chargeTotal charge per unit1
Easter Electricity7.42p£7.028.27p
East Midlands Electricity7.25p£8.916.33p
London Electricity7p£11.318.38p
Manweb7.63p£11.559.03p
MEB7.18p£8.798.25p
Northern7.21p£11.048.55p
Norweb6.6p£9.347.73p
Seeboard7.04p£8.347.92p
SWEB7.73p£9.98.93p
Southern Electric7.1p£10.338.35p
Swalec8.08p£11.259.44p
Yorkshire Electricity6.95p£108.16p
Average, England and Wales7.27p£9.828.45p
Scottish Power7.13p£10.118.36p
Scottish, hydro-electric6.78p£11.038.12p
Average, Scotland6.96p£10.578.24p
Average, Britain7.22p£9.928.42p
NIE8.25p£14.8410.05p
Average, Britain + NI7.29p£10.258.52p
ESB36.58p£7.457.49p
Method of calculation
      1. The prices have been calculated from published tariff leaflets, assuming an average consumption of 3,300 units per year for consumers at the standard domestic rate.
      2. The British figures exclude VAT at 8 per cent.
      3. The figures exclude VAT at 12½ per cent. Prices have not been changed since March 1991. The figures have been adjusted for the exchange rate prevailing at the end of November 1995. The ESB price was approximately 30 per cent lower than the Northern price; so the ESB was most efficient then, even compared with all the privatised companies in Britain and the North; and the privatisation of generation will probably lead to higher prices, as was the case in the North.
      The savings from privatisation in generation are mainly in labour, by reducing the number of employees and reducing wages. But if prices are not reduced, these savings are not passed on to the consumer. The generators increase their profits, and the consumer does not benefit.
      The role of the regulator is fundamental in the outcome of the privatisation process. They are not a dispassionate referee: they are a member of the elite and are appointed because they are reliable. They are more likely to take the side of the generators. The regulator for gas recently gave An Bord Gáis an 8½ per cent increase when the board had sought only 7.54 per cent.
      What about consumers? There are tax implications. If wages fall, then PAYE, PRSI etc. fall. If the generators’ profits go up as a consequence, their tax will go up; but taxes on wages are higher than taxes on profits, so there is a net loss in revenue to the state. Also, if the generator is a foreign company, which is most likely, there will be no tax on all profits.
      The sale at the moment is likely to be a “fire sale.” The value of a generating station is based on estimated future profits. If expected future profits are low, as is the situation at the moment, when there is a recession, then the value will be low. This means that we have to privatise even more assets to satisfy the neo-liberal Troika.
[KC]

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