Lights on: in Britain, the privatized electricity system is providing better service. When will America see the light?

National Review, April 21, 1997 by Cecil Parkinson

In Britain, the privatized electricity system is providing better service. When will America see the light?

Lord Parkinson was Secretary of State for Energy in the Thatcher government.

The day after the British General Election in June 1987, I was summoned by Margaret Thatcher to No. 10 Downing Street and asked to take over the Department of Energy in the new Conservative government. In our election manifesto, we had committed ourselves to privatizing the electricity industry and introducing competition wherever possible.

At that time, the industry was wholly state-owned. It consisted of one generator, the Central Electricity Generating Board, which also owned the high-voltage distribution system covering the whole of England and Wales. Local distribution was handled by 12 regional companies, each of which held a monopoly in its own area and all of which bought all their electricity from the central generator.

When we first presented our proposals for change, we faced huge opposition from a variety of vested interests. We were told that real competition was impossible, that prices would rise, that the physical safety of the workers would be imperiled in the search for profits, and that the security of supply would be threatened. In the event, none of these things happened. In fact, prices have fallen, the safety record has improved, and service has improved. The whole industry is now driven by the needs of the customer and not by the wishes of the producer.

I was recently on vacation in America and I happened to see a news broadcast in which a union leader was opposing deregulation of the American electricity industry. I wondered if he had borrowed one of his British counterparts' speeches from ten years ago. All the same arguments were trotted out in an attempt to scare the public.

On the other side of the coin, a delegation of high-level executives from California's electricity industry visited Britain a couple of years ago to study the way our privatization has worked out in practice, and they have now presented proposals that appear to be based on what we did. Since California is held out by deregulation experts as an example for the rest of the United States, an account of what we did might be helpful.

Our main aim was to make sure that we introduced competition into the system wherever possible and that we resorted to regulation only where breaking the monopoly was not feasible. For instance, we realized that it would be prohibitively expensive to duplicate the distribution system; therefore, the actual wires should remain a monopoly area where the regulators' writ would still run. However, rather than leaving the high-voltage distribution system in the hands of the Central Electricity Generating Board, we decided initially to transfer ownership of that system to the area distribution companies and subsequently to make it a free-standing company. The high-voltage grid became both a common carrier open to anybody who had electricity to sell and also a customer for such electricity -- a market maker. It is now fulfilling both those functions. And instead of having one generation company, we broke the CEGB into three parts. We also opened the market to other generators; approximately twenty new generators have come onto the system.

THE end result is that over the last two years, medium and large industrial users of electricity have had up to 25 suppliers competing for the right to supply them, and we plan to extend that freedom of choice to every household that wishes to exercise it by mid 1998. The critics have now changed their tune and are complaining about how long it has taken to develop the necessary computing technology to do this. One might suggest that if we had said ten years ago that within any foreseeable future every household in the land would have a choice of electricity suppliers, we would have been accused of misleading ourselves and others.

Another criticism of privatization is that it has exposed certain problems and forced the government and the electricity industry to face up to them. Rather than being grounds for criticism, I see this as a further justification of privatization. For example, we had always believed that our electricity industry was extremely efficient, and the industry had always encouraged us to believe this. In fact -- as we learned once we introduced competition -- so long as the industry was a monopoly it had no incentive to be efficient. One of the favorite justifications of industrial pollution in years past can be summed up in a Northern British aphorism, "Where there's muck there's money." Since an overwhelming proportion of the cost of generating electricity is represented by the cost of the fuel consumed, the most efficient electricity is that which is least polluting. In this case, where there's muck, there's waste, not money. And so, contrary to the predictions that competition would lead to an increase in pollution, competition has given conservation and the environment a boost.