Profit and loss

Three privatised utilities - electricity, gas and water - are paying fat dividends but can barely deliver the goods to their customers. Is there a connection?
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The Independent Online
BACK IN the darkest days of the 1980s miners' strike, Walter Marshall, the idiosyncratic, controversial origami enthusiast who was chairman of the Central Electricity Generating Board, made a public vow.

It was his job, he said, to make sure that the lights did not go out all over Britain. Throughout the year-long dispute - and in contrast to the coal strikes that had brought down Edward Heath a decade before - the power continued to flow. The miners were defeated and Marshall duly picked up a peerage from a grateful Margaret Thatcher.

Last weekend, however, the lights did almost go out and this time no one could blame the miners - there are hardly any left to blame. Capitalist, not socialist, dogma was the driving force behind the scare, just as it is behind the water crisis, which threatens new shortages this summer, and behind the growing emergency in Britain's privatised utilities.

The narrow escape - the third for Britain's electricity supplies in just six months - provides one more piece of evidence of a breakdown of an implicit contract between the utilities and the public. The utilities no longer believe that it is their primary purpose to provide a public service and, as a result, the British have withdrawn their trust and abandoned their tolerance.

Last week the Gas Consumers Council revealed that complaints against British Gas had doubled in 1995: complaints about its failure to fulfil service contracts rose by 150 per cent; accusations of delays in providing appliances jumped sevenfold, and the council reported that "householders have occasionally, and disturbingly, been stranded without cooking and heating facilities" when engineers deliberately left supplies disconnected.

This follows the revelation, at the end of last year, that a record number of people queried their water bills in the year ending last March. The number of written complaints about service, 155,000, was the second highest so far this decade - and this was before the onset of last summer's crisis. Everyone expects them to have risen stratospherically since. One Yorkshire Tory MP, Sir Donald Thompson, told the House of Commons on Tuesday: "All summer, correspondence about Yorkshire Water rolled into my office. I have received more correspondence on this subject than on the community charge and the Child Support Agency put together."

The elements may be gathering for a Conservative equivalent of the "winter of discontent" that drove Labour into the political wilderness. Once again there is rising hatred of a group of unelected men, unaccountable to the public but unaccountably favoured by the Government: the utility fat cats appear to be sliding into the shoes of the union barons. And, once again, ideology and patronage appear to be luring ministers into a position where they can no longer guarantee basic services.

Last weekend's crisis owed a little to the weather, but a lot more to the political climate. It began when power lines in the North-east iced up and started "galloping", as engineers call it, spinning uncontrollably like giant skipping ropes in the wind until they hit each other and short- circuited. This knocked out the nuclear power station at Hartlepool and the big Teeside gas-fired station.

This would have been no more than a little local difficulty had it not been for the failure of the privatised utility managers to read the free market they are paid so much to serve. Seeking to drive down costs and boost profits, electricity companies have negotiated 15-year contracts for so-called "interruptable" gas supplies, under which, as the name suggests, the flow of gas may be stopped under some circumstances. These contracts are naturally much cheaper than those guaranteeing fuel whatever happens.

As temperatures fell last week British Gas, facing high demand from its other customers, simply stopped supplying five power stations which were feeding "baseload electricity" to the National Grid. Although British Gas was entitled to do this under the contracts, the result was a crisis for electricity consumers.

Tony Cooper, a member of the Government's own energy advisory panel, last week called the interruptable contracts "unbelievably stupid". He added: "Anyone in their right mind would know that the maximum demands for gas and for electricity would come at the same time."

Almost equally unbelievably, the official electricity regulator, Stephen Littlechild - who is supposed to safeguard the public interest - appears to have been unaware of the extent of these contracts. Last week, after the event, he called for details. His Office of Electricity Regulation (Offer) said that while he had known that such contracts existed, he had not known how many of them there were.

Tony Cooper, who is also general secretary of the Engineers and Managers Association, dismisses this. "It is clear that the regulator has this information available to him," he says, adding: "somehow or other he must have missed it in the paperwork."

No one was supposed to know about this near miss. No formal announcement was made: the news, to the industry's annoyance, leaked out. But last week the National Grid admitted to the Independent on Sunday that similar narrow squeaks had taken place twice last year, on 19 November and 19 July.

The crisis has other roots in the privatisation process. This week the trade union-supported Privatisation Research Unit will publish a major report highlighting "heavy incentives" to remove the spare capacity needed when things go wrong.

Since 1994, the National Grid has saved an estimated pounds 43m after the regulatory body, Offer, accepted its arguments that the rules on spare capacity should be relaxed. The capacity of the Grid has fallen from 61,693 megawatts at privatisation to 57,200 today, while peak electricity demand has risen.

"It is not surprising," the forthcoming report concludes, "that the system is now operating so that there may not be enough electricity. That is the most profitable way to run a privatised system - although it is not the best way to run a public service."

WE were warned. Seven years ago, in the run-up to privatisation, a leaked draft of an address by John Baker - then chief executive at Walter Marshall's CEGB and due to take up the same position at National Power - signalled a sharp change in priorities. "We need to define ways of running our power stations so that we can exploit our power contracts profitably," it said. "Our task will not be to keep the lights on whatever the cost. It will probably pay us to overstress our plant."

The then Energy Secretary, Cecil Parkinson, was quick to assure all who would listen that the draft did not represent Mr Baker's true thoughts.

In fact, experts say, nobody now is responsible for ensuring that the lights stay on. Asked the straight question this week, Offer stumbled vaguely before opining that it is "the market" that ensures power supplies.

"So, instead of Walter Marshall, we have to rely on Adam Smith?"

"Who is Adam Smith?"

Actually, according to Tony Cooper, the "invisible hand" of the market, sanctified by the 18th-century economist, is running down the distribution network for electricity, just as for water. The number of maintenance staff, he says, has been cut by about 40 per cent. As a result, the system of power lines will slowly deteriorate until something sparks a crisis. "In my judgement," he says, "we are moving towards a position where something like a 1987 gale would leave parts of the country without supplies for six months."

THIS will sound familiar to anyone who visited the House of Commons at teatime last Tuesday and saw Conservative, Labour and Liberal Democrat MPs vying with each other to condemn last summer's performance by the privatised water companies.

The shadow environment secretary, Frank Dobson, recounted how the water companies were given pounds 6.5bn of taxpayers' money on privatisation (far more than was raised by their sale) in debt relief and a "green dowry". This was, in the words of Michael Howard - then the junior minister in charge of the privatisation - to finance "the biggest programme of sustained investment in their history".

"What has happened since then?" asked Mr Dobson. "Four things have shot up since privatisation: profits, dividends for shareholders, bosses' pay and bosses' perks. All those increases have been paid for by another increase - the rise in water prices that customers have been forced to pay. Last year the water industry made the highest profits since privatisation, while investment fell to its lowest level since privatisation.

"That cutting of investment is a fraud on the customers. Part of the price formula agreed by the regulator allowed the companies to charge consumers more to fund investment in maintaining the system. Needless to say, they have been allowed to charge the customers, but have not got round to spending all the takings. Anyone else who did that would be open to the charge of obtaining money by false pretences."

Yorkshire Water, he said, had had 69,000 unplanned interruptions of water supplies even before its catastrophic performance last summer. Alice Mahon, the MP for Halifax, said that the same company - which loses 103 million gallons a day through leaks - was planning to abolish its leakage detection teams before last summer and had reduced stocks by allowing its reservoirs to silt up.

Doug Hoyle (Warrington North) told how North West Water had tried to drain three reservoirs for maintenance at the height of the drought. Jack Thompson (Wansbeck) said that Northumbrian Water had cut off 50,000 of his constituents for four days only last month. Patrick Nicholls (Teignbridge) and Matthew Taylor (Truro) mounted a joint Conservative-Liberal Democrat assault on the performance of South West Water.

The Secretary of State for the Environment, John Gummer - who twisted about so much the Deputy Speaker had to rebuke him for not facing the Chair - could only say: "I would not have shared a public relations agency with Yorkshire Water in the past year. One or two things could have been put much better and I know that they will be because the water industry is in private hands."

That particular non sequitur aside, ministers do still seem to believe that the water crisis was merely one of public relations, compounded by a bit of bad weather. Yet the first water restrictions were imposed at the end of June, at the very beginning of the first spell of good weather following what had been the wettest winter since 1869.

MORE generally, ministers see the complaints about fat cats, the cries of monopoly and the growing hatred of the private utilities - a dislike so intense that Yorkshire Water warned its staff not to provoke assaults by being seen in public in uniform - as beside the point. Privatisation, they say, has brought efficiency, and efficient companies must benefit the consumer.

But in the real, monopolistic worlds of the gas, water and electricity industries, specialists have searched long and hard to find any efficiency savings at all.

An exhaustive study of the private regional electricity companies by the London Economics consultancy found entering the free market had not made them more efficient at all. They calculated that the companies would have made money if the regulator had forced them to keep prices below the rate of inflation. Instead, after privatisation, they were allowed to set charge rises at 2.5 per cent above the retail price index, and they made huge profits.

"The rules at privatisation were very lax," said Phil Burns, one of the authors. "They have produced so much money that there has been no need to find efficiency savings."

Such savings as have occurred in other privatised utilities have been found by mass redundancies. Since privatisation 100,000 workers, nearly 25 per cent of the combined utilities workforce, have been fired.

In industry after industry, there is no assumption that the benefits of these "savings" should be shared with customers. Last year, Thames Water dismissed a suggestion by the watchdog, Ofwat, that it should share savings from efficiency gains with customers as well as investors. Regulators "should not get involved" in deciding what dividends it should pay shareholders, said David Luffrum, the finance director.

Even Yorkshire Water's disastrous summer proved to be an irrelevance to top shareholders. In November the company announced a 50 per cent rise in six-monthly profits: dividends rose by 10 per cent.

Dan Corry, senior economist at the left-leaning Institute for Public Policy Research, said last week that, while maximising profit was the only value honoured by the utilities, they had no reserves to respond to a crisis with their workforces "downsized" and their spare capacity reduced. Indeed their status as private monopolies gives them little incentive to learn how to deal with the predictable hazards of dry summers and cold winters.

Nationalised industries with public service values were good in crises, he added. They could successfully appeal to a Dunkirk spirit.

Private companies in a genuine market could also respond well in an emergency, as Perrier did in removing its product from the shelves to restore public confidence when it found some bottles of water may have been contaminated. But private monopolies lack both public spiritedness and fear of the consumer. "They have no incentive to get off their backsides," he said.

THERE is little chance of improvement in the near future. Indeed, new privatisations seem likely to bring further public insults. There will almost certainly be fewer trains after the railways are sold off. At the end of last year the Court of Appeal upheld a complaint from the pressure group Save our Railways that five of the first seven rail franchises contained scope for illegal reductions in services of 50 per cent or more. Instead of increasing guaranteed services to comply with the law, the Government is trying to change the law to legalise the potential cuts.

Meanwhile Captain Robert Killick, who was until October director of safety at Scottish Nuclear, warns that in future, as a privatised nuclear industry comes under immense pressure to boost profits, "it is inevitable safety will suffer, whatever verbal assurances are given to the contrary".

It is possible that some of the worst excesses of the existing privatised utilities may be over. Peter Boulding, of the independent Centre for the Study of Regulated Industries, believes so. The lax price controls on the regional electricity companies are being tightened, while British Gas will soon face competition.

But this does not mean that investment on infrastructure and resources will increase. On the contrary, it is likely to fall even more as times get tougher. And Labour - which, despite Mr Dobson's rhetoric, had an abysmal utilities record in the 1970s - may well make things worse with its planned windfall tax.

"But you try saying this in public," said one analyst who did not want to be named. "The private utilities have lost legitimacy in the eyes of the public and will be fair game after the election. This is going to be the most popular tax in British history."

So if John Major does not succeed in putting out the lights, where Arthur Scargill failed in the 1980s, Tony Blair may yet pull it off.