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5. Prices, charges and quality: Crucial
elements in the social debate

In most countries, in order to protect individual consumers, the public authorities fix directly or indirectly the price of water and electricity, and even that of gas. The worldwide trend towards privatization and the opening up of the utilities to competition entails the establishment of regulators which are independent of the public authorities (compare Chapter 1.9 above).

In the United States, in the electricity sector, independent regulatory bodies are responsible for guaranteeing a balance between the rights of consumers and those of the private electricity companies. In each state, Public Utilities Commissions are responsible for regulating the electricity system. The jurisprudence of these bodies, which is traditionally favourable to domestic consumers, reflects the liberal tradition of the country. In the same way, the Federal Commission set up by the Federal Power Act of 1935 regulates the electrical sector at the federal level, and in particular as regards prices, which remain low in comparison with those charged in many other countries, although they may vary sharply among the individual states. The United States 1998 Energy Policy Review reports a consistent price gap between publicly and privately owned electricity utilities. The former sell their power 16 to 20 per cent cheaper on average than investor-owned utilities (IOUs). Considerable controversy exists as to whether this gap can be fully explained by preferential access to cheap federal hydropower, tax-exempt financing and other government interventions which effectively amount to subsidies, or whether it reveals a real difference in efficiency.

A recent empirical US study, using a large database covering some 98 per cent of all IOU power sales and 83 per cent of all power sales by publicly owned utilities found that publicly owned utilities had sales prices 2.5 per cent lower than IOUs, holding constant other factors including costs and taxes. The effects on costs and prices of public versus private ownership as well as the effects of competition were tested in the study. The results confirmed that public ownership lowered prices by 2.7 per cent compared to private ownership for equal cost. The effect was particularly pronounced for residential customers: their prices lay on average 15.4 per cent lower if their suppliers were publicly owned utilities. Competition lowered prices by 7.8 per cent on average, in a balanced manner across all consumer groups.⁽¹⁾

The studies carried out by the ILO on the privatization of the public utilities show in general that privatization and liberalization prove more beneficial to large industrial consumers than domestic households.

Furthermore, the available data on electricity prices do not confirm the theory that electricity is cheaper where privatization is most advanced. Table 5.1 presents international price comparisons published by the UK Electricity Association, which suggest that the variation in price levels does not correlate with the ownership of the systems.

Electricity is relatively cheap for domestic consumers in Greece and Ireland, which have introduced no privatization or liberalization; and relatively expensive in Germany and Belgium, which have substantial private sector involvement. Domestic prices in the most privatized country, the United Kingdom, are about average.

For industrial consumers, France and the United Kingdom, with very different systems, have about the same level of prices.

Table 5.1. Electricity prices at 1 January 1996 (UK pence per kWh)

Country		System mainly private (P) or public (PUB)		Company		Domestic		Industry
Austria		PUB		EVN		12.44		7.23
Belgium		P		National		15.01		6.46
Denmark		PUB		SEAS		13.76		4.48
Finland		PUB		Helsinki		7.83		4.29
France		PUB		EDF		13.38		5.21
Germany		P		North		15.85		8.70
		P		West		11.45		7.33
		P		South West		13.75		7.69
Greece		PUB		PPC		7.90		4.86
Ireland		PUB		Urban		8.57		5.06
		PUB		Rural		9.06		-
Italy		PUB		ENEL		11.99		6.89
Luxembourg		P		CEGEDEL		11.56		5.43
Netherlands		PUB		Average		10.69		5.26
Norway		PUB		Oslo Energi		5.84		2.90
Portugal		PUB		EdP		12.01		6.40
Spain		PUB		National		12.65		6.08
Sweden		PUB		Vattenfall		9.49		3.12
England/Wales		P		North		9.23		4.99
		P		Central		9.75		5.87
		P		South		8.42		4.91
Scotland		P				9.02		5.29
Northern Ireland		PUB				10.85		6.15
Source: L. de Luca (ed.): Labour and social dimensions of privatization and restructuring (public utilities: water, gas, electricity), ILO, Geneva, 1998, p. 145.

As this table shows, industrial consumers enjoy lower electricity prices than domestic consumers in all Western European countries, in line with the market principle that large consumers can be supplied more cheaply, and so are charged less.

Where competition is introduced, the market principle of pricing is reinforced, resulting most probably in a more favourable position for industrial consumers as compared to domestic consumers. Evidence from Scandinavia supports this view (see box 5.1).

In the course of the decade 1985-94, the difference in the price of electricity for domestic consumers and industrial customers broadened in the following European countries: Belgium, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and the United Kingdom. In Denmark, there was a reverse trend. On average the difference increased in these countries by between 5 and 15 per cent in the course of this decade, except in Italy, where the difference rose from 61 per cent in 1985 to 116 per cent in 1994. There was also a marked increased in the difference in France (from 46 per cent in 1985 to 53 per cent in 1994), Greece (0 per cent and 12 per cent), Portugal (21 per cent and 32 per cent), the Netherlands (8 per cent and 18 per cent) and Spain (14 per cent and 27 per cent). This increase can be explained by the evolution of overall production, transport and distribution costs of each category of customer. But the trend also reflects the desire of electricity operators to keep prices down for industrial customers, as a means of competing with other energy sources and allowing the user enterprises themselves to remain competitive, prior to the gradual liberalization of the European electricity market.⁽²⁾
 

Box 5.1 Electricity prices in Scandinavia Following the partial introduction of competition in 1996 in Finland, prices actually rose for many people, and the liberalization itself is being cited as one cause of this. The Swedish experience as well is that domestic users have not benefited from reductions, and will be unable to since the cost of metering is too high. Pre-launch expectations that the market would bring 5-10 per cent lower electricity prices for consumers have proved premature. Meanwhile, end-prices to consumers have actually risen about 3 per cent due to Swedish government tax increases. Swedish competition authorities are reviewing pricing policy in the wake of complaints from the public. Indeed, consumers have failed to see any perceivable benefit from deregulation. It was intended that individual homeowners would be able to select the power supplier of their choice, but their hands have in effect been tied by the prohibitive SKr500-SKr1,000 cost of installing new metering equipment. The incentives for shopping around have been significantly reduced. There is a long tradition of energy trading between Scandinavian countries. Power has been supplied across borders in response, for example, to power shortages in Norway's wholly hydro-electric system. Since the start of 1996 there has been an open market for trading electricity between Norway and Sweden. This market, however, has not been working perfectly, and official reports from both countries say that it has been easily manipulated. According to the Swedish Competition Authority: "In a number of cases in 1996 it has been asserted that large power producers in Sweden and Norway have 'manipulated' spot prices on the Swedish-Norwegian electricity trading market to their own advantage, for example by reducing the offer of electric power, which increases spot prices. The effect is that electricity trading companies that have little or no power from their own production and buy electricity on or parallel to the electricity trading market through futures contracts have increased costs for electricity purchase." Source: L. de Luca (ed.), op. cit., pp. 146-147.

Furthermore, taxes on energy and prices to consumers may reflect social or political choices. Thus in Germany, the decision taken in October 1998, by the new "red-green" coalition Government (see Chapter 1.7), with a view to increasing energy taxes on petrol, heating oil, electricity and gas (with exemptions for energy intensive industry), was sharply criticized by employers' organizations as being anti-competitive. The German mining and energy trade union IG Bergbau also criticized the proposed ecology tax reform and believes that additional taxes would jeopardize jobs and reduce purchasing power.

According to the Wood, Forestry and Water Industries Workers Trade Union in the Czech Republic, privatization has had an effect on sewerage and water rates and thus on expenses for citizens and families. Although prices have increased substantially, future rises will be regulated on the basis of the inflation rate. In the Czech Republic, the prices of privatized operations in the case of water are broadly similar to the prices of publicly run utilities (see table 5.2) and domestic water and sewage prices are higher than industry prices.

The reduction of price subsidies has been a feature of transition in some countries, partly in preparation for privatization. For example, in Lithuania, between 1991 and 1995, the average electricity bill for domestic consumers increased by 400 per cent, according to trade union sources. In the case of Poland, it was estimated by senior electricity managers in 1992 that, with the removal of subsidies, average domestic tariffs would rise by 600 per cent within five years and that some people, especially in outlying areas, would face even steeper increases with the removal of cross subsidies. This trend has also been noted in other countries. In the United States, for instance, according to the Utility Workers Union of America, one effect of restructuring of utilities has been cost shifting between classes of customers. Industrial and large commercial consumers have been the real winners in this process, with residential consumers seeing little or no benefit, and in many cases facing the prospect of higher prices, poorer service and diminished reliability.

Table 5.2. Czech Republic: Water prices, January 1997 (Koruna per cubic metre)
(M = municipal, P = private)

Town or area	Company		Domestic water	Domestic sewage	Industry water	Industry sewage
Prague	Prazske vodarny, Praska kanalizace	M	12.18	14.18	9.49	10.30
Karlovy Vary	VaK Karlovy Vary (Suez-Lyonnaise des Eaux)	P	12.20	19.46	8.34	13.44
Pizen	Vodarna Plzen (Générale des Eaux)	P	9.45	11.55	8.40	13.65
South Bohemia	Severoceske VaK (Welsh Water)	P	12.08	15.45	8.61	10.32
Ostrava	Ostravske VaK (Suez-Lyonnaise des Eaux)	P	11.99	16.03	11.23	13.88
Brno	(Suez-Lyonnaise des Eaux)	P	7.04-16.49	9.03-21.63	7.04-12.50	8.19-17.43
South Moravia	(Anglian Water)	P	7.0-22.0	10.08-18.10	4.72-8.14	10.27-14.05
Average			11.59	14.53	10.56	14.15
Source: L. de Luca, op. cit., p. 146.

Without an appropriate regulatory framework concerning prices already in place before the introduction of major changes, the effects of deregulation and restructuring may generally be disadvantageous to domestic consumers. In New Zealand, electricity prices have risen for domestic consumers, although no corresponding fall has occurred in the charges paid by commercial consumers. There are also now considerable price variations between electricity companies. For medium-sized domestic consumers, the most expensive supplier charges 70 per cent more than the cheapest one. That difference is over 60 per cent for smaller households. While the effects of deregulation have varied, they have generally been disadvantageous to domestic consumers.

Furthermore, deregulation of the gas industry in New Zealand prompted a series of changes in arrangements between suppliers and distributors which led to some price increases for consumers. In the wake of deregulation in 1993, the main wholesale supplier, NGC, increased its charges to the main distribution companies by about 6 per cent. The major distributor on the North Island, Enerco, responded by raising its prices by 13-14 per cent for residential consumers and 3-4 per cent for other consumers. Subsequent supply contracts have reversed the 6 per cent rise but incorporated other increases over a five-year period, including higher rates for distributors operating at a distance from NGC.

Management privatization (commercialization and corporatization) is associated with reductions in cross-subsidies between types or categories of consumers and moves towards full cost pricing. In the Indian State of Orissa, the elimination of cross-subsidies in electricity and a move towards full user cost pricing would result in substantial tariff increases for domestic users and the agricultural sector. Already before privatization technically took place, tariffs rose by 17 per cent in two annual rises in 1995 and 1996, and further rises are anticipated with the plans for restructuring and privatization. In Australia, it is anticipated that without cross-subsidies for electricity, rural consumers will either pay more for that service or, if pricing controls are maintained, the higher costs may translate into a reduced standard of maintenance and service on rural lines.

In early 1997, a National Conference on Energy Policy and Economic Development was organized by the Pakistan WAPDA Hydro Electric Central Union (CBA), attended by a number of politicians, academics and trade unions (the Water and Power Development Authority (WAPDA) is the country's main power generation and distribution company). The conference, which received widespread press coverage, produced a number of recommendations and observations. Participants pointed out that electricity prices in Pakistan were substantially higher than in neighbouring countries and criticized the requirement that the Government and WAPDA pay energy companies for 60 per cent of their capacity even when electricity is not needed. The conference also claimed that reductions in costs associated with thermal machinery had not been passed on to consumers. Privatization had not resulted in open price competition, but rather allowed multinationals to reap profits through a fixed minimum price, with the option of raising prices as fuel prices fluctuate. Restrictions on the establishment of new power stations afforded companies already owning power stations considerable market strength. The Conference also claimed that WAPDA had neglected important hydro-electric projects because of the drain on funds represented by payments to multinationals in foreign currency. The Conference set up a Steering Committee to mobilize public opinion and pressure the Government into revising its energy policy. WAPDA has recently faced heavy losses because of large payments to private power producers. The Government of Pakistan has required nine of the country's 19 private power companies to reduce their tariffs as part of an official campaign to cut the public sector's growing losses, which the Government said were caused by exorbitant payments to private power producers.⁽³⁾

In France too, following a substantial increase in the price of water, criticism of the size of water bills has become increasingly frequent in recent years. Angry customers have organized meetings in several regions in order to coordinate their demands for a more rigorous and transparent management of the water distribution services. Given the worrying trend in water prices (up by 40 per cent between 1992 and 1996), France has set up a water observatory which groups together all the partners concerned and which will carry out an analysis of price trends and components. The share of the private sector in the distribution of drinking water in France increased from 31 per cent in 1954 to 60 per cent in 1980, to 75 per cent in 1991 and to 80 per cent in 1998. This evolution now seems inevitable for technical and financial reasons, although calls have been made for the nationalization of this sector or at least a strengthening of the role of the public authorities. The General Planning Board, the Government Accounting Office and other public bodies have published reports encouraging the public authorities to carry out an overall survey of these questions. As a first step, from 1999, all customers in France should receive water-quality readings along with their water bills.

In sub-Saharan Africa, only 5 per cent of the population has access to the electricity network. In most countries in this region, the electricity sector is still controlled by the State, within the framework of integrated public monopolies responsible for the distribution and transport of the energy which they produce. Governments fix tariffs which are not based on any commercial factors since electricity is seen as an essential service for the population. This makes it difficult to undertake any kind of privatization, especially since it is difficult to collect sums due. Some experiments with prepaid meters and "intelligent fuse boxes" have been carried out, in particular in the United Republic of Tanzania, but the economic crisis has made urban households poorer and the State, the largest consumer, is itself an unreliable bill payer. These constraints adversely affect the budgets of electricity companies, which have often large deficits.

In Côte d'Ivoire, the privatization of water has been carried out progressively since 1960. In 1998, the water distribution enterprise SODECI served 380,000 customers (out of 14 million inhabitants) with 1,300 employees. Privatization has resulted in an average increase in the price of water (323 CFA francs per cubic metre in 1998) but the quality of the service provided has also been substantially improved. It is the State which fixes the selling price of water. A system of tariff equalization has now been introduced whereby privileged regions (such as that of the economic capital Abidjan) contribute to the development of other regions. Furthermore, there is a social tariff (approximately half of the average price) for underprivileged populations. The collection rate for water bills is around 95 per cent, which is much higher than the rate generally observed on the continent. This result is due to the decentralization of the commercial management of the enterprise and the establishment of a cut-off date of payment; the Government has also authorized the privatized enterprise to suspend the supply of water in the event of non-payment and to impose late payment penalties. However, as in many countries, the collection rate is much lower in the case of state and other public bodies.

* * *

In conclusion, privatization, like the other forms of restructuring, seems rarely to have resulted in any major social upheaval. The enterprises concerned were often, before their privatization, not part of the administration but public enterprises or establishments of a commercial nature with a large degree of financial autonomy. They were already confronted with the challenge of making a profit before their "denationalization" or "demunicipalization". This status did not prevent them from dismissing workers or from introducing wage individualization. This is why, particularly in the electricity and gas sectors, privatization often results more in a psychological break than any real physical change, and is always part of a process of finding ways to finance the cost of infrastructure, to achieve economic efficiency and a new distribution of competence between the public authorities and private economic bodies.

In the water sphere, the introduction of various forms of private management methods reflects the desire of the public authorities to ensure the long-term viability of this essential public service. Since these three sectors account for a fairly low share of the employed active population (see Chapter 2) the main social issues involved are less a matter of who owns the enterprises than the financing of installations, privacy policy (in particular for underprivileged households) and the protection of health and the environment. Thus, the price of these public services should not increase without an objective justification which can be accepted by consumers, who remain attentive to the link between an increase in price and an increase in quality.

In any reform, a socially balanced approach that takes into account the needs of people and local circumstances is preferable to any slavish imitation of models. The interests of workers in the sector must be guaranteed, as well as access to water and energy at reasonable prices for all citizens, especially the poor and disadvantaged. Water and energy are social goods and constitute basic needs, and strong social control is required to ensure that these goods are distributed to the good of society as a whole.

1.  J. Kwoka: "Power structure: Ownership, integration and competition in the US electricity industry", Boston, Mass., 1996.

2.  J.-L. Gaugiran and L. Farlen: "Les prix de l'électricité en Europe de 1985 à 1994", Revue de la Concurrence et de la Consummation (Ministry of Economy and Finances, Paris), No. 86, July-Aug. 1995, pp. 15-21.

3.  "Pakistan forces power groups to cut tariffs", Financial Times (London), 11 May 1998.

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