Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
by Jerome a Paris
Tue Nov 15th, 2005 at 05:45:58 PM EST
Initially posted on 4 September 2005.
In order to press the point that government is not the source of all problems, quite the opposite, let me tell you the tale of the electricity sector in France and tell you why it works and why State ownership is a big part of why it works.
Sadly, the IPO of Electricité de France (EDF), the national power utility and largest electricity company in the world, is expected to be kickstarted this coming week , with the release on Tuesday of a preliminary prospectus to analysts.
As you know, I am probably more on the right than many of you with regards to economic policy - I am favorable to free trade, I am not instinctively hostile to big business, big oil, and financial instruments, but I am really not convinced that selling off EDF is a good idea. Let me explain below why.
You may want to read beforehand my diary from a few months back describing the fundamental role of nuclear energy in France's electricity mix, and how it is managed and priced.
EDF is usually described as the epitome of what's wrong with the French economy: State-owned, it is "loss-making", "bloated", a protectionist monopoly, and a symbol of taxpayer funded waste and inefficiency, with overpaid and overprotected employees, an incestuous relationship with the State supposed to regulate it and instead protecting it and encouraging it in its acquisition sprees in other countries. Plus, it has untold liabilities relative to unfunded pensions obligations and to the future costs of waste management and nuclear plant dismantlement... Thus, a worthy target for deregulation, privatisation and union-busting.
All of the above is a very partial - and ideological - interpretation of some real facts.
So, here are the facts:
- EDF is State-owned (for the time being). That's true. But it is NOT loss-making and it has NOT received a centime in subsidy in the past 20 years. Quite the opposite, as a cash rich company, it has regularly been raided by cash-strapped governments to cover budget shortfalls, whether via "special dividends", or transfers of reserves from it to other State bodies. In fact, one of the arguments for the privatisation is that the company needs to rebuild its capital base and that the State is unable to do it after having eroded it with saddening regularity in the past. And EDF's sound finances are not built on gouging consumers. As the table below shows, French electricity prices, whether wholesale or retail, are pretty low:
(click on picture for a bigger version, or on this link for the original: European Electricity prices in 2002)
- EDF is a protected monopoly. That's plain false. What is true is that France fought against the European directives opening up the electricity markets, but once these directives were put in place, the French market was opened up to the minimum prescribed, and competition was effective (as opposed to countries like Germany or Spain that had opened "fully" to competition, but somehow competition never happened for various discreet and highly technical reasons). The network (RTE) was operationally separated from EDF (even if it was still a part of the company) and very quickly proved its independence viz. EDF. That EDF keeps a big chunk of the French market does not mean that it is protected but that it is competitive (of course, this is not compatible with "State-owned" in the usual market-driven discourse, so that fact is conveniently ignored)
- EDF's workforce is overpaid and overprotected. It is certainly well-paid and well protected. But is it overpaid? It seems to be providing good value for good money, which is of course unfashionable these days. A former boss of EDF explained to me that EDF was built on the "holy trinity" of the Conseil d'Etat, the Corps des Mines and the CGT. This is worth some explanation, as it is at the heart of my point.
- the Conseil d'Etat is the highest administrative court in France. It settles all legal disputes between the French State and individuals or companies. It advises the government on the "regularity" of laws. It is ferociously independent and plays a major role in shaping the behavior of the French State as a regulator. It has thus acted to limit the overreach of the government viz. EDF as a separate entity with its specific mission to provide for electricity production.
- the Corps des Mines is the elite of the elite of French engineers. It's probably the most concentrated (there are about 10 new ones per year - the top 2% students of the elite Ecole Polytechnique graduate school) and most powerful group of engineers on the planet, and they have been running French industry for the past 200 years, both from the Ministry of Economy and the Ministry of Industry and within the top French companies. They run a high proportion of the top French companies, including Total, Areva, Lafarge, Renault, St Gobain, EADS, Alcatel, Casino (retail), and namy more and they have not been caught in the big scandals of incompetence of the French state like the énarques have in recent years. They've built industries for the long run and for the greater good of France (high speed trains, the nuclear programme, the space programme, Airbus) and EDF is their flagship (even though the current boss, Pierre Gadonneix is not one of them, being just a "standard" Polytechnique graduate). They have a culture of technical excellency, long term planification and a strong ethic of the common good - and they are truly the brightest minds of their generation.
- the CGT is the communist-affiliated trade union and the biggest in France. It has been the strongest union within EDF for the last several decades, and has very strong power within the company (including control of the massive social budget of the company, used to provide advantages in kind to workers). It has always fought hard (and successfully) to protect the rights and income of the EDF workers, but it has also played a strong role in emphasising the technical excellency and the work ethic of the workers. The company is there to serve the public 24/7 and the workers care deeply about this role, and EDF is one the favorite companies of the French public, so it must be doing something right.
The system is simple: strong competence, both at the managerial and the worker level, good remuneration for all (and guaranteed employment), and strong oversight and regulation. and it has worked spendidly so far.
- As regards EDF's investment spree in the rest of Europe, it is a more significant argument, but it is a political one. There is no European rule preventing it, and as the French market is open to all, no assymetry. But countries (like Italy) that have privatised and broken up their national monopoly can understandably be upset that another State-owned company becomes active in their electricity sector. What European rules do say is that State-owned companies cannot be helped by their government, and in particular cannot be financed with the help (or the implicit guarantee) of the State. Privatisation is an obvious way to get there, but by no means the only one.
In this context, my arguments against privatisation are as follows:
- privatisation and liberalisation are seen as a way to make the supposedly sleepy or overweight public utilities more effective. In practice, that means squeezing more out of their workers. Companies with well paid workers are seen as especially ripe targets. So privatisation really means paying the workers less, or using fewer of them to do the same work. There is certainly some scope for that, but if you do that, can you expect the same level of dedication to their job that you have now? And is that a wise thing, to transform your highly motivated and competent workforce into quasi-mercenaries with little attachment to their work, when they are running 58 nuclear plants and providing an ABSOLUTELY VITAL service to the population? Are the short term savings worth the long term risks? That high "social" bill is paying for a real service. Is it reasonable to slowly degrade that service? The price may not be apparent today, but it will be after 20 or 30 years.
- liberalisation of the sector does not really reduce public oversight. If anything, it makes regulation and supervision even more important, to ensure that service is provided to all, that the network has the technical ability to withstand various crises, that the system has the spare capacity for high-demand days, and that the various players in the market all play according to the same rules and have equal access to the high voltage network which is a natural monopoly. The fact that these players are for-profit makes the relationship between them and the regulator confrontational by definition. The regulator is there to force them to do things that have a cost and that are not really necessary in the short term or in normal circumstances, and the companies will try to avoid these as much as they can. A publicly owned company, with less pressure to make as much profit as possible, does not have as much an incentive to cut corners.
The two above arguments function within the liberalised environment that exists in the US and in Europe, but I will argue that there is an even more fundamental argument against privatisation, and in fact, against liberalisation of the electricity sector. Power is a very tricky good. It is almost impossible to stock, and it must thus be produced at the time it is consumed. Thus it requires more capacity for peak demand than is needed the rest of the time. It is also a vital good, whose absence is not tolerated AT ALL (and rightly so) by the population. It is thus important to build robust systems, with enough back up and redundancy - and reliability. Thus it is a sector which has a structural need for over-engineering, and for long term planning, as infrastructure will last 20-50 years (or more for bits of it) and takes time to be built, but needs to be able to tolerate strong short term changes in consumption patterns. It is very hard to make the extra capacity economic. Either you tolerate the very high spikes in prices that make peak capacity (plants that produce power only a few times a year) economic, or you force everybody, through State regulation, to build excess capacity. Price spikes cannot easily be passed on to retail consumers, for practical and political reasons.
The sector screams for State intervention.
This brings me to my final, and most persuasive argument. If State intervention is needed in any case, to force investment, because such investment is vital, why not let the State, which can finance itself much more cheaply, do that investment?
Look at that table (from an official French study, 4 page PDF)
The discount rate you use - effectively the cost if financing, has a major impact on the cost of your electricity, especially for investment-heavy plants like nuclear (or wind). State intervention, in the context of long term investment plans, therefore has a major downwards impact on electricity prices. The "cost" of a well-paid (even an "overpaid") workforce is minimal compared to the gain from long term, sovereign-priced, financing for an investment that NEEDS TO BE DONE IN ANY CASE (that's important as it negates the "crowding out" argument against State borrowing).
So the right can make a decent argument that liberalisation, combined with good public regulation, can be effective and bring competition and efficiency in the sector. But that potential gain is dwarfed by the loss on the financing side as investors lose access to cheap, long term sovereign finance and must additionally remunerate their capital.
The private sector will invest in flexible, relatively cheap gas-fired plants which have to bear the price risk on gas (not a good proposition, it appears today); the State can invest in sectors that require longer periods to make a return, like nuclear or wind, and which have the additional collective benefits of (i) no carbon emissions, (ii) no dependency on the Middle East or Russia and, in the case of wind (iii) no long term supply risk. And State investment will make these actually cheaper than what the private sector can achieve.
So, public ownership means:
- cheaper electricity
- more reliable system
- better paid workers
We must fight the general prevalent mood that says that government "is the source of all problems". No, government, in emergency intervention like in organising the power sector, has a VITAL ROLE to play.
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