Greg Palast The Observer - Britain's Premier Sunday Newspaper - Guardian Media Group
DEMOCRACY AND REGULATION: How the Public Can Govern Essential Services
Pluto Press, London and Virginia
Saturday, February 1, 2003
England’s residents pay 44 percent more for electricity than do American consumers, 85 percent more for local telephone service, and 26 percent more for natural gas -- and by European standards, British prices are low. In the developing world, where costs for labor and other inputs are lower than in the USA, prices are typically far higher. Domestic electricity customers in Sao Paulo, Brazil, pay nearly US$0.13 per kilowatthour, 58 percent more than the US average of $0.08.(1) Except in a few places (such as California, where price regulation was temporarily replaced by markets), Americans pay astonishingly little for high quality public services, yet low charges do not suppress wages: US utility workers are the nation’s industrial elite, with a higher concentration of union membership than in any other private industry.(2) In our travels throughout Europe, Latin America and Asia, we have been asked for the secret to America’s low prices. Experts expect us to answer with a technical discussion of pricing formulae or a description of the energy futures-trading market. Most are surprised by our response: low-cost, high-quality service rests on a simple, two-part formula we call Democratic Regulation: 1. Complete open public access to information; and 2. Full public participation in setting prices and standards of service. Despite its relative success in practice, America’s democratic process of regulating privately owned systems is virtually unknown outside US borders. What little is written of US regulation concentrates on recent experiments with so-called "market pricing mechanisms" and "deregulation." While market-driven utility pricing (first introduced in Britain in 1990 when utilities there were privatised) is currently in vogue worldwide, in most states, the US holds fast to its core system of highly elaborate regulation involving an extraordinary level of public involvement and control. Unique in the world (with the exception of Canada), every aspect of US regulation is wide open to the public. There are no secret meetings, no secret documents. Any and all citizens and groups are invited to take part: individuals, industrial customers, government agencies, consumer groups, trade unions, the utility itself, even its competitors. Everyone affected by the outcome has a right to make their case openly, to ask questions of government and utilities, to read all financial and operating records in detail. In public forums, with all information open to all citizens, the principles of social dialogue and transparency come to life. It is an extraordinary exercise in democracy -- and it works. Over the past 20 years, a wave of privatisation of public services worldwide has forced governments to scramble to create new laws and agencies to regulate these new enterprises. Expert consultants, mostly American and British, have been hired at enormous fees to design rules and regulations to insure that the new private owners of water, electricity, gas, telephone and electricity systems provide quality services at reasonable prices and treat consumers and employees fairly. For the most part, the result has been disastrous. In Rio de Janeiro, prices following privatisation shot up 400 percent, 40 percent of the electricity workers lost their jobs -- and the lights went out. In Britain, water prices since privatisation rose 58 percent in real terms. In one case, the new Yorkshire water company, having drained its distribution system physically and financially, suggested abandoning part of the city of Leeds in response to a water shortage. In Peru, some telephone prices jumped by 3000 percent. Neither regulators nor market forces have reigned in overcharges by the new monopoly enterprises. The International Labour Office (ILO) held a Tripartite Meeting on Managing the Privatisation and Restructuring of Public Utilities in Geneva April 12 - 16, 1999. Among the unanimous conclusions adopted at that Meeting, the following statements summarize what has been learned from the international wave of privatisation: ! The provision of water, gas and electricity supplies for all – regardless of the type of ownership of the provider – must be in the public interest. ! [T]he participation of workers’ representatives [footnote omitted] in such processes, as well as transparency in information and procedures, should be taken into consideration so that there can be positive results for all. ! Also, public accountability is necessary for restructuring or privatisation, to strengthen public utility services and prevent deterioration in quality of and in access to services. ! Lessons about the effectiveness of benefits and problems arising from different approaches can also be learned from countries which have carried out extensive restructuring or privatisation. ! Social dialogue should take place at all appropriate stages of the decision-making process, including within the regulatory framework. ! A fundamental requirement of restructuring and privatisation is that it is carried out in an open and transparent process involving all parties concerned without damaging commercial confidentiality. ! The replacement of the public monopoly by a private monopoly should be avoided or if a monopoly continues it should be strongly regulated. ! Utility and government information and methods must be open for review by industry, workers’ representatives and the public. When utilities are privatised, the State should still retain a responsibility in ensuring universal access to water, electricity and gas services at affordable prices. The issue we address here is not whether privatisation is wise or foolish. We will leave the quarrel over privatisation to others. The questions we will answer are, once privatisation occurred, Why did regulation fail? and, more importantly, How can these systems be fixed? This is why we turn for a cure to the American experience where we find that it is not the rules of regulation but the method by which the rules are designed which makes all the difference. America’s relatively successful control of privately-owned utilities is the direct result of its democratic process, with decisions made by public debate in a public forum with all information available freely to all parties. Until now, no book has been written to give an explanation of the day-to-day workings of this system of wide-open regulation. Our goal is to provide that initial guide. This monograph includes a step-by-step explanation, based on the authors’ 75 years of combined non-academic practical experience in utility regulation, of how to conduct a democratic review of prices and services. Is the American experience useful to Brazil or Germany? Unequivocally, yes. What we find astonishing is that nations from Australia to Peru have adopted the US system of private ownership of utilities while ignoring the US system of strictly regulating their operations. It is not lost on us that so many of the new owners of utility corporations are the very US firms which submit to stringent, democratic regulatory regimes at home. By 1999, US public utility companies had already invested more than US$13 billion in overseas companies.(3) There is no reason to believe these American companies cannot abide by similar rules of democratic governance when operating outside the States. Another little known fact is that, despite the recent experiments with markets in electricity, the US holds to the strictest, most elaborate and detailed system of regulation anywhere: private utilities’ profits are capped, investments directed or vetoed by public agencies. Privately owned utilities are directed to reduce prices for the poor, fund environmentally friendly investments, protect community employment, and open themselves to physical and financial inspection. This is a natural consequence of democratic rulemaking. Public control of the procedure tends to lead to more rules, seldom fewer. For example, after the Three Mile Island nuclear accident in 1979, the code for safe operation of nuclear plants, designed in public, expanded to several thousand detailed pages. This goes against the grain of current economic fashion which is to disparage regulation. But Americans, while strongly attached to private property and ownership, demand stern and exacting government control over vital utility services. The US system is no regulatory Garden of Eden. It has many snakes and traps, many failings; and the theory of the American system often promises more than reality delivers. That makes this Guide especially helpful. The authors, workers in the field, can warn readers away from America’s mistakes and muddles, as well as mark its real achievements. We recognize that, today, the US system of democratic regulation is under attack by the promoters of market pricing in America itself. Led by industrial customers seeking to corner the lowest-priced resources, market advocates seek to exempt the generation portion of the electricity infrastructure from price regulation and open it to what they assert is competition. Thus America itself is engaged in a struggle between setting electricity prices by democratic regulation – as it has done for about a century – and setting prices in a marketplace. But even these market experiments, conducted in a few of the 50 states, have been developed and are monitored with full democratic public participation. The widely publicized debacle in California is instructive. Prices tripled in parts of the state; one utility approached bankruptcy while another filed for bankruptcy court protection; blackouts rolled across the state; and deregulated generation suppliers made extraordinary profits. The details of profiteering became known almost immediately, partly as a result of government-required public financial filings by the price-gougers. The democratic political process, led by the state’s Governor and Legislature, quickly called for correction (albeit in part because of the financial threat to politically powerful utilities). And the democratic result across the country is that, of the 25 states that have taken steps toward their own market experiments, at least a third are already backing away. The half that have taken no steps to abandon their full regulatory structures are now confirmed in their opinions. Only a handful of states are plunging full speed ahead in the face of California’s experience (including Pennsylvania, Massachusetts, Texas, and Ohio). None of the American market experiments has yielded much in the way of positive results for large numbers of consumers when compared to the system of democratic regulation. Chapter I illustrates the consequences of privatisation with and without democratic regulation through case studies of three nations: the US, Britain and Brazil. This is followed by, in Chapter II, a fuller description of what it means to use the democratic process in regulation. Chapter III discusses the creation and dissolution of a power pool and so-called “competition” in the electricity market in California, while Chapter IV shows how the current regulatory trends in the US do not abandon the democratic principles of regulation. Chapter V provides a step-by-step description of the US utility regulatory system and Chapter VI describes how social pricing is done in the US to provide price protections to the poorest customers. Chapter VII describes several other issues that are publicly decided in the US. Chapter VIII provides examples of how key issues of importance to domestic and industrial customers, as well as to labor unions, environmentalists, and low-income advocates, are resolved in the US by democratic participation in negotiations. Chapter IX provides some guidelines for democratic participation in the regulatory process. This is followed, in Chapter X, by a short history of the development of democratic regulation in the US over the hundred years of the Twentieth Century. Chapter XI discusses the issues of transparency and open dialogue and their implications for society's regulation of the multinational corporation. Chapter XII describes the specific failures of undemocratic experiments in deregulation in the US and privatisation in the UK, while Chapter XIII provides more detail about the debacle in California and the rise and fall of Enron. Chapter XIV reviews similar failures in the rest of the world. The Guide concludes, in Chapter XV, with an analysis of secrecy versus democracy and answers the question: Why regulate at all?
1. Telephone prices cited at 1997; electricity and natural gas prices at 1999. Centre for the Study of Regulated Industries (UK); Edison Electric Institute; Office of Gas Supply Regulation (UK); American Gas Association; Consumers International; OECD; Instituto Brasileiro de Defesa do Consumidor; US Department of Energy (DOE) Energy Information Administration (EIA). 2. US Bureau of Labor Statistics. 3. US Securities and Exchange Commission (SEC)Proposed Rule: Foreign Utility Companies, 17 CFR Parts 250 and 259; SEC 2000 Annual Report, Item 9: Wholesale Generators and Foreign Utility Companies (Jan. 31, 2001).

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