PSPD in English Archive 2002-08-24   855

The Privatization of the Power Generation Industry: Evaluation and Alternatives

1. Introduction

While commercialization and marketization are being rapidly carried out in public services, the labour union of the power generation sector has been on strike for more than four weeks against the government’s privatization policy. The government proceeded to respond negatively to the strike, thus increasing social conflict. In this essay, I will examine current social conflicts with a focus on the government’s restructuring plan (privatization) as a part of the government’s massive reform drive. These questions will be addressed: First, is the privatization of the power generation (electric) industry an inevitable choice? Second, are there any problems in the government’s plan? Third, if there are, what should the solutions be?

There are a variety of definitions of “the public good” (or of public service). Even though it is generally defined as the “essential services that maintain the life, property, and routine of the whole or a part of the people”, the detailed contents are generated by the consequences of conflicts and compromises among different social influences. That is to say, as long as the public interest is maintained by the nation, it is incomplete because its contents are determined by classical attributes and political intentions. Thus, the social conflicts regarding the privatization of the power generation can be explained by redefining the extent of public interest through the conflict between the two powers: One tries to keep the power generation service in the public sector, and the other tries to privatize or commercialize it.

When we discuss the public enterprise as a main body supplying services to the public it is important to note that the entity is contradictory of itself. This contradiction ensues between the government’s control and autonomy, and between its effectiveness and commerciality. The question remains: how should public enterprises be maintained in their contradictory structure. It is true that efficiency, which the government takes as a motivation for its privatization, is not always inconsistent with maintaining or strengthening public interests. Even if there are conflicts between them, effectiveness has priority over efficiency. Nevertheless, as has been shown in the pursuit of neo-liberalism recently, when contradictions are generated in the relationship between effectiveness and efficiency, efficiency has a priority, in contrast to previously, and social conflicts are generated in this process.

In this essay, I will investigate the commonalities between the pros and cons of privatization in the particular contradictions of public enterprises. Furthermore, I will attempt to find solutions for these problems. My conclusion is that the government’s plan of privatization will fail to provide non-discriminatory service because of increases in utility fees and the generation of a “fuel poverty population”. I will also reveal the plan’s hastiness and the lack of social agreement, which leads to other social conflicts in practice. Lastly, I will suggest the introduction of public ownership and a competitive system. This will include the reform of management in the power generation companies, based on autonomous management, as alternatives to the privatization of the power generation industry in South Korea.

2. The Issues of Privatization of the Power Generation Industry

(1) The Government’s Plan for Privatization.

The main points of the government’s plan for restructuring the power generation industry are to divide the Korea Electronic Power Corporation (KEPCO), which has been a vertical monopoly, into the generation, transmission, and distribution of electricity, with the generation and distribution held in the private sector. In this case, the transmission of electricity will be preserved as a monopolistic role of KEPCO. In the second phase, competition among the power generation subsidiaries will be guaranteed, but KEPCO will be in charge of transmission and distribution. In the third phase (2003-2009), the wholesale competitive stage, both the competitive and divisional system for distribution and also the transmission network will be opened, so that the distribution companies can be free to use the transmission of electricity. In the final phase (2009-), the retail competitive stage, the individual consumers will be able to choose the power generation companies by themselves so as to gain their electricity supply directly from one of them. For this purpose, the power generation section in KEPCO has been divided into one hydraulic, one atomic, and five steam-generated subsidiaries. At the same time, in preparation for a competitive system among the power generation subsidiaries, the Center for Power Generation Trade was established, and the Power Generation Committee was initiated for promoting efficient competition in the power generation industry.

The government’s plan (the Ministry of Commerce, Industry and Energy, 2002) for the privatization of the power generation companies are for five power generation companies to be privatized in two steps. During the first step, two of the companies will be privatized within the first half of this year, with each company selected and privatized progressively. In second step, the other three companies will begin privatization by 2005. The Trade Sale and the Initial Public Offering (IPO) will be adopted as the method for privatizing. The sale to foreign investment is limited to 30 percent of the national power generation facilities in South Korea.

The government’s segregation and sale plans for the power generation industry are possibly based on the fact that the vertical integration system has been broken up so as to be reorganized in order to create a competitive industrial structure in the network industry. This has been managed through the traditional monopolistic industry because the economic effect due to the scale has been weakened with the advancement of technology, and the matter of system separations was solved with the improvement of trade skills in the market. While these kinds of social and economic factors are combined with the ideology of neo-liberalism, commercialization and marketization are presented as a form of privatization in the area of the power generation industry.

However, which aspect of the government’s plan for privatizing makes a general strike of the power generation employees possible for more than four weeks, and why is the wave of social conflict getting higher? I will investigate this in the next chapter.

(2) The Weakness of the Privatization Policy.

The government has identified the necessity and the goal of its restructuring power generation industry; an increase of efficiency and supply of good-quality electricity through competition in the electric industry, and the assurance of a stable supply of electric power through the functioning of the market. The government’s plan possibly leads to a loss of the public good, and some concern about its inadequate procedures. First, reasons for the concerns on losing public good are caused by worries about an instability of electric supply, an increase of utility fees, economic centralization and outflow of national wealth, generation of fuel poverty in the population, and unstable employment in the power generation industry. Secondly, hastiness and an absence of a social agreement about privatization are reasons for the weakness of its procedures.

1) The Loss of Public Good

Increase of Instability of the Electric Supply

The stable supply of electricity affects not only the price of electricity but also the whole industry. For example, the frequency is essential to the quality of electricity, and it is affected by supply. For instance, a variation 12Hz(0.2%) of frequency causes a failure in conduction in the ultra-high precision industry, and if the frequency goes to 2.40Hz(4%), all the power plants have to stop working. Otherwise the stream turbines will blow up, and the network also will shut down. Instability of the power supply will rise due to the fact that most of the construction of power generation facilities requires a great amount of capital and a long gestation period of capital. In South Korea, it can be predicted that the demand for electricity will continue to increase by 6-8 percent per year, and that brings negative expectations in terms of private capital, if it is not able to undertake the expansion of power generation facilities. Generally speaking, the characteristics of the equipment industry does not always play a role in blocking the investment of private capital. If there is an incentive for investment, such as an appropriate interest ratio, private capital will be raised. However, this way of insuring the appropriate interest ratio does not meet the market principle that privatization is looking for, but it brings an increase in consumer prices, which results in the reduction of restructuring.

In addition to the lack of power generation facilities, another significant reason for the instability of a power supply is the constant possibility of consultation, or at least of strategic behavior, among the power generation companies. As is pointed out in the report by the Korea Institute for the Industrial Economics & Trade, the competition among the six companies is likely to evolve into consultation, and if the companies are merged, the M&A is likely to cause instability of electricity so as to result in a utility fee hike. In reality, power producers in an oligopolistic market structure tend to reduce the quantity of power generated rather then invest in new facilities in order to maximize profits. The California case clearly shows the pursuit of maximization having a reduction effect on electricity by reducing the reserve rate of electricity.

Increase of Utility Fee

Indeed, successful privatization of electricity entirely depends on managing both a stable supply of electricity and also price controls effectively. This indicates that the key issue lies in how to adapt the measures of controlling market power and enhancing social welfare. After completing privatization, the electric charges are mainly affected by the supply conditions. Electricity is a product for which demand and supply are consistent so it cannot be reserved. Even more, there is no substance, and it is a necessity for everyday life, so if there is only a short supply, it is directly linked with a fee hike.

Electric charges are also affected by the method for controlling consumer prices. Generally, other countries have introduced some method of control of consumer prices in preparation for the absence of perfect competition. There are mainly two control systems: an investment interest ratio and the restriction of prices. The method of investment interest ratio creates the possibility of overspending capital or cost by the Averch-Johns effect This is a way of insuring a certain profit for investors. In particular, it results in reducing the incentives for renovating conductivity or technology because the controlled institutions are only interested in maintaining an average level. In contrast, the method of restricting prices has been adopted in countries with a tendency for privatization because it is considered to be a better method of overcoming the matter of conductivity under the control of the interest ratio. In South Korea, it has not yet been decided which method should be adopted, but in order to give incentives for new facility investments and the sale of power generation subsidiaries, the method of restricting of prices is highly recommended. If the government adopts the method of using investment interest as the controlling system for the price, it is informed that KEPCO should insure a 12-15 percent interest for private capital. However, it has only 5.7 percent investment interest. In addition, the large cost of restructuring will affect the price of electricity. According to the statement of Bang-lim Kim, a member of the National Assembly, the cost of restructuring is reaching 5.6 trillion won, and this amount is equivalent to a 31 percent increase in electric charges.

Even if the restriction of prices is adopted, it cannot insure the stability of the price. In the case that energy demand grows smoothly and supply facilities are sufficient, the market works competitively and the electric rates are likely to cover short-term marginal costs. Under this situation, the restriction of prices is only able to respond to the limited phenomena of partial competition. If there is a sudden shrink of supply, the restriction of price cannot deal with this matter. That is to say, individual power generators will have market power without depending on any consultation only if the inelastic demand is connected with the shortage of supply.

Loss of Public Function as a General Service

In regard to the matter of a stable supply of electricity, it is noteworthy that privatization would lead to failure in functioning as a public service. That is true. For the pursuit of public good, KEPCO has provided electric power for agricultural usage as well as mountain villages at a cheaper price – less than 60% of the prime cost. However, without the consideration of a general increase in prices, the privatization will affect only the socially weak and the lower income brackets by abolishing the progressive tax on household electric charges formed by the cross subsidies and by rationalizing power rates for agricultural usage. Additionally, a lack of support for the coal mining industry exterminate the coal industry. Needless to say, electricity is an essential product for health, safety, and economic welfare. Nevertheless, the rise of electric prices will lead to the increase of a fuel poverty population.

The term “fuel poverty population” indicates a population which purchases energy with over 10 % of their income. For example, in England, in 2000, where there is an advanced social welfare system, the fuel poverty population reached 4 million households, that is 16% of all of England households. This number is 1.5 million households smaller than in 1996 because of the government’s extensive effort. England’s Department of Trade and Industry stated that deaths from freezing exceed 30,000 every year. In addition, by adapting the meters for pre-payment, over 3.7 million households had to employ expensive power service in 1998. Compared to the case in England, there is scarce understanding in South Korea of the concept of a fuel poverty population, as well as of its influence on privatization.

Instability of Employment

Regarding employment, it is useful to take the case of England’s power generation industry as one example, and the experience of Korean Heavy Industry as another. In 1990, when privatization of the power generation industry was initiated in England, there were 144,000 employees in the power generation industry. However, the number of employees dropped to 78,000 (46%) in 1998. The most serious section was the power generation sector among electric industries. In National Power, the employees were reduced from about 9,000 to 3,000, and in PowerGen, from 17,000 to 3,000.

The company has asserted that there will be more than 400 new hirings every year resulting from the constant increase of electric supply. However, enhancing competition, developing technology, and the restructuring of the workplace will exceed the increase of employment, and the quality of employment will deteriorate because of an increase in the number of irregular employees. On the other hand, the government has asserted that the decrease in employment is not necessarily linked with enhancing competition because personnel expenses are only a small part of business expenses. However, in terms of competition in the power generation sector, it is actually limited by relatively high fixed costs, and competition in personnel expenses will intensify.

The Loss of National Control, and Economic Centralization

There is a need for deep discussion regarding the overseas sale of power generation companies. One thing I should point out is the similarity between the domestic (conglomerate) groups and overseas (multinational) companies in terms that they all aim at making profits.

Recently, LG Power was merged into the Singapore national electric subsidiary company, Singapore Power International. This indicates that even if the nation utility company is sold to domestic groups, there is no guarantee to prevent it from merging into an overseas company. Conclusively, this is not a matter of national wealth outflow but a matter of privatization. However, foreign investment in public enterprises is not only about an emotional reaction or an outflow of national wealth, but also about the loss of national control over a major strategic industry. For example, in England when the power industry was privatized, the government succeeded in preventing foreign firms or single sources of private capital from having dominant control of power generation and transmission by keeping a golden share. The golden share in the transmission part expired in 1995, but in the generation part, the government still keeps the golden share. This shows that the government of England was cautious about the dangers from unrestricted foreign investors that privatization would have had on the domestic economy.

Along with the loss of a nation’s control over the economy, another significant problem is that privatization will accelerate economic concentration. MOCIE agreed with the exemption of restrictions of total investment as an alternative for ensuring a stable supply of electricity when conglomerates participate in privatization. This indicates that the government is overlooking the fact that conglomerates could enhance their regime through privatization. More serious problems lie in the way of sale. The government articulated this method of sale: for the purpose of sharing stocks in the power generation industry, they will try to adopt the method of distributing stocks for each company, but ultimately for practical privatization, they will focus on the sale of the right of management. The sale of the right of management has advantages such as ease and inexpensiveness, especially if it would be able to create responsible attitudes in management, rather than using the method of public offerings. Nevertheless, as the Planning Team for Privatization Research (2000) pointed out, this kind of way of finding an owner runs the risk of allowing conglomerates or foreign capital to dominate state strategic industries, and it would fail to gain agreement from the people.

2) Deficiency of Social Agreement

With some faults in the process of privatization, the government’s arbitrariness and the lack of social agreement in the process show the government’s forcible and bureaucrat process of privatization. It was only four months after Kim Dea-jung’s administration came into power when the government decided to restructure the KEPCO-privatization, in 1998 July. Six months later, the Framework for Restructuring the electric Industry was announced. The government undertook to realize this plan by enacting legislation by 1999; however, it postponed registering it until Dec. 2000, due to the strong moves against it by the power generation union. It was 2001 April, when KECPO was disaggregated and the Center for Electric Trade and the Electric Committee were established. The government will try to sell it in the first half of 2002 based on the agreement for a one-year delay in the National Assembly.

This kind of hasty procedure is not based on any social agreement. First of all, the labour union is absolutely excluded. I surveyed KEPCO employees’ opinions in Oct. 2000: 46.6% felt that employee and labour union opinions are ignored throughout the process of privatization, 43.1% felt that their opinion has no impact on the process, and 89.7% felt alienated. In the discussion on privatization, the most serious problems are first that the discussion was not started from the basic level of the pros and cons of privatization, but was started with the premise of how to undertake the privatization plan, and second that all participants in the discussion were all pro-privatization.

Under these circumstances, the government has insisted that they have already achieved a social agreement on privatization. In Dec. 2000 the labour union withdrew their strike and agreed with the restructuring of the electric industry, Moreover, on Dec. 23rd the bill passed the National Assembly by a unanimous vote. Nevertheless, their assertions are not based on the truth. First, the bill carried in the National Assembly is not for a privatization plan but contains only the matter of the desegregation of KEPCO. Second, even if the labour union agrees with privatization, the current power generation union is against establishing the previous National Electric Union and is independent from it. The disagreement is also presented in many statements that the government should withhold and look for social agreement with all groups within society, such as social seniors, economic and management professors, socialists, and members of the National Assembly.

If the government’s privatization (plan) has so many problems regarding public good and its procedures, and causes social conflicts, the next stage should be to find alternatives. I will investigate it in the next chapter.

3. Are There No Alternatives?

Alternatives to the government’s privatization of the power generation industry consist mainly of two things. One is, how should the structure of the electric industry be reorganized if there is no privatization. The other is, how can one improve the current power generation industry without privatizing it if there are inefficient factors.

(1) The Introduction of Pubic Ownership and the Competition System

The reconstruction of the electricity sector should start because KEPCO’s vertical monopolistic system was broken down to power generation subsidiaries. Even though the system of KEPCO has fallen, it can be legitimated by the fact that the economic effect of scale vanished in the power generation industry with the advancement of technology.

Nevertheless, if the goal of segregation in KEPCO is for increasing effectiveness through competition, it needs to be examined whether the current disaggregate system is competitive. Conclusively, the current segregated system is not a competitive system; thus the current system is not a comprehensive formation for an industrial structure. That is to say, if returning to the previous vertical structure of KEPCO is not a practical alternative, the current structure is also a transitional system to another structure. So what are the reasons that there is no competition? Most of all, it is caused by the fact that all the companies are affiliates of KEPCO. Since the mother company can pressure its subsidiaries concerning productivity or price, the competition for resources does not appear in the wholesale purchasing system. Competition between seller (affiliated companies) and buyer (KEPCO), which are actually the same, is a play on the stage. In addition, even the Electric Committee does not have political independence or a specialty. It can hardly be anticipated that the power generation industry will be able to have a system for competition. Thus, the most pressing matter is that the affiliated companies should be independent from KEPCO as public companies.

Second is the matter of the Regulation Committee. The regulation committee has the roles of settling a fair competition and market system, increasing social welfare, and protecting consumers’ rights and interests. Once the affiliated companies were disaggregated and the system for competition was introduced, the regulation committee become an essential organization regardless of the discussion on privatization. However, the first qualification which the regulation committee should follow is independence and autonomy from the government, considering the previous public companies were used for political purposes. That is to say, the regulation committee is for protecting the electric industry from being dominated by a political agenda. Nevertheless, the presence of the Electric Committee, which belongs to MOCIE means that they are not independent, and it should be pointed out that the Electric Committee is incapable of dealing with a specialty.

In sum, I suggest these alternatives for restructuring the power generation sector; first, power generation subsidiaries should be converted to public enterprises, independent from KEPCO. Second, the Regulation Committee should improve independence and specialization in order to introduce a practical competitive system in the power generation sector. Third, the minimum level of public interest should be maintained. However, it is very doubtful that there will be competition among public enterprises because there is a lot of pressure and intervention by the government. Thus it is crucial to ensure that the rights of management stay within the public interest, so as to eliminate commercial competition and inefficiency. In next chapter, I will investigate it in detail.

(2) The Realization of Autonomy and a Responsible Management

The government causes inefficiency and bureaucracy of the public industry sector is a reason for privatization and marketization. At this point, there needs to be an investigation about whether KEPCO has been managed efficiently. At this time, KEPCO has been run efficiently so far. This is clearly demonstrated by several management indexes. The electric fee in South Korea, even though it has been determined through political purposes, is only 36 percent of Japan’s and 90 percent of the US’s or France’s. However, KEPCO recorded 1 trillion and 4,678 hundred million won of current net income in 1999 and 1 trillion won and 7 thousand million won in 2000. This huge amount of net income was probably made by labour productivity, thermal efficiency in thermal power plants and a lower rate of loss in transmission and distribution which are ranked the highest levels in the world.

This does not indicate that KEPCO is a perfect public enterprise. They should be taken to account for their efficiency, even in the public industry sector, because efficiency is essential for realizing the public good. In the Western model, the introduction of a new public management and quality management shows the importance of efficiency in the public sector.

KEPCO is a mammoth enterprise that had 65 trillion won of assets and its annual budget was over 10 trillion won in 2000. If one compares that to the fact that the national budget of South Korea did not reach 89 trillion won, the scale is enormous. For KEPCO to efficiently manage its assets, a private and autonomous management should be introduced to increase its profitability. I suggest a realization of an autonomous management without government intervention, an introduction of a democratic and public regulation system, and lastly, an introduction of quality management and a new public management analysis.

1) The Realization of Autonomous Management

Even the government agrees that its frequent intervention and instruction has threatened autonomous management and caused inefficiency in management. Thus, even the government itself says that assuring discretionary power of personnel and budget is directly linked with an autonomous management in public enterprises. The problem concerning transparency is high-handed personnel administration, and an intervention in matters of the budget, which has been recently shown in the course of restructuring. High-handed personnel administration in the public sector became a chronic disease that generated inefficient management.

The Committee for Recommending the Representative System had legislated in government-run enterprises. However, the committee members who recommended candidates consisted of members who agree with the government. This current Committee is used as a tool for justifying a high-handed personnel administration. What needs to happen is an independent power for recommending a representative system and a standard for qualifying it. Also, the establishment of open screening is essential.

2) The Democratic and Public Control Regulation

The public enterprise has been managed according to the competent ministry or government’s control or instruction. However, the government’s control cannot substitute for an agreement with, or responsibility to, the entire society. For example, the government’s control through domination of the personnel management and budget, has caused the overflow of bureaucratism. Democratic and public control means that all citizens, including civil society, unionists, and environmental organizations can access the information without restrictions based on “commercial secrets”, and can participate in the regulation-making process. These kinds of regulations are able to improve the quality of service, and achieve a standard investment plan. In regards to the public interest, monitoring by the solidarity of labour unions and civil society is one of the most important strategies, and the labour union movement developed to public service unionism.

The core of democratic decision-making is the board of directors. Professor Yun-ja Kim pointed out that the public participatory management system needs to be examined. Furthermore, Professor Kim suggests a sharing system for the roles and responsibilities among the government as a final consumer, professional managers responsible for managing independently, labour unions, consumer organizations, and civil society, as if all were co-hosts of management. This model can erase the contradiction between achieving public good and profitability through the decision-making process, as well as ensuring transparency in management.

3) The Introduction of the New Public Management Technology

The main body for new public management is a progressive introduction of private management technology. Its main goal aims at increasing the quality of public service as well as raising efficiency and profitability. As a matter of fact, while efficiency in the public sector has been stressed, management reform has been a main way of transplanting neo-liberalism into the public sector with privatization, as was shown during the Thatcher administration. Most of all, new public management tries to accomplish commercial management in declining management by introducing inner marketism, stressing achievement, and management toward consumers. In this process, the important thing is not the context of management reform but the way of reform. This should be the way of labour-participation, not labours-exclusiveness. This is also the difference between England and Europe. In regards to reforming the public service, the point of the European approach is collaboration with labour unions. In this point, England is one of those exceptional cases. The difference lies in the fact that England is clearly hostile to the collective system that identifies a relationship between public service and employment.

Conclusion

After the Kim Dae-jung administration came to power, the privatization policy of public enterprises has been intensified. Conflicts on privatization take the role of identifying the regime of public service. In this point, I suggested the need of juxtaposing two projects in order to eliminate the logic of privatization. In one hand, it needs to be a pursuit of maintaining and enhancing public interest and improving the quality of service. On the other hand, there needs to be a realization of public reform that is linked with the elimination of inefficiency through strategic intervention.

In conclusion, I asked the government about its forcible and bureaucratic privatization policy of the power generation industry. First of all, can the electricity be supplied stably, since South Korea cannot import electricity? Second, how can the security be found that consultation will not happen among power producers, like in the California case? Third, why cannot the government stop the people’s worry about an increase of an electric fee even though they declared they would introduce a ceiling on the price, as in England? Lastly, why doesn’t the government withhold its plan for privatization in the face of massive social conflicts, despite the fact that KEPCO is not an insolvent enterprise. In addition, many people and some members of the National Assembly recommended ceasing privatization and pursuing a social agreement. Eighty-four percent of the public requested that the government and labour unions should reach a solution to the strike through immediate dialogue.

Neither the government’s inflexible attitude nor the labour union’s exclusive attitude is helpful for solving the labour-management relationship problem. The ILO advised that social, economic, and political factors have an essential role in the restructuring and privatizing of the power generation industry. Over the past 10 years, the lesson which we have learned from the structural reform of the electric industry is to increase the level of participation from the very starting point. This should make us aware how important it is to have change based on an agreement for restructuring or privatizing the national industry.

Park Tae-ju (Korea Institute for Industrial Economics and Trade)

정부지원금 0%, 회원의 회비로 운영됩니다

참여연대 후원/회원가입


참여연대 NOW

실시간 활동 SNS

텔레그램 채널에 가장 빠르게 게시되고,

더 많은 채널로 소통합니다. 지금 팔로우하세요!