It is not usally a good idea to distribute long papers on the list, but Gene's paper is not that long and it is very good, so I am violating my own principles.
Korea will not privatize its electric power system. The governments attempt to privatize the Korean Electric Power Company (KEPCO) has come to an end. A strong campaign by the Korean National Electrical Workers Union (KNEWU) spanning a couple of years, forced a careful reconsideration of the plan. In the end, ideology was overcome by the economics of the power industry. KEPCO for years has been 51% government owned, with 49% of the stock in public hands. Under pressure from the international lending institutions, the government planned to sell the power plants and, further, to split off the Distribution part of the business. To justify this, a campaign to denigrate the efficiency and viability of KEPCO was waged, in spite of the fact that the company is financially solid and technologically first rate. This is a standard tactic in other countries under pressure to privatize. The union mobilized to stop privatization. Management of Korea Electric Power may also have been strongly against privatization but was circumspect in responding. Workers held an illegal strike in 2002. Strike leaders were jailed but the tactic succeeded -- the intended sale, began to be widely known and understood by the public. KNEWU did serious and extensive research into the issue, and sought out engineers and economists and other unions worldwide to inform and advise it. The union also organized large street demonstrations to keep the issue before the public and the government. In February 2003, unions representing all the threatened industries, power, gas, water, telecom and railroads, sponsored a symposium to explore privatization. Korean politicians, professors and industry experts drawn from union ranks were joined by counterparts from the UK, Australia and the USA. The two day event generated extensive media coverage. In late 2003, the Tripartite Committee, a Korean powerful institution that investigates and recommends on matters of national contention stepped into the matter. Six Ph.Ds. in either engineering or economics were chosen to research and to report on the matter. Two were nominated by the government, two nominated by the union, and two chosen by the chair of the Tripartite Committee. These six studied the issue. The group traveled to the USA, Brazil, Canada, the UK, France, Australia and New Zealand to study how privatization and deregulation has worked or failed in those places. The investigators brought sharply different perspectives to the question. In the end the group concluded in May 2004 that the government's policy to introduce free market electricity should be cancelled. The President of Korea accepted the recommendation in early June and privatization is halted. Meanwhile an “International Symposium for Sustainable Development of Electricity Industry was organized by KNEWU and held in late June. Speakers from Canada, the UK and the USA joined Korean experts for the symposium. THE STORY IS COMPLEX KEPCO is a very large electric power company. A handy measure of size is generating capacity. KEPCO’s generation is about 50,000 Megawatts. That is much larger than even giant USA utilities. For comparison, American Electric Power Company with 36,000 Megawatts, is the largest generator in the USA, serving 11 states in the mid-west. KEPCO is so large in fact that selling it entirely was seen as not feasible. The initial step taken was to split generation off from the rest of the company (Transmission and Distribution). Generation was then further split into six separate companies which were to compete with each other after they were sold. These six generation companies exist now but have not been sold, despite repeated efforts to do so. Sale of the generating companies was stopped by the economics of electric power. By the time the new generating companies were put on the market, potential buyers had come to realize how risky the stand-alone generation business is. Potential purchasers considering acquisition of a generating company realized that without captive customers they could not be sure of selling the output at a remunerative price. In the 1990s buyers roamed the world gobbling up power plants at high prices, but in the early 2000s the lessons of the USA, the UK, and elsewhere are clear to them. Steve Thomas of the University of Greenwich reported at the June 2004 Symposium that 37% of capacity in the UK is owned by bankrupt companies, repossessed by banks or on sale at distressed prices. Profitable generators in the UK now control distribution companies, meaning they can sell kilowatt-hours at remunerative prices at retail even as wholesale prices crash. In the USA about 60,000 megawatts of distressed capacity is on the market now and only bottom-fishing financial strongmen are looking at the merchandize. Generators without customers locked-in have gone bankrupt in both the UK and the USA. Potential buyers of the Korean generation wanted the government to go further and to split distribution off as well. If the distribution segment, with its control of retail customers were available, an owner of generation could also own a distribution outlet and would then be protected from price wars, ensuring remunerative retail sales. In the deregulation debates in the USA and around the world, it is conceded that Transmission and, separately, Distribution, are natural monopolies. “It is inefficient to run two sets of poles and wires down the street …” is how the concession is expressed. But proponents of deregulation cling to the claim that generation can be a competitive business, with all the supposed benefits of competition. The Korean experience demonstrates, I believe, that generation too is a natural monopoly. There can be multiple owners of generation but the owners have to run the whole as a monopoly, or as a collusive cartel. This is because the overhead costs of generation are so large relative to total costs of power production. If a kilowatt-hour were sold as a commodity in a competitive market like wheat or corn, price cutting to get or retain market share could drop the price to or close to the marginal costs – roughly the fuel burned – with little margin to cover capital costs. In the USA, family farmers sell in a commodity world. They are driven out of business by selling at market prices. $25 billion a year in government subsidies is unfairly distributed to agribusiness to help cover overhead costs. (Farmers around the world, including Korea are in similar distress – witness the tragic death in Cancun at the WTO meeting.) For power generation, if overhead costs exist, and they do, the running cost is below average cost and “competitive” plants would make losses. Price has to be kept high enough to equal or exceed average cost or generators go broke. Thus generation is a natural monopoly. Even with multiple owners the capacity has to be planned and the output sold as if there were a monopoly owner. Against this background, perhaps a gracious reversal on the part of the government was both the path to labor peace, the sensible financial choice, and simultaneously the wisest course for the national economy. Reliable electric supplies after all are fundamental for business. The CHAEBOLS A Korea-specific concern is that some or all of the six generating companies could be acquired by the Chaebol giants. Generation planning and the cost of power could then disappear into the murky integrated finances of the chaebol, to the detriment of the country as a whole. KEPCO, after all, has been managed for the good of the country, providing ample and reliable power for the growth of industry and commerce. There is some long-range concern that the minority holders of 49% of the shares might be more interested in profits than the national good. Most of the 49% is held in Korea, though, and shareholder interference with management may be a long way off. Losing control of generation to a selfish conglomerate, on the other hand, might not be good national policy. There is obviously much more to the electric story than what is laid out here. An impeachment, an election, a court decision – all that is beyond my ken. ANOTHER COUNTRY UNDER PRESSURE In Thailand, electrical workers determined to stop privatization are now on a strike which has gone on for more than four months at this point. A delegation from KNEWU will travel to Bangkok this month to deliver advice and financial support to the strikers. OTHER INDUSTRIES Privatizing the other industries in Korea – water, natural gas, telecom and railroads -- is still on the table. The IMF/WB still holds the belief that privatization is almost always a good idea, and financial leverage over governments is powerful. (Witness Brazil and Argentina.) The break-up and sale of the natural gas industry is still a target in Korea, though the proposal there is clearly dimwitted. KOGAS, the Korean gas company, is a world giant in the import of LNG, currently the only gas supply to the country. As a very large buyer, the company can negotiate for supply from a strong position. The government’s proposal to break the company into three weaker importers seems ridiculous on its face, with only the prospect of the “efficiencies resulting from competition” to recommend it. The UK experience with the privatization of rail, which was reported on at the 2003 Korean symposium by a scholar and by a union president, both from the UK, ought to put a stop to that idea in Korea, but ideology often overwhelms sensible policy decisions. In all of these cases, as in the case of current attempts at renewed deregulation in California, common sense is hardly a match for the intellectual cover provided by neo-classical economists. Stand by. -- Michael Perelman Economics Department California State University michael at ecst.csuchico.edu Chico, CA 95929 530-898-5321 fax 530-898-5901
