Private Island: Why Britian Now Belongs to Someone Else (19 page)

The privatised electricity companies' minuscule debts and the fat profits they were making under RPI-X drew predators from across the Atlantic, and when the government's golden share in the firms lapsed in 1995, the Americans pounced. Just as California was making the disastrous decision to imitate the British model in opening up its own electricity system to competition, companies from Ohio, Nebraska, Texas, Georgia, Colorado, Louisiana and Virginia spent £10 billion buying up British firms. As the Americans began to flood in, Labour took over from the Conservatives, and Gordon Brown slapped a windfall tax of £1.5 billion on the electricity firms as punishment for their excess profits. It was easy for the Americans to borrow the money to pay, because their new acquisitions had so little debt on their books. But the windfall tax was a sign that US executives, caught up in the more-testosterone-than-sense expansionist passion that brought about the downfall of Enron, had misjudged the risks of investing in British electricity.

They tried the same tricks as their British predecessors. Edison Mission Energy of California, for instance, bought two big coal-fired power stations from Powergen in 1999. In 2000, it announced that it was closing one of the generating units at its Fiddlers Ferry coal station in Cheshire because, it said, it cost too much to run. In fact, it could have been run at a profit. But by taking 500 megawatts of the power it generated off the market, Edison Mission drove up the price of electricity, which
meant more money for Edison Mission, and for the other owners of power stations. The customers paid the price. Edison Mission eventually brought the unit back online after pressure from Littlechild's successor as regulator, Callum McCarthy. The writing was on the wall for the Americans. The windfall tax suggested there'd be a tighter regulatory regime under Labour, and shortly after the American buying spree began, wholesale prices for electricity plummeted. There was a rush for the exit. In desperation, the Americans cast around for somebody willing to take their British electricity assets off their hands.

McCarthy was indifferent to the rout of the Americans. He was only interested in price, and claimed partial credit for the sudden cheapness of electricity: he attributed it to Neta, a wholesale electricity trading system that he favoured and the government backed. The New Electricity Trading Arrangements were designed to bring prices down by making the electricity market fairer and more open. On the face of it, Littlechild had cause for satisfaction, too. He could point out that the fate of the Americans – some, notably TXU of Houston, lost their shirts in Britain – gave the lie to the notion that the privatised electricity system was a licence for capitalists to print money. In reality, the fall in the electricity price had little to do with Neta and much to do with Littlechild's endorsement in the late 1990s of the ‘dash for gas' – the rapid construction of gas-fired power stations, cheaper to build and run at the time than coal or nuclear. This led at the turn of the century to an electricity glut.

New power stations, an electricity surplus, lower prices, companies going bust because they weren't competitive: it sounds as if everything Littlechild planned had come to pass. Yet the result wasn't at all what he'd imagined. Just because the American companies' shareholders, and their customers back home in the US, got stiffed by their adventures in Britain didn't mean that Britain benefited. In the first place, the electricity surplus was a political and industrial disaster. The new wave of gas-fired power stations took enough market share from the coal and nuclear stations to
bring them to the edge of bankruptcy, but didn't have the capacity to replace them if they actually went bust. It wasn't just that the livelihoods of thousands of miners and engineers loyal to Labour were on the line: a system that could bring the country to a halt in a fraction of a second was subjected to market shocks that had no market solution. Blair's government had already intervened to slow down the switch from coal to gas; in 2002 it had little choice but to bail out British Energy, the private company that owned the nuclear stations.

And there was a deeper, less visible problem. Neta was fantastically complex. There is no evidence to suggest that any elected politician has ever understood how it worked (any more than they understood its byzantine predecessor, the ‘Pool'). Some specialists believe civil servants don't understand it either. How could they? Its arcane codexes are intelligible only to corporate lawyers and accountants. Yet there was one important clue to how Neta worked: the electricity companies were all for it – this, despite the fact that McCarthy championed it as a means of bringing them to heel. And when Neta – the electricity trading system we still have today – was introduced, it gradually became clear why. It was even more opaque than the Pool. And although its introduction coincided with a sharp fall in wholesale electricity prices, customers saw no change in their bills.

It was true that the ‘dash for gas' had brought about a squeeze in profits for the companies that generated electricity. But the main beneficiaries of this weren't customers: they were the firms that distributed and sold the power. Excessive profit margins simply shifted from one set of electricity companies to another. The inevitable next stage was for the companies that distributed electricity to merge with the companies that generated it. This was ‘vertical integration', just the kind of cosy arrangement, with all its potential for price-fixing and abuse of market dominance, that Littlechild wished to avoid. The introduction of Neta shed no light on the real costs to companies that sell customers electricity they've ‘bought' wholesale from themselves.

There was only one set of companies rich, powerful and experienced enough to take advantage of Britain's burgeoning oligopoly. In 1998, as the Americans began their withdrawal from Britain, Continental Europeans arrived to take their place. The first bid from across the Channel, only seven years after the CEGB was destroyed, came from Electricité de France, the French CEGB.

I met Stephen Littlechild at a hotel in Dorridge, near Birmingham. He's still busy in the obscure world of utility regulation, still attached to Birmingham and Cambridge Universities. Gently sunburned, with white hair and beard, he's almost seventy; he has a Puckish energy, an enthusiasm more postgraduate than professorial, and a way of punctuating his conversation with a falsetto giggle. He once said that instead of RIP, the inscription on his gravestone should read ‘RPI-X'.

Privatisation, he told me, had been a matter of achieving clarity. ‘In the nationalised industries … nobody had a clue what anything cost. The government just gave them money, and sometimes didn't … What has happened is that a price has been put on everything.'

He blamed two groups for the problems that followed electricity privatisation. One was the City analysts who mistakenly characterised investment in long-established public electricity enterprises as ‘risky', thus underestimating how cheaply new owners would be able to borrow money. The other was the politicians, who never gave him the powers he wanted to obstruct the anti-competitive mergers of electricity makers and electricity sellers.

In 1995, Scottish Power, which was integrated from the moment of privatisation – it both sold and generated electricity from the big coal stations at Longannet and Cockenzie – became the first privatised producer to take over a privatised seller when it bid for the former Merseyside and North Wales Electricity Board, renamed Manweb. Littlechild said he had tried to persuade
Tim Eggar, energy minister at the time, to intervene. Instead of worrying about the power over customers the takeover would give the Scottish firm, Eggar said he wanted to give Manweb ‘a kick in the pants'. Both companies now belong to Iberdrola of Spain.

It seemed odd that Littlechild, the great free marketeer, should be upset about a private Scottish firm taking over a privatised electricity board, yet quite relaxed about a state-owned French company taking over the private London Electricity in November 1998. That first foray by EDF was followed in 2000 by its purchase of Cottam; in 2002 EDF added the old electricity boards in south-east and south-west England to its portfolio, and in 2008, with the purchase of British Energy, it bought most of Britain's working nuclear power stations. As age shuts them down the plan is to replace them, starting in 2023, with a French-designed reactor known as the European Pressurised Reactor (EPR). With the abolition of the CEGB, Britain no longer has the skills to design and build nuclear power stations.

‘People naturally feel some pang of regret that something made in Britain is no longer made in Britain,' Littlechild said. ‘But the reason it happens is that a better service has been provided elsewhere.'

Didn't it invalidate the privatisation of the CEGB and the old electricity boards if they could just be renationalised by the French, without British firms being able to do anything similar in France?

‘People are better off,' he replied, ‘even if it means some jobs move overseas, because we specialise in other industries and other sectors where we have an advantage, like financial services. The argument that Adam Smith and others made for free trade did not depend on other countries accepting it as well. You appear to think that you should not let foreigners compete in this country unless our companies are able to compete in their country. I'm saying we stand to gain by letting anyone who wants to compete in this country – at least customers stand to gain.'

Littlechild seemed reluctant to accept that EDF's move into Britain undermined the rationale for electricity privatisation and I was surprised, just before I left, when he looked at me sadly and said that, yes, he did regret what had happened, only a month before his term as regulator came to an end. ‘I think it was not possible for the regulator to stop it … I didn't want an important reform being compromised by a company from overseas that was still state-owned, very large, not subject to competition, its actions not determined by meeting the needs of customers but by, well, its plans.'

It wasn't that nobody tried to stop EDF's move into Britain. But in 1998, Labour was working with the set-up it had inherited from the Tories. In her notorious Bruges speech ten years earlier, Thatcher had warned overweening Eurocrats: ‘We have not successfully rolled back the frontiers of the state in Britain, only to see them reimposed at a European level.' The same year, in another, forgotten speech, she boasted to an audience of businessmen that her government had forced Europe to break down the barriers to cross-border business. By supporting a single European market in goods and services, she said, the Conservatives were taking action ‘to secure free movement of capital throughout the Community'. She saw no contradiction: those who claim to be her heirs still don't. But implicit in Thatcher's support for the single market was acceptance of a single Brussels-based regulator as the ultimate arbiter of fair competition in Europe. Since then the EU Competition Directorate has had more impact on Britain than any other EU body. And France has proved an adept lobbyist. Brussels lets the French protect EDF from competition at home, allows EDF to borrow money at low government rates, and lets it expand into the open arena of Britain.

A strong, cunning negotiator capable of schmoozing the Eurocrats was required if the Department of Trade and Industry was ever to make the case in Brussels against the EDF takeover of London Electricity. On 30 November 1998, when news of the
deal broke, exactly such a man was in charge at the DTI: Peter Mandelson. New in the job and eager to prove he was more than just a master of the political dark arts, he claimed he modelled himself on a Tory predecessor, Michael Heseltine, who had pledged to ‘intervene before breakfast, lunch and dinner' on the side of British industry. But Mandelson never had a chance to put the case. A few weeks after EDF made its move, he was on the brink of tears, listening to Tony Blair telling him over the phone that he must resign. Details had emerged of an undeclared £373,000 loan Mandelson had taken from the Treasury minister Geoffrey Robinson to buy a house in Notting Hill, an untenable conflict of interest. Mandelson quit, and after a sojourn on Corfu with his ‘old and good friends' from the Rothschild banking family, passed into his personal Golgotha: a small flat, a Fiat Punto instead of a ministerial car and Friday nights shopping in Hartlepool Tesco's.

Had his desire for a nice house not forced him out of office, would Mandelson have made the effort to lead a concerted lobbying effort in Brussels against the EDF takeover? We'll never know. He was, proudly, the grandson of a patriarch of nationalisation, Herbert Morrison, and as such a kind of familial opponent to George Osborne, son-in-law of David Howell, patriarch of privatisation. Mandelson claims in his memoirs that his house purchase was ‘nesting, rather than socialising'. But by moving to Notting Hill and hanging out with the Rothschilds he passed into Osborne's territory.

Tucked away in Mandelson's account of his 1998 downfall is a tortured paragraph, part confession, part self-justification, which could stand as the heart's cry of New Labour – the agony that wells up in the soul of an ambitious, sensitive socialist who suffers because he can't live like the hedge fund people, those people who are so much more charming than one has been led to expect, who are so groomed and well dressed and go skiing every winter. ‘A bit of high living had definitely crept into my soul,' Mandelson wrote.

With Mandelson gone and his replacement, Stephen Byers, coming to terms with the job, the baton passed to civil servants and to a junior minister responsible for energy, John Battle. Battle was from Leeds, a Catholic and an activist for social justice whose life until that point – studying the poetry of William Empson, training for the priesthood, setting up Church Action on Poverty to campaign for a minimum wage and mastering Labour's housing brief in opposition – hadn't obviously pointed him towards the energy portfolio in government. Today he is no longer an MP, and has returned north to a life of good works. I met him in the Tiled Hall Café in Leeds. He recalled the day in 1997 when he first walked into the DTI building as minister. He was greeted by a reception committee of civil servants.