What the privateers don't want you to know:

How American unions and consumers won their rights

Gregory Palast

I want to tell you a secret. American consultants have sold the world on the wonders of Free Markets and Private Enterprise, yet one nation has held tight to its socialized public service industries: the United States. In the USA, three out of four citizens - 78 per cent - are served by government-owned water systems. Government ownership of sewerage systems approaches 100 per cent. Out of 3,000 electric systems in America, 2,000 are owned by government or consumer cooperatives.

US corporate chieftains march the globe telling other nations to sell their utilities, but in America itself, the story is quite the opposite. US electricity privateer Entergy Corporation, which recently bought London Electricity, offered to sell its US home electric company to the city of New Orleans. And recently, government took over the large, privately-owned water utility for the state of New Mexico.

Here is another secret. In Europe and Latin America, US corporate executives promote the policy of reducing government regulation of privatized utilities. What they do not tell you is that America itself has the world's strictest system for regulating private utilities. Here in the land of Free Enterprise cowboys, we have little tolerance for private ownership of water and no faith in free markets for electricity. And for good reason: Americans have 100 years experience with for-profit utilities, and we have learned they must be either owned by or controlled by government.

World Bank economists insist that private managers are more efficient than government owners and regulators. But compare America's socialized and regulated utility industry to Britain's privatized operators. In the seven years since Britain's privatization of water, the price for water has risen 88 per cent to an average 59p per cubic meter. In the US, the price per cubic meter of water averages 22p, less than half the cost in the UK. Likewise, Britons pay 50 per cent more for electricity than the average US consumer.

Stringent regulation

Let us also compare employment and service quality in the US versus Britain. Since privatization, Britain has lost 90,000 union jobs in the gas, water and electricity industry - and service has declined to the point of crisis. In Yorkshire, consumers had to chase water trucks for a glass of water. One-third of England's water supply leaks into the ground out of deteriorated pipes - yet the nation's lax regulators, free-market boosters, have allowed private water companies to eliminate 7,000 jobs.

In the US, by contrast, stringent regulation of service quality is the key to employment security. US regulators do not let the free market determine the level of service, rather, regulators provide detailed standards for operations. For example, US law determines the method and frequency of reading, cleaning and replacing meters. The result of strict, detailed regulation has been a relatively high level of job security for the American utility worker, who enjoys the highest industry wages in the US - and the highest level of unionization. Due to both regulation and public ownership, 70 per cent of the utility industry workforce is unionized, whereas, in other industries, only one in ten American workers now belongs to a trade union.

How can utility corporations in the US charge low prices while paying relatively high wages? The answer is that US regulators force most operating costs onto shareholders by limiting private utility profits. A typical US utility earns a 3 per cent return on capital after deducting for taxes and inflation. Britain's privatized water utilities have garnered an astonishing 30 per cent return - ten times the profit allowed in the US. It is no wonder that US utilities are fleeing America to buy up British companies.

The battle for democracy

The US is certainly no paradise for consumers or trade unionists. Yet, over the last one hundred years, America's workers and consumers have learned ways to control utility privateers. Our key weapon: democracy. Democracy in utility regulation is made up of two rights: The Right to Information, and The Right to Participation.

Americans have the right to complete access to utility account books and service records. Any US citizen can see all financial documents of a private utility company - and all operating records.

For example, in the 1980s and 90s, for labor unions in Chicago, I investigated the quality of service of the local gas company. This private gas corporation was forced by law to provide me with thousands of pages revealing the company's projected costs of piping; the number of employees needed for each job; internal studies of system safety; detailed projections of future capital spending - even personal memos passed between executives.

In the US, a private utility seeking a price increase must provide regulators with hundreds or thousands of pages of technical support for their request. Any consumer, including union members, may receive a copy of all these documents, free of charge, for the asking. The utility may not give secret data to regulators. What the government sees, the public may also see - a system quite different from the secret price reviews conducted in Britain, Chile and elsewhere.

US citizens may also use the "discovery process" in which the utility must answer all written questions asked by citizens about its operations and finances - and provide every document in the utility's possession which addresses the question. I have been in utility price review cases in which an electricity corporation has had to produce a million pages of internal documentation.

Mountains of paper

Indeed, one of the problems faced by the American public is the ability to analyze all the information available for inspection. To dig through these mountains of paper, customers, local government and unions often hire teams of experts. The hunt is worthwhile: we often find contradictory figures, and sometimes evidence of outright fraud. In the case of Long Island Lighting Company of New York, I discovered internal memos from the electricity company's president which suggested he lied to regulators about the true cost of a nuclear plant. The company agreed to refund $400 million to consumers.

The result of open information is a safer, more reliable system with lower prices. In the case of the Chicago gas company, our search of company files found reports indicating a dangerous pattern of leaks. Armed with this information, the gas workers won a government order requiring the corporation to replace old pipes. As a result of this discovery, the company was forced to reduce its prices to gas customers.

With all this information open to public inspection, how do private utility corporations maintain their commercial secrets? The answer is, they don't. Even when a utility is private, its information remains public property. Indeed, competitors in the US electric and telephone industry get details of competitors' costs. The US Supreme Court has ruled that, "society has a strong interest in the free flow of commercial information." The American system contrasts with the secrecy-shrouded regulatory systems of Brazil, Britain and Columbia. In those nations, "commercial secrecy" is the smoke screen behind which private utility corporations can hide embarrassing or damaging information from regulators and the public.

The right to use it

Having all the information is meaningless without the right to use it. In most nations with newly privatized systems, consumers and unions have little or no role in setting prices or the terms of service. In Chile, for example, a private electric company sets its prices based on its own calculation of cost and desired profits. The government regulators review the utility figures, in secret, then calculate their own proposed prices and profits.

The final sum charged to consumers is the average of the company's own prices and the government's. This system is madness: as a practical matter, private utility monopolies can raise their prices and profits almost without limit by loading their calculations with fantasy figures. Without help from i ndependent citizens' groups and unions, Latin American regulators are helplessly dependent on the data given to them by the private corporations. The result is as expected: high prices, high profits and low service. In Chile, a typical domestic electricity customer pays US$.08 per kilowatt-hour, nearly double the price charged by those US utilities which, like Chile, rely on hydroelectric power. Britain's new system is little better than Chile's.

In the UK, consumers and unions are barred from participating in price reviews except for meaningless "public comment" sessions.

Public trials

The failed systems of Latin America and Britain were devised by American-trained consultants; yet the US system is very different. In America, citizens have won the right by law to full participation in setting prices and terms of service. This is accomplished by turning price and service reviews into public trials of the private utility. This is how it works:

First, utility executives provide a complete set of financial and operating documents to the government and all interested citizens. Government lawyers then question the corporation's executives - in public. Following the government, any consumer or union member may question the utility executives.

In a typical utility "rate case," company executives withstand over one hundred hours of public interrogation. Consumer groups, unions and local governments often hire specially-trained lawyers to conduct the examinations.

The government's experts then provide their own calculations and proposals for prices, profits and services. They present their studies to the public, providing all calculations. The government must open up its own files for public inspection. Members of the public (or their lawyers) may interrogate the government experts on their reports. Utility company attorneys may also question the government, but only in the public forum.

Citizens' proposals

Then comes the opportunity for citizens to present their own proposals. As a rule, consumer and environmental organizations, unions, industrial customers and local governments hire expert economists and financial analysts to present studies attacking the corporation's or the government's proposals.

The citizens' representatives must also withstand interrogation by the government, the utility and each other. A judge sitting in the proceedings insures that all parties have equal opportunity to participate.

The entire review process becomes a year-long public debate. At the end of the year (often after several rounds of proposals, counter-proposals and cross-examination), the regulators issue their opinion, providing a complete set of calculations and written justification for their decision. Any citizen may appeal the decision to the Courts. This contrasts to Britain where the utility, but not citizens, may appeal decisions.

The US system has been attacked as too complex, involving too many lawyers and too many citizens who lack expertise. In a US rate case, thirty organizations may participate, requiring months of public hearings. It is true, democracy is complex, messy and difficult. The Chilean and British systems, which prohibit public participation, have the smooth appearance which we expect from authoritarian government. But regulatory dictatorships are not more efficient: the higher prices and poor services in these nations are a testament to the failures of these "market-based" systems.

Who pays?

Of course, making use of democratic rights can be expensive. Public utility trials require citizen groups and unions to field teams of lawyers, economists and investigators. How do such non-profit groups pay for this expertise? There are several mechanisms. For example, each state government has an Office of Consumer Services with experts whose only job is to challenge the claims of the utilities. These consumer agencies also provide cash grants to citizen advocacy organizations to pay for expert witnesses in the utility price trials. The federal government's Legal Services Corporation provides attorneys for low-income consumers. In addition, courts can award compensation to organizations which bring successful legal claims against utilities.

One of the most creative and effective means for obtaining funds to pay for public participation is the Citizens Utility Board, the CUB. In California, Illinois and Wisconsin, private utility corporations were forced to place in the electricity and telephone bills a solicitation to join the "CUB." Joining the Citizens Utility Board costs $25 per year. This contribution is voluntary, yet, in just the state of Illinois, the CUB signed up 100,000 members in just a few months, taking in more than a million dollars to fund their work.

Some community groups also obtain donations simply by walking from house to house to sign up dues-paying members.

An unending war...

Information is power and no one cedes power without a fight. The Offices of Consumer Services, the agencies which pay for experts for the public, were established in 1977 after an organized group of poor people seized the office of the Chairman of the Board of a private gas company. They refused to leave until the state agreed to fund their participation in the utility price hearings.

However, the poor could not have won this fight alone. They had the political support of church leaders and, most important, trade unions. Thirty-five labor unions in Chicago had recently formed the Labor Coalition on Public Utilities, binding together workers from all industries into a single force to protect the common interests of consumers and utility employees. The Labor Coalition, in an alliance with consumer activist Ralph Nader, also pushed the Illinois state legislature to establish the Citizens Utility Board.

In 1978, unions and consumer groups allied into a national organization, the Citizen-Labor Energy Coalition, to fight profiteering by private electric companies. These and other groups were successful in making utility regulation a key issue in state and local election campaigns. Politicians in both parties vie to be seen as the strongest opponents of the private electric and gas companies. [Generally, the government-owned and cooperative water and electric systems enjoy public support.]

But, the fight never ends. Unionists and consumers remain in an unending war with utility corporations who spend millions of dollars lobbying to overturn the regulations which squeeze their profits. This year, electricity corporations hope to eliminate the US Public Utilities Holding Company Act of 1933 which restricts their foreign investments.

...against billions of dollars

America's democratized system of regulation has produced better service, more secure employment and lower prices than laissez-faire systems operating elsewhere. Nevertheless, the US system fails in case after case. America is often more democratic in theory than practice. Private utilities, with billions of dollars in assets, spend several million dollars to present their cases. These monopolies have an enormous economic incentive to subvert the law, conceal information, reduce service, cut worker wages and benefits, and corrupt or simply overwhelm the regulators. Corporate donations to the Democratic and Republican Parties purchase political influence. Private utilities, sometimes illegally, offer future employment to regulators.

Ultimately, no regulatory or market force can fully curtail destructive profiteering by privately owned monopolies.

The only means of insuring that utilities put the public interest above profit is to remove the profit motive. Within the US, government-owned systems and consumer cooperatives remain superior to the privatized companies by every measure of price, service and efficiency. This is true in other nations as well. Santiago, Chile, is divided between private and public water companies. During last year's drought, the privatized company failed to keep water flowing to their customers while the publicly-owned system maintained service. America's experience with private ownership demonstrates the importance of bringing democratic rights to utility regulation. However, there is as yet no system of regulation which is superior to democratic ownership, i.e. public ownership, of public services.

Gregory Palast, economist with Union Associates, New York, is a founder of the Labor Coalition on Public Utilities (US) and Unison's Public Utility Reform Group (UK). In addition to his work with trade unions, he has conducted several price reviews and investigations as a regulatory expert for US state governments. This article is based on a speech he gave at the PSI Water Conference in Stockholm, August 1997.