1. Public ownership of utilities - benefits, costs, efficiency, legality
David Hall
Visiting professor PSIRU University of Greenwich
LP conference Imperial College May 2018
Note: this presentation draws on work carried out with colleagues including Kate Bayliss and Mika Minio-Paluello

2. Why public ownership of utilities
Economic gains (cost of capital, transaction costs, local economies)
Democratic gains: control and planning and localisation and transparency
Public interest objectives: renewable energy, affordability
…and it’s popular, efficient, affordable, and legal

3. Debt and equity in the water sector 1990-2015
Source: NAO 2015
Bayliss & Hall, Southampton, March 2018

4. Total profits 2007-2016 and uses
Company
Pre-tax profit (£m)
Tax (£m)
Post tax profit (£m)
Dividends (£m)
Interest payments
Retained earnings (£m)
Thames Water
3,361
-195
3,165
-2,531
-3,006
6340
Total for all 9 English water companies)
20,707
-1,666
18,862
-18,129
-14,650
733

5. Energy: problems in all functions
Transmission and distribution grids, private monopolies, excessive charges
CAB estimates consumers are owed £7.5bn. by grids alone for over-charging
Half of profits taken as dividends
Need for grids to be more flexible/smart in functions
Big 6 supply companies repeatedly criticised for charges
Some small and/or municipal supply companies start up eg Robin Hood Energy
Renewable generation
Large public sector RE normal in Europe eg Dong, Vattenfall, Munich
Big potential for public regional offshore RE in UK

6. Water and energy: public ownership possible role
Public ownership of water and sewerage companies (and water only companies)
Public ownership of electricity and gas transmission and distribution grids
Natural monopolies, savings from reduced cost of capital, £2bn. +
Public sector supply companies in all regions
More reliably affordable energy
Co-exists with other supply companies
Regional renewable energy inc. via LECs
Local solar and wind, but also public investment in offshore wind etc
Local energy communities (LECs)
enable villages/towns/cities to run renewable energy, grids, and/or supply services
Also part of EU thinking

7. Economic benefits
Reduced costs of capital: saving over £2billion per year in both water and energy by elimination of dividends and reduction of interest rates
Lower transaction costs through direct control
Eliminate ‘corporate’ functions etc:
note savings made after ending of PFIs in London, Manchester
Regulation: can simplify/reduce/democratise cf OFGEM spends £63m./emp 883
Local economy:
about £400m per region annual boost to economy, through consumer spending, and/or employment, procurement, just from water/grids public ownership
potential for downstream investment and procurement by regions

8. Democratic control of public services
Large public sector companies are common in Europe: regional or city level
Stockholms Stadshus AB:
owned by the City council, 16 companies, including housing, social care, water, waste management, economic development, stadiums, cable services, arts, district heating and energy, port: employs 2,792. Financially OK
2016: income = £1.33 billion, pre-tax profits £171m., paid tax £51m, dividend £44m.
Supervisory board: 9 from councillors (4M, 5F), reflecting party balance, + 4 trade union reps
Eau de Paris: 10 councillors, 2 professional experts, 2 staff reps, 1 from environment assn, 1 consumer assn, 1 from ‘water observatory’
Intermunicipal companies common
Netherlands, owned by districts/provinces: board 4 council reps, 2 worker reps
Milan – Gruppo CAP, owned by 196 municipalities, realtime information on syste, including reason and progress on all works in city, including contractor names (WebGIS)
UK too: Transport for London (TFL) – board open and online (but no worker reps)

9. Democratic control and professional management
Creation of new regional authorities for water, energy (etc)
Consist of councils in region, regional board members from councils
Can include also reps from consumers, workers, environmental groups etc
Create information obligations, public meetings/online documents (as TFL)
Regional auths as supervisory boards of new public sector companies
So eg water, energy distribution grid, renewable generation, supply
Information and planning key roles for regional, national, local bodies

11. Efficiency: no comparative advantage for private sector firms
Meta-reviews and major studies across countries and sectors find no consistent difference (including sectoral studies)
Most recent review of studies across sectors concludes that: “research does not support the conclusion that privately owned firms are more efficient than otherwise comparable state- owned firms.” (Mühlenkamp 2015)
Knayezeva et al (2013) control for selection bias in comparative study of 2400 firms, and showed, with a high level of statistical significance, that privatised companies did worse than those that remained public, and continued to do so for a period of 10 years: “the privatization group underperforms the group of sectors remaining public”.
UK privatisations in general: “little evidence that privatisation has caused a significant improvement in performance” (Martin and Parker 1997, Florio 2004)
Similar for meta-review of studies of outsourcing versus direct provision: “it is not possible to conclude unambiguously that there is any systematic difference in terms of the economic effects of contracting out technical areas and social services” (Petersen et al 2012)

12. Affordable: compensation costs not prohibitive
UK law: parliament decides, not city rules, can pay less than market value e.g. for ‘economic justice’ (Moodys, Linklaters)
Claims by SMF et al that compensation will cost £90billion: use ‘virtual’ figure of RAV, which includes debt: ‘economically illiterate” (Dieter Helm 2018)
Hall2016 est compensation for elec/gas grids as £24bn, cf. annual savings £2bn+
Bayliss/Hall 2017 est compensation for water as circa £20bn, cf. annual savings £2bn+
increases UK public debt from 100% of GDP to 105% : no cause for alarm (FT)
Investors would probably not flee UK, cf. German expropriation of nuclear reactors in without compensation, no capital flight (city analyst)
Jonathan Ford, City Editor of FT: “The whole aim of the exercise would presumably be to stop private companies from making excessive returns from the public. Why then would the government start by paying a market premium based on those same excessive returns?” (FT 18 Feb 2018 John McDonnell is right: Britain can easily nationalise water )

13. Proposals comply with EU law
General EU neutrality on public ownership
TFEU art. 345: “The Treaties shall in no way prejudice the rules in Member States governing the system of property ownership.”
Public ownership plans within sectoral legislation in energy
EU energy rules do not forbid public ownership
No monopoly of supply
Grid and supply/generation functions separated as per current law
Lots of public ownership already in EU, trend to remunicipalisation

14. Legal: Netherlands even makes private ownership of water and energy grids illegal
Water: Waterleidingwet (articles 3i,3j,1f.): “It is forbidden to produce… or… deliver drinking water to consumers…. except for a …water company over which control is exclusively exercised by …..public authorities (“publiekrechtelijke rechtspersoon”)”
Electricity and gas grids: Electricity Act 1998, Gas Act 2008: private ownership of transmission/distribution systems prohibited
Legality confirmed by CJEU Essent 2013 para 39,69: “Article 345 TFEU must be interpreted as covering rules entailing the prohibition of privatisation… the objectives which underlie the choice of the legislature in relation to the adopted rules governing the system of property ownership may be taken into consideration as overriding reasons in the public interest to justify the restriction on the free movement of capital.”
Netherlands also uses inhouse exemptions from procurement laws:
2012Transport Act allows big cities to run routes inhouse without tendering content/uploads/Public-Procurement-Law-and-In-House-Delivery-of-Public-Services-Improving-a- Paradox.pdf
2010 Social Support Act allows inhouse household support service, reversing previous requirement to tender. EU complains but courts say OK.
Intermunicipal IT company ‘Wigo4it’ : in-house, no tendering needed

15. References
‘Bringing water into public ownership: costs and benefits’ K. Bayliss and D. Hall May 2017
Hall and Nguyen (forthcoming 2018): Economic benefits of public services Real World Economics Review