Monday, February 07, 2011

The Price of Privatization

Common wisdom for thirty years now has been that the private sector does things much better than government and that making money is the primary human motivation. We’ve deregulated the airlines and sold off what used to call public utilities – the gas, electricity, and water that we need every day, along with telephone communication.

Both political parties have been overtaken by the idea that making money (which is the purpose of the private sector) will guarantee good outcomes. In fact, this seems to underlie what many people see as morality, both for companies and individuals.

It wasn’t always that way. I can recall that a concept of working for the good of the community, whether that was your local town or the nation. And I don’t think that was my childish naiveté. There’s still community feeling around: people support volunteer fire departments, and they staff a myriad of organizations that tend to stray animals, help people find jobs, and keep the parks clean.

But privatization of so many things and the rationale of making money are doing damage that those do-gooder organizations, even the churches, can’t repair. We’ve seen two big examples over the last few days.

While snowstorms blanketed the nation from New Mexico to Vermont, a blob of intensely cold Arctic air sloshed down into the southwest. Temperatures twenty degrees colder than normal and worse were common. My outdoor thermometer read minus 12 F.

In Texas, power plant equipment froze up and shut down fifty power generating units, causing the power companies to institute rolling blackouts across the state. The natural gas generators intended as backups couldn’t operate without electrical power. And natural gas pumping stations shut down, causing outages in New Mexico. The detailed causes will be examined, but this seems to be the general outline of what happened.

It is true that the cold was extreme, but profit-making companies have no incentive to plan for the worst. Or, apparently, prepare in any rational way: backup equipment that can’t operate without electrical power? Duh! Regulation is no guarantee; the companies lobby and buy their way to as much profit as they can. Being prepared for unusual events like last week’s cold eats into profit.
Texas officials take pride in the fact that theirs is the only state with its own independently operated power grid and say federal oversight isn't necessary. [WSJ]

There’s another way to think about electrical and gas utilities. People need them to keep their houses warm and lit when Arctic air and snow hit. They are particularly needed then, because last week’s cold was life-threatening. Reliability of supply is essential. So it needs to be guaranteed in some way. That requires more and better equipment than the bare minimum arrived at by compromising with profit. So perhaps power utilities are not suited to both serving the community and turning a profit.

Less reliable power, then, is one of the costs of privatization.

The other example is quite different, but no less damaging to the idea of community. Frank Wisner, having been US ambassador to Egypt, India, and other places, would seem to be the perfect person to deliver President Barack Obama’s message to President Hosni Mubarak of Egypt. And presumably he did. But then he appeared on a panel at a security conference in Munich on Saturday and delivered a message at odds with Obama’s statement on Friday. Obama was pushing for Mubarak to step down, without quite saying those words. Wisner said that the transition required Mubarak to stay. The questions were being asked quite explicitly because he had been the President’s messenger, so what he said would be taken in that light. By the end of the day, the State Department had disavowed Wisner’s statements and Vice President Joe Biden had reiterated the President’s message.

After Wisner retired as ambassador, he went on to new jobs. After all, an ambassador may have prestige and connections, but he doesn’t make as much money as an executive of Enron or AIG. Wisner is now at Patton Boggs, a Washington law firm heavily involved in lobbying. He was a cheerleader for the nuclear agreement with India, one of the firm’s clients. And you can bet he was working his connections behind the scenes to get that agreement passed.

Likewise, he knew Mubarak from his days as ambassador, and the government of Egypt and various of its wealthier families are clients of Patton Boggs. It seems to be those instincts that took over Wisner’s comments on Saturday.

There is always a problem in selecting an expert for a government mission; the connections that expertise brings are likely to present a conflict of interest. That should have been part of President Obama’s calculation in selecting Wisner.

In a system that makes money the criterion, it makes sense for a former ambassador to capitalize on his network and expertise. And, in a system that allows unlimited political participation by corporations and foreign countries, a firm like Patton Boggs is the place to be.

There have always been people who are primarily driven by money. But there will be more of them if money is seen to be the source of prestige, happiness, and all things good. A different goal might encourage an ideal of public service, companies doing patriotic things for a dollar-a-year fee, as in World War II, or public servants retiring to write their memoirs so that their wisdom might profit the country. Those things happened in a less money-driven world that America once was.

The price of the worship of unrestricted capitalism that we’ve indulged in for the past thirty years is high. Endangering citizen well-being and the loss of leaders we can look up to are part of that price.


Andy said...

Less reliable power, then, is one of the costs of privatization.

It would interesting to see some actual data one way or another, but I don't think the recent problems in Texas support this assertion. The Texas grid is managed by a non-profit corporation of private energy companies, energy co-ops, municipal and other public power generators and various other stakeholders. It's basically a co-op created by the Texas Legislature. In that respect it's similar to the Corporation for Public Broadcasting. It's not really a private entity, but more of a hybrid.

Moreover, the problems that affected the Texas grid weren't limited to the private parts of the system. Several Texas municipal power plants were shut-down by the cold as well as plants in Mexico, which are all publicly owned. It doesn't appear from the basic research I've done that the public utilities in Texas were less susceptible to cold-weather-related problems.

Although I generally agree with your criticism of privatization as a right-wing dogma, it's not readily apparent that privatization had anything to do with what happened in Texas.

Cheryl Rofer said...

It's not just the issue of ownership of individual power plants. It's the way the system has been canted. Profit is good. Cheaper is better, unless we're talking about executive salaries. I'm using "privatization" in a very broad way here to stand in for the anti-community craziness that has seized the nation over the past thirty years.

The good of the community becomes secondary or less. In both these cases, the price is paid in loss of community values: in one case, essential services are lost when they are most needed, and in the other case, trust is lost.

troutsky said...

We are fighting Canadian tar sands development which is just barely profitable but insanely destructive. My beef is having no say in the direction of energy development.

Andy said...


Ok, is there any evidence that "anti-community craziness" was at all responsible for these grid problems in Texas and elsewhere? Also, is there any evidence that privatization efforts in general have negatively affected grid reliability?

My overriding point is that, absent evidence, I'm skeptical of the notion that reduced reliability is an inherent cost of privatization, especially as a "very broad" concept.

Cheryl Rofer said...

Business for profit means not preparing for extremes because it costs more. Community service means maintaining service.

It costs more to offer a resilient, reliable service. The classic example of this is the Post Office/Postal Service, although the utilities aren't far behind. Serving the entire community's mail needs includes nearly-inaccessible villages in northern Alaska. Serving them will never yield a profit.

Likewise, preparing utilities to continue operating during extremes costs more in equipment and personnel. Profit insists on the lowest costs possible (except for those executive salaries, of course!). So we can expect less-expensive and less-reliable equipment.

I'm not sure what "evidence" you want, Andy. Texas is different from Minnesota is different from California. Lots of things are different now from what they were when utilities were publicly owned and more severely regulated. So there's no controlled experiment.

I would note that the recurring power outages in Washington, DC (yes, them too!) would have occasioned enormous derision in American news if they occurred in, say, Moscow. So there's a comparison of sorts.

And I'm wondering what the evidence was that sent us hurtling toward privatization and greed. I don't recall the sorts of things you seem to be asking for on the other side.

Andy said...


Thanks for your reply.

Business for profit means not preparing for extremes because it costs more. Community service means maintaining service.

What you describe here is not business for profit, but poor business practice. A business which does not prepare for extremes is a business that isn't going to be around very long (unless, of course, that business is protected from failure - see Wall Street and GM among others). There are a lot of business like that but they are the first to go once adversity hits.

Profit insists on the lowest costs possible (except for those executive salaries, of course!).

That is not accurate either. Some industries are more cost-sensitive than others, but the idea that profit requires the lowest costs possible simply isn't true. Just as a quick example, my Dad started a construction business after WWII and my brother runs the business today. That longevity and profitability is due to planning and preparing for adversity as well as NOT insisting on the lowest costs possible. The business' success is due in no small part to paying extra for quality people and quality materials which results in fewer problems, fewer delays (which are the real profit-killers in the construction industry) and more business from referrals. My family has been competing against "lowest costs possible" contractors for decades. Those competitors may last a couple of years, but their poor practices eventually catch up to them and then they disappear.

On the question of evidence, I've already said what evidence I'm looking for - actual data that shows, one way or another, whether privatization of electrical utilities results in a less reliable supply of electricity. You don't seem to have any, so I went looking and found this CRS report which I've only just skimmed. I think there is some support for your contention in there but the whole issue is pretty complex and the history much more involved than I realized.

Cheryl Rofer said...

Andy, my father was a small businessman too, so I know what you're talking about.

But the companies that own the power generating stations are not like our fathers' businesses. They're not even like big companies were when my father had his business. They're driven by their quarterly reports, which must show profit.

You and I agree that a well-run business would prepare for extremes, but that only means that being driven by quarterly reports is not good business. But that's the way it's done now, because it's good business for the investors. The heck with the customer.

And I'll still maintain that some businesses (like the post office and very likely the utilities) will never make a profit the way, say, cosmetic manufacture will.

When people argue for privatization, they argue from an ideal - like your father's business. But, in the quest for evidence, show me one company that operates like that today, especially a big one!

And yes, the reasons for reliability or not are complex. But the arguments that have carried the day on privatization haven't been based on the kind of facts you're looking for.