Industrial relations implications of the liberalisation of the UK electricity sector

In November 2000, the European-level social partners in the electricity sector agreed a joint declaration on maintaining a "partnership approach" to restructuring in the context of the increasing liberalisation of the European energy market. Given the advanced state of the liberalisation of the electricity sector in the UK, this feature reviews how restructuring has developed and the impact it has had on industrial relations.

The UK led the way in the deregulation of the energy sector, a process that has now spread throughout Europe. In 1999 the first phase of the creation of the "European internal market" in electricity was completed. Under Directive 96/92/EC, Member States were required to open up 25% of the national market in electricity provision to competition, with this share planned to expand in the future. In a communication responding to the recommendations of the March 2000 Lisbon European Council (EU0004241F), the European Commission declared that it would take into account social aspects when presenting concrete proposals for the acceleration of liberalisation in the European energy market.

A recent study for the European Commission showed that 250,000 jobs were lost in the EU electricity sector between 1990 and 1998, but that restructuring had taken place in a socially responsible way. The European-level social partners in the electricity sector (EU9902151F) expect further reductions in the number of jobs to occur as a result of competition. On 27 November 2000, EURELECTRIC, on the employers' side, and the European Federation of Public Service Unions (EPSU) and the European Mine, Chemical and Energy Workers' Federation (EMCEF) representing employees, agreed a joint declaration on maintaining a "partnership approach" to restructuring.

Interest in "partnership" has grown considerably in recent years in the UK, especially in the privatised utilities (UK9907214F). A common feature of a partnership approach is management guarantees about job security in return for unions accepting greater flexibility (UK9910135F). Given the advanced state of UK energy liberalisation, this feature reviews how restructuring has developed in the sector and the impact it has had on industrial relations. It is based on interviews conducted by the authors with employer and trade union representatives as part of a European Foundation for the Improvement of Living and Working Conditions research project on "pacts for employment and competitiveness" (PECs) (IT0003265F).

The restructuring of the industry

Under state control, the UK electricity industry was organised around a single generating company, the Central Electricity Generating Board (CEGB), and 12 area boards which distributed electricity within specified geographical areas. The CEGB owned the power stations and the "national grid" through which electricity was transported. Its primary concern was output – "keeping the lights on". The importance of maintaining a constant supply of electricity meant that industrial relations were characterised by stability. This was facilitated by extensive consultation and formal procedures for dealing with grievances and disputes. Trade union membership was very high and collective bargaining at national level well established. In general, pay and conditions were relatively good and employment was secure, with staffing reductions carefully managed by central agreement.

The Conservative governments of 1979-97 sought to break up what they perceived to be inefficient state monopolies. In 1990, the electricity industry was split into generation, transmission, distribution and supply, which were then privatised separately. A key part of privatisation was the restructuring of the generating part of the industry. In England and Wales, the CEGB's power stations were split into two fossil-fuel generator companies - National Power, with just over half (52%) of total generating capacity, and PowerGen, which had a third of capacity. The nuclear power stations, which provided 15% of capacity, were privatised later (in 1996) under the name British Energy.

Once privatised, National Power and PowerGen became responsible for the first time to private financial investors and, perhaps even more importantly, were forced to compete for orders. However, in the early years competition was not as strong as the government had hoped: "duopolistic competition" meant that the big two generators retained strong market power to set prices. Recently, however, new entrants in electricity generation have emerged and the "big two" have diversified their operations. Significantly, the government required PowerGen and National Power to divest plant in order to allow them to take over regional electricity companies. Generating capacity has therefore become more dispersed and competitive pressures more pronounced. The generating share of both PowerGen and National Power has now fallen below 15%.

Industrial relations in a period of change

The new commercial environment meant that companies had to reduce costs in order to be competitive and increase shareholder value. Yet cost-cutting had to be managed in a way which not only avoided damaging confrontation with the unions but also allowed management to press ahead with further changes to working practices to increase efficiency. With labour costs a relatively small component of total costs – under 10% – and with profitability high, the generating firms did this partly through steady increases in pay. However, employment levels fell dramatically. Since 1990, PowerGen's workforce has fallen from just over 9,000 to just over 3,000. The workforce at National Power has contracted even more sharply, from 17,000 in 1990 to around 3,000 today. In the main, these reductions were achieved through relatively generous severance terms in the context of policies to avoid compulsory redundancies.

Nevertheless, the dramatic reductions left a feeling of job insecurity among the remaining workforce. According to the Unison trade union, employees also raised concerns about increasing workloads, stress and safety. Furthermore, they expressed concern about fewer opportunities for career development. The unions themselves felt increasingly marginalised by management. This reflected the companies' changes to their collective bargaining structures. First, the national collective bargaining machinery was dispensed with and replaced with company bargaining. Further decentralisation then occurred down to business unit level, stretching union resources still further. More fundamentally, it is clear that management in the privatised generating firms did not see collective bargaining as a positive vehicle for change. Rather, managers appeared to accept that some degree of bargaining around the terms of restructuring was inevitable where unions remained well organised.

Partnership or PECs?

With the workforce reduced dramatically and so much restructuring achieved, did managers in the generating firms seek to maintain stability in industrial relations through "pacts" with the unions? One interpretation of the evidence is that "tacit employment pacts" exist in both firms, based on an informal understanding that change will be managed without recourse to compulsory redundancies. In many ways, these tacit arrangements achieve the same outcomes as more formal agreements without either side having to commit itself to an unchanging policy of cooperation.

However, these informal understandings should not be given the status of "pacts". Managers interviewed were anxious to stress that each case had to be dealt with on its own merits and that there were no absolute guarantees that future job cuts would be achieved through a voluntary severance package. Moreover, both managers and trade union representatives were clear that in many cases the redundancies were only nominally voluntary. In particular, where relocation was not feasible for personal reasons, as was the case for many people, redundancy was the only option.

Instead of a formal pact, both PowerGen and National Power therefore developed an informal type of "partnership" to manage the restructuring process. This was based on shared understandings about the need to improve efficiency and to manage rationalisation without conflict. Industrial relations stability was bought at the price of favourable redundancy compensation for those leaving the companies and higher than average pay awards for those remaining.

A more formal "pact for employment and competitiveness" (PEC), in the European Foundation's terminology, was not used for a number of reasons. First, the approach used to date served managerial aims fairly well. Given the uncertain environment in which the companies operate, with change an ongoing process, managers argued that a formal arrangement would risk creating a hostage to fortune. Second, while human resources managers appeared to value having unions "on board", even if the development of human resources management meant that relationships had to change, there was some evidence that managers in other functions were suspicious of the role of unions and would oppose formal arrangements on job security. Third, diversification strategies and the decentralisation of collective bargaining made company-wide pacts unlikely, since bargaining increasingly took place at the level of business units. Finally, in this context the unions too were wary of being seen as too close to management and identified with the rationalisation process.


The liberalisation of the UK electricity sector led to massive job losses without overt industrial conflict. Significantly, this occurred without any formal "employment pact". Instead, a partnership approach to change emerged in which both parties recognised the new realities of the commercial environment and pledged themselves to find adjustments without recourse to compulsory redundancies. However, these findings should be seen in the light of the traditions that characterise British industrial relations. There has always been a greater reliance on informal understandings and "custom and practice" in the UK, compared with other European countries. This informs the attitudes and priorities of both management and trade unions, and helps to explain the lack of enthusiasm on either side for greater formalisation.

In contrast, the processes of privatisation and deregulation in other European countries appear to have produced more emphasis on negotiation and formality in responding to change. For example, Electrabel, the Belgian electricity distribution company, reached agreement with unions in December 1997 to protect job security through reductions in working hours and a wage freeze (BE9801130N). In France, EDF-GDF reached agreement in 1999 with the unions to reduce working time to as low as 32 hours a week in order to expand employment (FR9902155N). Similarly, ENEL in Italy negotiated a "concertation pact" with unions that sought to minimise job losses through agreement on restricting contracting out and a commitment to continuous training. This demonstrates the way in which similar developments in markets can lead to quite different industrial relations outcomes from country to country. (James Arrowsmith, IRRU and Tony Edwards, Kingston Business School)

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