[BETA] Fortnightly

Suddenly, the U.K. electric industry holds more than academic interest for U.S. utilities. Up to now, it did not appear that many American utility executives had studied the British privatization. But the ongoing attempt at takeover of the U.K.'s South Western Electricity (SWE) by its American counterpart, The Southern Co., ups the ante considerably. If it comes to pass, Southern's acquisition of SWE will tap directly into the U.K. industry and bring real-world experience home to the States.In the United Kingdom, the national grid allowed the old government-run Central Electricity Generating Board (CEGB) to become the privatized and competitive Electric Supply Industry (ESI). Spanning the length and breadth of the country, this high-voltage transmission network provides a common interconnection between generating facilities in all parts of the land and consumers in all of the 12 regions. The national grid is managed and run by National Grid Company (NGC), which is held by the 12 regional electricity companies (RECs). While NGC has not yet been privatized, it has been a major factor in the separation of the industry into generators (National Power, PowerGen, and U.S. independents such as ENRON and Mission Energy) and distributors (the 12 RECs, one being SWE).

Tight Grids

The independent grid, conceived as a common carrier, lies at the center of the pool of electricity supply. Every day the generating companies bid capacity to NGC in half-hour increments, at a bid price per increment. Regulatory oversight of the system by Britain's Office of Electricity Regulation (OFFER) focuses on the price structure of the pool, not the cost structure of the system. Thus, the overall system has successfully decoupled the issue of transmission access from asset ownership and the obligation to serve. Moreover, the regulatory emphasis on prices, which are set at long and predictable intervals, encourages RECs like SWE to cut costs and innovate to boost margins. It also makes them attractive takeover targets for companies like Southern, which believe they can bring costs down even farther. Thus, as the United States opens up the electric transmission system, the U.K. experience may prove directly applicable to areas that feature a tightly integrated transmission system, such as New England.

Historically, Americans have viewed a tightly integrated grid as an obstacle to competition. Witness the posture taken by American Electric Power Corp. regarding transmission access through their service territory over the past 20 years. And consider New England, which has a long history of regional dispatch and planning under NEPOOL and NEPLAN. Controversy raged there in the early 1990s when Northeast Utilities (NU) took over Public Service Co. of New Hampshire. That takeover gave NU control over 65 percent of transmission lines in New England and most of the region's surplus bulk power. Critics feared NU would use its control of transmission to block competing lower-cost suppliers from selling power to small New England utility companies unable to build new generating capacity. They also feared NU would use opportunity-cost pricing for transmission services to discriminate against its competitors in the bulk-power market. The merger was allowed to proceed only through an