July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
Electric Reform in Great Britain: An imperfect Model.
First came the Pool, with its faults and virtues.
Now comes a wave of troubling takeovers.
What happens when retail supply opens up?
Much of the pressure to reform the electricity supply industry in the United States assumes that the United Kingdom's electricity experiment offers a proven model. Close examination, however, reveals that competition in generation is more apparent than real. Competition in supply (the retail segment) is not scheduled for the vast majority of consumers before 1998, and the industry is rapidly reintegrating and concentrating into a structure that may not be competitive.1
Six years of experience in Britain have demonstrated that the form of regulation, whether rate-of-return or incentive, is not the key factor. The promise that incentive regulation would end up simpler, cheaper, and a less dominating influence than rate-of-return regulation has not come true. In fact, it is now apparent that effective regulation of monopolies requires a regulatory body with the commercial know-how to understand a utility's cost base well enough to identify where costs can be squeezed (em and with the political power to enforce its will. High utility profits and the ease with which utilities still hoodwink the Regulator suggest that these conditions have yet to be fulfilled in Britain.
Less than Ideal
The Government's reform proposals assumed a four-tiered structure for the electricity supply industry:
s Transmission (high-voltage lines)
s Distribution (lines of 132 kV or less)
s Supply (the purchase of electricity in bulk and its resale to final consumers, including meter reading and billing).
Transmission and distribution were assumed to be natural monopolies. Generation and supply were assumed to be potentially competitive.
An ideal structure would have stocked the generation and supply sectors with enough companies to ensure competitive behavior, while establishing a single national monopoly grid and a number of distribution companies with geographically defined monopolies whose performance could be compared. The companies involved in each of the four businesses would not have held interests in other electricity supply businesses because of the risk that they could exploit market power unfairly.
Nevertheless, a number of constraints on the Government, some self-imposed, worked against immediate implementation of such structure. First, any new companies had to be salable to potential shareholders. Second, the new system had to be completed well within the span of office of a Government, effectively only three to four years, since any business half-finished at election time may well be abandoned. Third, the Government had committed itself in its election manifesto to promote nuclear power, so any new structure had to accommodate the special needs of nuclear. (In the end, the attempt to privatize nuclear failed, leaving a state-owned and subsidized nuclear sector.) Finally, the reliability of the electricity sector had to be maintained, so a number of transitional measures had to be included to reduce the risk that the system would fail.2
Previously, distribution and supply were integrated and carried out by 12 regional, state-owned, monopoly companies. They bought all their power from the Central Electricity Generating Board (CEGB) at standard bulk tariffs over which