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Electric Reform in Great Britain: An imperfect Model.

Fortnightly Magazine - June 15 1996

(Kw) in 1994, with full eligibility for all demand levels in 1998.

The competition in retail supply introduced in 1990 posed no major risk because it involved only about 5,000 eligible customers. They were easy to target; their bills were large enough that even a small reduction could yield worthwhile savings. Little chance existed for any emerging suppliers, RECs, or the two large generators to undercut each other significantly without incurring losses. After all, the Government had engineered the cost bases of the two generators to be almost identical. The RECs had no effective alternative but to buy from these two companies. Nevertheless, the new market was vigorously fought over. Most large consumers changed suppliers or negotiated lower prices from their existing supplier, creating the impression of a competitive market.

The lowering of the eligibility ceiling to 100 Kw marked a much more daunting change, however. Some 45,000 new consumers

became eligible for supply choice, creating a vast data-processing problem. To set proper charges for distribution services required a meter that could transmit consumption data on a half-hourly basis. The first year after opening up this market was chaotic. Nevertheless, many consumers did change suppliers or negotiate lower prices. The practical problems can likely be sorted out in the long term. The cost of metering, marketing, and data processing are low enough compared to even the smallest bills in this market sector to make competition worthwhile.

However, until competition in retail supply becomes available to all consumers, the new market cannot be termed satisfactory. Suppliers may well offer sub-economic terms to large consumers to maintain the volume of their market, passing on extra costs to their captive consumers. The Regulator will find it difficult to prove this subsidy, because, in a network industry such as electricity, allocating costs between different groups of consumers in a network industry involves difficult judgments. Changes in the balance of tariffs can always be explained by claims that they remove cross-subsidies.

Other Sectors:

The Grid, Nukes, and IPPs

The Government has met its objectives unequivocally in at least one area: opening up access to the wires so that ownership of the high-voltage transmission grid or low-voltage distribution network offers no competitive advantage to suppliers or generators. The attractions of owning these sectors now lie purely in perceptions of how profitable these businesses will be. Once the Regulator obtains a better grasp of the cost base and is able to impose a more stringent regulatory regime, these sectors will become low-risk businesses with correspondingly low, but secure, returns for investors.

Other anomalies remain, however.

To reduce public ownership of the nuclear plants, the Government has split the assets into two parts: 1) plants that are potentially salable (em those being the seven Advanced Gas-Cooled Reactor (AGR) stations and the Pressurized Water Reactor (PWR) (em and 2) the old stations, the Magnoxes, which are too near the end of their useful lives to be sold. On April 1,1996, it transferred the new plants to a new company, British Energy, which, it is hoped, will be privatized this year. The