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Electric Reform in Great Britain: An imperfect Model.

Fortnightly Magazine - June 15 1996

older plants were moved to another new company, Magnox Electric, which is planned to be absorbed into the state-owned fuel-cycle company, British Nuclear Fuels. If British Energy is sold it will not pursue any new nuclear interests, and instead will become a large generating company with market power similar to National Power and PowerGen.

The emergence of IPPs after 1990 appeared the vindicate the Government's belief that competition would grow to break the generation duopoly, but in reality, while the IPPs have reduced the market shares of the two large generators, they haven't contributed much in developing a competitive market.

Ownership of the IPPs remains dominated by the RECs that signed 15-year gas supply contracts matched by electricity supply contracts. Thus, these IPP plants can afford to bid zero into the Pool to ensure their dispatch, knowing that they will receive a price equal to the long-term contract price. In effect, it is the consumers (most of whom will remain captive until at least 1998) who bear the risk for these IPP plants. In fact, the Regulator acknowledged that these plants have played little role in adding competition to the generation sector in his decision to impose a price cap on the Pool and to force National Power and PowerGen to sell 6,000 Mw of coal-fired capacity. As the RECs quickly filled their 15-percent quota for owned generation, and as the full opening up of the retail supply market (in 1998) has neared, the RECs began to lose their power to shift the risk of building new plant to captive customers. The flow of IPPs built on such terms quickly dried up.

New Obstacles:

Mergers and Takeovers

Activity in mergers and acquisitions did not begin in earnest until 1995, mainly because the Government held so-called "Golden Shares" in the RECs, which effectively prevented any takeovers. But when that restriction was removed, the market clearly reacted. It judged that the regulatory formulas would allow the RECs to earn large profits in a low-risk business. As a result, the RECs became targets for takeover. By April 1996 only three of the twelve RECs had not fallen prey to takeover bids.

The deals can be divided into four categories: conglomerate takeovers by diversified companies, horizontal takeovers by foreign utilities, horizontal integration into other utility services, and vertical integration of generation and supply. The first three categories raise issues of regulation, such as ensuring that profits are not siphoned out of the businesses (em particularly the monopolies (em either into competitive businesses or overseas. The issue of foreign ownership also raises an emotional reaction: Ownership of key structural industries ought to remain in national hands so that the companies can be more easily controlled.

It is the threat of vertical integration that raises questions of principle. Strict separation was never enforced in the new structure: The RECs quickly took advantage of their ability to contract for 15 percent of their power requirements from sources owned by themselves, and the generators competed vigorously in the supply markets. Separation was further eroded when an integrated Scottish electricity company