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Electric Reform in Great Britain: An imperfect Model.

Fortnightly Magazine - June 15 1996

new meters are not required, that they can assume, rather than measure, a consumer's demand profile. That shortcut would remove an important market mechanism: the ability of consumers to shift their demand patterns according to price signals. Nevertheless, some consumers from rich districts with higher-than-average consumption and good records of paying bills will remain attractive to new suppliers, so some sort of market may emerge on the basis of "cherry-picking" strategies. But where would this leave low-volume consumers in poor areas? If the distribution and supply businesses should separate, leaving no retail supplier with a geographic locus, who would serve as the supplier of last resort, and for what compensation?

It is therefore difficult within the present structure to see how full competition would emerge. Small customers would likely end up paying for competition in other market sectors.

A Dynamic View:

From the Bottom Up

Favoring a less static view, some have speculated that new entrants might find value in getting access to full details about a geographically concentrated set of consumers and use this information to sell gas, water, cable television, and other home shopping services. Or, perhaps supermarkets or gasoline companies might try to buy loyalty to their products by offering discounts on electricity sales.

These new dynamic structures hold attractions. A market driven from the bottom up would take much more account of the requirements of consumers, as represented by powerful buyers such as oil companies and supermarket chains. Such companies would prove much more aggressive than individual consumers in seeking out the lowest package of generation costs, which would reduce the risk that residential consumers would end up paying for competition in large-volume markets.

An integrated, competitive system may therefore prove viable. But would it be preferable to an integrated, noncompetitive system? If integrated competitive suppliers were allowed to retain the advantage of a cheaper generation portfolio, a day-to-day Pool would be irrelevant or only of marginal significance. IPPs might also have no space in such a competitive system. In the past, IPPs were squeezed out by lack of access to the system; in this scenario, they would lack a final market for their power. Moreover, competition authorities would require extremely fine judgment to determine how many suppliers are sufficient to guarantee

competitive behavior, and clear guidelines to prevent the concentrations that would inevitably be sought by the largest companies. An integrated competitive system would also require determined actions to break the local de facto supply monopolies.

If moving to such an integrated competitive system is the British Government's intention, with clear safeguards against unchecked market power, then it shows no sign of acknowledging it. The British Government seems too credulous of the empty rhetoric of takeovers and mergers. The existence of "synergies" and "economies of scale," and the promise of creating "world-class British companies," seem to be accepted uncritically. A more likely interpretation is that the new structure failed either because it was infeasible or the Government lacked the political will to enforce it, so that the industry now lies at the mercy of the players, which