The British Electricity Experiment

Abstract

The privatization of the electricity supply industry (ESI) in Britain, which began 1990, is in itself an unremarkable event: much of the ESI is privately owned in several European countries and in the United States, and the U.K. privatization program has embraced utilities since 1984, when British Telecom was privatized. The thing that is remarkable about recent policy toward the industry is the radical nature of the regulatory reform accompanying privatization. A vertically integrated, administered generation and transmission structure was replaced overnight (on March 31,1990) by one that is deintegrated and market based: generation and transmission have been separated, and there has been an attempt to establish competition in generation. A number of countries have been moving gradually in the direction of encouraging competition, but nowhere else have such dramatic changes been implemented so quickly.

This chapter is an abridged version of Vickers and Yarrow (1991) plus a postscript on some subsequent developments. The research was part of the project on the regulation of Firms with Market Power under the UK Economic and Social Research Council initiative on the Functioning of Markets. Financial support from the ESRC and the Office of Fair Trading is gratefully acknowledged. The views expressed in the paper are entirely our own, and we are responsible for any errors. We are very grateful to Billy Jack and Kaiser Kabir for their research assistance and to Nils-Henrik von der Fehr, David Begg, Paul Seabright, Jean-Paul Rochet, and seminar audiences at Harvard University and the Massachusetts Institute of Technology for their helpful comments and suggestions.