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REVIEWING THE GLOBAL EXPERIENCE ON ECONOMIC REGULATION A forward looking perspective

REVIEWING THE GLOBAL EXPERIENCE ON ECONOMIC REGULATION A forward looking perspective April 18-20, 2011, New Delhi, India Practical consequences of trade off choices in regulatory and privatisation policies: what do we learn from gas and electricity privatisation in the UK Devendra Kodwani

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REVIEWING THE GLOBAL EXPERIENCE ON ECONOMIC REGULATION A forward looking perspective

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  1. REVIEWING THE GLOBAL EXPERIENCE ON ECONOMIC REGULATION A forward looking perspective April 18-20, 2011, New Delhi, India Practical consequences of trade off choices in regulatory and privatisation policies: what do we learn from gas and electricity privatisation in the UK Devendra Kodwani The Open University Business School UK www.open.ac.uk

  2. Two common features • 1940s nationalisation and 1980s de-nationalisation programmes Speed Lack of systematic approach

  3. 1940s Nationalising in hurry.. • “very little thought had been given either in the Labour movement or in Whitehall. It was generally agreed that they should be run by public corporations, not by Departments. The literature of 1930s and 1940s is full of references to public boards for this and that industry or service but nothing much beyond that. The lack of previous thought was reflected in the treatment of this all important aspect during the drafting of the Bills. The least amount of attention was paid to it in the discussion on the Coal Industry Nationalisation Bill. Probably the structure for electricity supply received most attention, largely because of the differences of opinions between the Ministers. By the time the Gas Bill was being drafted there was much more awareness of the problem, awareness made more acute by the realisation that the organisation of the coal industry was not proving satisfactory.” (Chester, 1975:1025)

  4. 1980s De-nationalising in hurry.. • “ this was a stroke of political entrepreneurship, for which I, like other commentators, was quite unprepared” (Littlechild, 1986:102).

  5. Political consideration and context Policy consequences Lack of systematic approach Speed Regulatory policy/regime/ instruments Choice of methods Restructuring/ competition consideration

  6. Creating markets in gas • 1948-1986: A monopsonist and monopolist • 1986-1995: Privatisation not equal to competition • 1986-1999: Emergence of competition and break up of British Gas

  7. Battle of introduction competition in UK gas industry 1980-1998

  8. Battle of introduction competition in UK gas industry 1980-1998

  9. Battle of introduction competition in UK gas industry 1980-1998

  10. Battle of introduction competition in UK gas industry 1980-1998

  11. Issues and lessons from British Gas privatisation and regulation • making the privatisation as politically viable idea • political trade off between restructuring and pushing through privatisation meant that government lost opportunity to create market based institution of governance, namely, competition. • consequences of this missed opportunity were witnessed in the continued market power enjoyed by British Gas as privately owned utility for 11 years after privatisation

  12. Issues and lessons from British Gas privatisation and regulation • regulatory and competition authorities failed to achieve a rational and competitive market structure in gas industry for eleven years • hindered the application of economic tools such as matching the price controls to marginal costs and appropriate discount rates • NIE predicts this…

  13. 1989-1998 Restructuring and privatising electricity supply • 1989-91 • Sale of electricity Industry • Office of Electricity Regulation (OFFER) • Competitive generation and supply (customers with demand for 1MW+) • 1994: First periodic review of price controls (RECs) • 1995: Expiry of ‘golden share’ • 1998: Competition extended in100kW+ market • Now full ‘competition’ for LV customers also.

  14. Concluding remarks • although economic performance is the stated objective political parties bring to bear their ideological view points as the main drivers for change • consequence of giving more importance to political motives leads to compromise on choice actual policy instruments as shown in both cases of nationalisation and privatisation of electricity and gas industries in post 2nd World War period.

  15. Concluding remarks • The nature (local network monopolies) of gas and electricity industries is one of the main reasons the regulation is likely to prevail in future • Emergence of green agenda as a key political challenge and its implications for energy policy have brought back the role of energy regulators and political interest in these sectors. • Economic regulation was seen to be a transitory institutional need till the competition developed in electricity and gas markets but that is unlikely to happen.

  16. Thank You.

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