The British Electricity Experiment

Abstract

The British electricity experiment John Vickers and George Yarrow Privatization of the British electricity supply industry has been accompanied by a series of far-reaching structural and regulatory reforms. Whereas traditional solutions to market failure problems in electricity supply rely on high degrees of vertical and horizontal integration or collaboration, the British reforms have included the vertical separation of transmission from generation and (partially) of distribution from supply, together with horizontal de-integration in generation. The comparative radicalism of the reforms should yield considerable information about a set of generic issues that confront policy-makers, not only in electricity supply, but also in other industries where major questions of competition policy arise. These issues include efficiency tradeoffs between markets and hierarchies, problems of tacit collusion, the significance of entry conditions, the role of regulators, and the interactions between regulation of market power and other controls, such as environmental regulation. Initial evidence indicates that, as intended, significant new entry is occurring in both electricity generation and supply. Many issues remain to be resolved, however, not least in the area of environmental regulation, and it is far from clear whether, ultimately, the reforms will be judged a success in terms of their impact on economic efficiency.