Theory and practice of governance of the British electricity industry

Abstract

This paper reviews the theory and practice of governance of the British electricity industry since its reform in 1990. It shows that the promise that regulation would be ‘light’ has not been fulfilled and regulation is now a dominant influence on the policies of the electricity companies. A key element of the new system was the use of incentive regulation to set the prices for monopoly activities. This was meant to be cheaper and simpler than rate-of-return regulation, providing stronger incentives for the companies to reduce their costs. However, incentive regulation methodology has evolved and now differs little from rate-of-return regulation. Regulatory interventions have frequently been necessary in the generation market to prevent abuse of market power. The structure of the generation market is now highly competitive and the market mechanisms have been reformed, but it remains to be seen whether this will be sufficient to make generation truly competitive. The regulator has been successful in completing the corporate separation of monopoly activities from competitive activities, but it now seems likely that generation and retail supply will be allowed to integrate. This will provide a more secure environment for new investment, but at the expense of competition in generation.