Vertical integration may very well weaken Britains pool

Vertical integration may very well weaken Britain`s pool

Douglas J. Smith

Managing Editor

When England and Wales implemented privatization of the Central Electricity Generating Board (CEGB), the government was very specific that the generation of electricity be separated from that of transmission and distribution. One of the major concerns at that time was the fear that if the privatized companies were vertically integrated, the companies would prefer to distribute the electricity they generated even though it might be more expensive.

Kevin Dodman, Power Engineering International`s European editor, in his article “UK electricity sector switches to takeovers,” discusses the merger mania now taking place in Britain. If the mergers of generating and distribution companies go through, 1995 might be the year Britain sees the start of reintegration of its electric industry into vertically integrated companies. Should all of the bids mentioned in Dodman`s article succeed, over 60 percent of the generation in England and Wales would be vertically integrated with its distribution.

In my opinion, if this occurs, the innovative feature of Britain`s privatization–the separation of electric generation from its distribution and, more specifically, the power pool–will no doubt be in jeopardy. The end result would be a less competitive wholesale market for electricity and a weakened power pool.

When the government privatized the industry, it formed three power generation companies: National Power, PowerGen and Nuclear Power. Distribution was handed over to 12 regional electricity companies (RECs). One transmission company, The National Grid Co., owned by the 12 RECs, was formed to operate the power pool and transmit the electricity. Unlike other countries that have not completely opened up their transmission systems, Britain`s power pool has allowed the wholesale market for electricity to be a success.

Britain`s conservative government, under Prime Minister Margaret Thatcher, was responsible for the privatization of the electric industry. The executives of the electric companies point out that consumers have benefited from privatization. According to the executives and the government, the average household electric bills have fallen by more than 13 percent since 1991. Since being privatized, the generating companies, formed from the old CEGB, have produced electricity more efficiently. Today, the generating companies produce twice the amount of electricity per employee than CEGB did prior to privatization.

Although, on the face of it, consumers in Britain have benefited, privatization remains unpopular with many of the country`s voters. Obviously, some of the blame can be put on the shoulders of the executives whose salaries have increased three-fold since privatization. In addition, these same executives have been awarded large share options, which have also tripled in price. Consumers are also not happy with the mergers now being discussed. However, this might change when the final stage of privatization occurs in 1998. At that time, all consumers of electricity will be able to buy from any generating company they choose.

David Newbery, Cambridge University Department of Applied Economics, in a Financial Times article, is of the opinion that once vertical integration has been achieved, it will be too difficult to “unscramble the egg.” If Britain allows the electric supply industry to once more become vertically integrated, then I see it as a step in the wrong direction. In my view, the separation of electric generation from its distribution is the only way to have a truly competitive market. If it`s not broken, why fix it.

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