- 1997-2003 : the changes
In 1997, after eighteen years of Conservative administration, the Labour party came to power and several changes were introduced in the regulatory regime. It was according to Howe (2001) a way to avoid giving too much to the investors of the RECs especially big US utilities.
The new Labour Government started by putting a windfall tax on the owners of the RECs, then, in January 1999, they merged the Office of Electricity Regulation and the Office of Gas Regulation into only one which was called Ofgem and which became the appointed new regulator.
As Parker (1999) explains, several other official recommendations were taken and put into practice in the following years :
- “Ministers should be given the power to issue statutory guidance on social and environmental objectives, including energy efficiency objectives”,
- Regulators oughted to protect the customers interest “wherever possible and appropriate through promoting effective competition”,
- The customers representative organisation should be independent to be able to focus on consumers
- “Strengthening the accountability, transparency and consistency of regulation”.
From September 1998, Domestic Electricity customers were able to switch suppliers to take advantage of lower prices, which is the proof that competition was starting to enter this market. Customer awareness of being able to switch suppliers was important : 89% of the people living in a zone opened to competition (in February 1999).
Moreover, in May 1999, the domestic electricity market was fully opened to competition. And by the end of September 2000, more than 33% of the domestic customers had made a demand to change supplier and according to Ofgem, 50% of all consumers have changed since the market opened to competition.
Another significant event was the Utilities Act 2000 which "increases provision for the protection of consumer interests, a move which is supported by the regulatory requirement to separate distribution from supply activities". Furthermore a new body was created to ensure the protection of customers : Energywatch.
- Identification of the regulation office for the electricity industry and the role it plays
- Before 1998 : Offer
As indicated in the historic review, the Office of Electricity Regulation was the first regulatory body established after the privatisation of the industry in 1990. It was, according to Surrey (1996), a "non departmental agency" because it was not directly responsible for any Government Department. They had a vast range of responsibilities but have nevertheless to share them with the Secretary of State Government.
In accordance with the Electricity Act, the Director General should be the only one to put into practice the "details of regulation". However, on main issues both the Government and Offer are concerned.
The 1989 Electricity Act sets the first main rule : "ensure that reasonable demands for electricity are satisfied, to licence suppliers of electricity, to ensure that they are financially viable and to promote competition wherever possible" (J. Surrey, 1996). At the beginning customers protection did not appear to be a priority as it was widely agreed that the best consumers' protection was an effective competition that enable people to choose their suppliers.
- Ofgem
Ofgem is the Office of Gas and Electricity Markets and it regulates the gas and electricity industries in Great Britain. It is governed by an authority composed of executive and independent members.
Its duties and power arise from the different Acts passed in 1989 -Electricity Act- and in 2000 -the Utilities Act-. Their aim is to protect the interests of consumers both in present and future, by promoting competition. They also must have a regard to "ensuring all reasonable demands for electricity and gas are met, securing that licence holders are able to finance their obligations", making sure that the interest of the sick, disabled, elderly, poor and other utility consumers are respected (www.ofgem.gov.uk).
On a more economic scale, they need to improve and encourage efficiency and economy, to protect the public from danger and to secure the long term energy supply.
Ofgem is also required to be respectful of the environment. For example they, have to take care that the electricity and gas industry do not damage the environment.
Furthermore, in the case of companies, Ofgem delivers licences which describe the behaviour companies must have toward customers to make sure they provide a reliable and safe service. They can also force a company to apply the law and particularly licence obligations by imposing financial penalties when customers have for example being injured.
Moreover, Ofgem is required to control prices for several institutions :
- The National Grid Company for the high voltage electricity in England and Wales
- the twelve RECs in charge of the distribution of electricity for England and Wales.
The price control is a key issue to guarantee that "monopolies do not abuse their position and provide companies with a future level of revenue and appropriate incentives to meet their statutory duties and licences obligations"(). Money earned by a monopoly business is also constrained to regulation with the RPI-X price control reviewed modified every five years. The RPI-X is a method used to "control prices, not profits, and encourage efficiency within the company"()".
Companies are also encouraged to provide the best service possible by being rewarded or even penalised depending on the quality of their service.
- Benefits and drawbacks of regulation
The positive or negative effects created by the regulation can be seen in various fields such as economy with the variation of prices, environmental with the emission of toxic gas or the transmission consequences, social through the policy of companies toward disabled, elderly or poor people and finally health and safety with the measures taken to protect consumers.
According to Parker (1999, p.216), "privatisation with effective regulation is intended to alter the state's role to macro-management or establishing the rule of the game. The more that these constraints are set out clearly in statute or other official documentation, the more transparent the regulation becomes for both managers and investors".
This part will attempt to define the pros and cons of the regulation within the different areas.
First of all, the economic aspect which is mostly concerned with prices. According to the survey conducted by the Electricity Association at the end of 2002, England is the fourth cheapest country for electricity in Europe. This tend to prove that competition introduced after privatisation is being effective. "Prices have fallen by 46% for the medium size customers since the opening of the industrial market to competition" (Electricity Association, 2003, p.6). This tendency is comparable for the domestic market and the prices decrease was about 32%.
The price control is also important in monopolies areas of the business such as transmission and distribution, to make sure the companies are efficient "by determining inflation limited price caps" (Electricity Association, 2003, p.21). In the case of supply, there is no need to exert control on prices since the market became highly competitive.
The Enterprise Act of November 2002 generated singular changes in the fields of competition law and suppressed law and consumer protection legislation. This reform concerned the monopoly and mergers regime which used to be under ministers control and who were replaced by other competent competition authorities, as well as the criminalisation of cartel activities, but it also gave the possibility to appeal against the decision taken by the Office of fair trading in case of a damage. This is a proof of the continuous renewal of regulatory system that regulators try to adapt to fit the best as possible to consumers need.
Furthermore, according to Ofgem, the creation of the New Electricity Trading Arrangements in 1997, which purpose was to “bring about a more competitive wholesale market bringing downward pressure on the price of bulk electricity and ultilimately prices to all consumers”, had a positive effect on prices by reducing them. However, Electricity Association argues that the decrease of wholesale prices made the value of generation plant put up for sale dramatically decrease and almost “all merchant independent power producers are suffering financial pain and are paying debt payments out of their cash reserves” (Electricity Association, 2003, p.76). According to them, a stable environment and prices should be provided to stimulate long term investments to ensure future security supply.
Several Acts establish the standards and rules companies need to follow in order to respect the environment : the Electricity Act of 1998 which requires the Secretary of State for Trade and industry to be careful with the effects of generation, transmission and supply and the companies are subjected to particularly strong rules dealing with respect of nature and construction of new power stations ; the Utilities Act of 2000, which define the Secretary of State role : providing regulatory bodies lines of conduct toward environment .
However, other bodies, for instance the Environment Agency, carry out the task of principal regulator for environment regarding the Environmental Protection Act 1990 and its aim is to "enforce Integrated Pollution Prevention and Control Regulation" (Electricity Association, 2003, p. 22). A memorandum was signed between Ofgem and the Environment Agency to determine the way they were going to co operate to be the most efficient as possible.
An example of the positive effect of regulation concerns the gas emissions. The Electricity association highlighted that the annual reduction of CO2 emissions between 1990 and 2001 decreased from 19% although the consumption increased from 20%.
The tendency for the sulfur dioxide emissions and the nitrogen oxide emissions are comparable
The enterprise Act of November 2002 was a key issue in the field of consumers' protection as it modified the legislation. It made possible for the regulator to "obtain urgent court orders to stop infringements of a wide range of protection laws including those relating to doorstep selling, unfair contract terms, the provision of consumers credit, distance selling by telephone, misleading and comparative advertising, and guaranties" (Electricity Association, 2003, p.26).
Competition in the market led to some trouble concerning mistaken transfers, accounts and bills when customers decided to switch suppliers. According to Energywatch, the number of complaints could be estimated to 20 000 every month. The suppliers, who needed to react, decided to get into partnership with Ofgem and Energywatch, to try to improve these kinds of problem. This partnership with a regulator body seems to have been effective since the number of complaints have decreased to 1 500 in August 2002 ().
Another issue influencing the quality of service is the disconnections. In 1990, 80 000 disconnections were counted. However, the action of Ofgem ensured this very high number to decrease to 300 in 2001 (Electricity Association, 2003, p.52).
Fuel poverty, which affects about four million households according to Electricity Association, seems to be for the moment an unresolved subject. This implies that these people, mostly single parents and elderly people, have to spend 10% or more of their already low income, to be able to heat their house. The Government measures will attempt to help 1.1million households by the end of 2004 through the establishment of different programs (Electricity Association, 2003, p.53). Energy companies agreed to combine their efforts with Ofgem to try to eliminate this problem.
Companies have to care for the health and safety of their employees, contractors and the public. The Electricity association annual report pointed out that the accident rate in the Electricity industry has been decreasing since 1994, from about 1,1 accident for 100 employees to 0,4 in 2002 (2003 ,p. 18). And in the case of the members of public, the tendency is the same : about 300 people injured at work in 1991 to 195 in 2002, and 110 people injured at home in 1991 to 160 in 2002. In 1999, the Electricity Association which works in relation with Ofgem, created a program called Safelec 2000, which was updated at the end of April 2002. Its aim is to improve health and safety performance.
Companies have also developed measures and targets to achieve in regard to the Safelec program, especially for distribution and generation. Even if the number of injuries recorded is low compared to other industries, 0.4 accidents per 100 employees is still too much and the industry should keep on making prevention especially to the members of public, about the risk electricity constitute.
Conclusion
To conclude, regulation of privatised industries is necessary not only to protect the consumers' interest, but as well the environment, the health and safety of people and the economy.
Regulations needs also to be updated regarding to changes that appear and may affect its efficiency.
It has been shown throughout this essay that regulation could prove effective in certain areas but could also be subjected to some problems.
The decrease of prices was one of the most remarkable change after the privatisation of the industry and when the market fully opened to competition. It has benefited the consumer as well as the environmental measures.
However, in the matter of health and safety or even social issues such as fuel poverty, it is widely agreed that regulation could be improved.
BIBLIOGRAPHY
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Young A, 2001, The Politics of Regulation : privatized utilities in Britain, Palgrave.
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Parker D, 1999, Regulation of privatised public utilities in the UK : performance and governance, International Journal of Public Sector Management, Vol. 12, No. 3, pp.213-236
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Surrey J, 1996, The British Electricity Experiment : privatisation; the record, the issues, the lessons, Earthscan
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The Electricity Association, 2003, Elesctricity Industry review 7
TABLE OF CONTENTS
Introduction
I- The situation of the British electricity industry
- A historic review up to 1997
- 1997-2003 : the changes
II- Identification of the regulation office for the electricity industry and the role it plays
A) Before 1998 : Offer
B) Ofgem
III- Benefits and drawbacks of regulation
A) Economy
B) Environmental
C) Social
D) Health and safety
Conclusion
