Electricity Reform Abroad and U.S. Investment

Energy Information Administration

Endnotes

1. Paul Cook, The British Council, Governance and Law, The Evolution and Performance of UK Privatization, INTERNET address: http://www.britcoun.org/governance/briefing/iss2int.htm.
   
2. "Sale of the Century," The Wall Street Journal (October 2, 1995), p. R17.
   
3. Often times the marketing function of the electricity industry is subsumed in the distribution segment. However, certain services normally provided by distribution companies can be separated out. These services include such items as brokering, billing, and metering. As stated earlier, the marketing segment of the electricity industry along with generation was considered to be potentially competitive and deregulated gradually. It should be noted that in the United Kingdom, the conventional term for the provision of these services is "supply" rather than "marketing".
   
4. A single-firm "natural monopoly" industry is warranted when the operating costs of an industry are lower with a single supplier. See: Alfred E. Kahn, "The Economics of Regulation", (The MIT Press, Cambridge Massachusetts: 1988), p. 11/1.
   
5. "Time's Up for Greedy Bosses," The Daily Mail, March 1, p. 1.
   
6. John Chesshire, "UK Electricity Supply Under Public Ownership, " The British Electricity Privatization Experiment, Privatization: The Record, the Issues, the Lessons, ed. John Surrey (London, England: Earthscan Publications Limited, 1996), p. 15.
   
7. For background information on the history of the British Electricity industry see, Regulating Utilities: A Time for Change? ed. Colin Robinson (London, England: Institute of Economic Affairs, 1996), pp. 109-144 or The British Electricity Privatization Experiment, Privatization: The Record, the Issues, the Lessons, ed. John Surrey (London, England: Earthscan Publications Limited, 1996).
   
8. According to Robinson, the industry had become both "an instrument of government policy and government industrial policy." Regulating Utilities: A Time for Change? ed. Colin Robinson (London, England: Institute of Economic Affairs, 1996), p. 111.
   
9. John Chesshire, "UK Electricity Supply Under Public ownership, The British Electricity Privatization Experiment, Privatization: The Record, the Issues, the Lessons, ed. John Surrey (London, England: Earthscan Publications Limited, 1996), p. 19.
   
10. John Chesshire, "UK Electricity Supply Under Public ownership, "The British Electricity Privatization Experiment, Privatization: The Record, the Issues, the Lessons, ed. John Surrey (London, England: Earthscan Publications Limited, 1996), p. 19.
    
11. The semi-autonomous relationship of the former regional distribution boards to the rest of the industry was one reason why vertical deintegration was more easily achieved in the United Kingdom than in other countries.
    
12. In additions to the recently privatized elements of the electricity industries in the UK, other participants in UK electricity include independent power producers and Electricity de France. In 1995, the UK imported roughly 2 percent of its electricity from France via its 2000 megawatt link to France. Source: Department of Trade and Industry, Digest of the United Kingdom Energy Statistics (1996), p. 99.
    
13. In the United Kingdom, costs associated with the privatized, deregulated electricity industry are often expressed in budgetary time periods (i.e., April 1 to April 1 fiscal years) and not calender year time periods. Thus, for the purposes of this report, 19xx/19yy will refer to particular fiscal years and 19xx 19yy will refer to particular calender years.
    
14. Nuclear Electric, which was to remain under public ownership, accounted for 17 percent of generation capacity. During the initial debate over privatization, the viability of the nuclear power industry as a private entity came into question. As in the United States, the issue of stranded cost liabilities was an important issue in the debate on industry restructuring in the United Kingdom. The initial plan called for the coupling of thermal and nuclear assets as a means of encouraging investor acceptance. National Power was to be given all of the UK's nuclear power plants along with roughly half of the country's non-nuclear capacity. This plan, however, was latter dropped when it became apparent that the financial liabilities of nuclear power made early privatization unfeasible. Nuclear power was to remain under public ownership, but under a new company name, Nuclear Energy. Plans to privatize nuclear power were postponed although a portion of the industry was eventually privatized in 1996 as the company British Energy (for a discussion on the issue of stranded costs and nuclear power in the United Kingdom, see box entitled: "Nuclear Power and the Issue of Stranded Costs").
    
15. Green, R.J. and Newberry, D.M. "Competition in the Electricity Spot Market," Journal of Political Economy, Volume 100, Number 5 (October 1992), pp. 929-953.
    
16. "The Busiest Merger Lab: The UK Electricity Sector," Electrical World, Volume 210, Number 7 (July 1996), p. 29.
    
17. In February of 1997, the conglomerated Hanson split up its various businesses and consolidated its energy holdings in the newly created company the Energy Group. The Energy Group is the largest private producer of coal in the world and owner of Peabody Holding Co, the largest U.S. coal company. In June 1997, PacifiCorp, of the United states, purchased the Energy Group.
    
18. The REC's franchised operations consisted of the below 1 megawatt users of electricity in each of the geographical territories assigned to the former Area Boards.
    
19. The initial non-franchised marketing market applied to the > megawatt consumer of electricity.
    
20. Customers whose electricity demand ranged from 1 kilowatt.
    
21. Customers whose electricity demand
22. Petroleum Times (July 1, 1991), p. 4.
    
23. Internal document, Smith New Court United Kingdom.
    
24. Internal document, Smith New Court United Kingdom.
    
25. Nuclear Electric participates in the pool but as a passive price taker.
    
26. Alex Henney, Electricity Journal (January/February 1997).
    
27. CFDs are similar in many ways to forward contracts in that they are generally bilateral contracts and often non-standardized. They are also similar to futures contracts in that they are purely financial instruments (i.e., no delivery of electricity takes place) and they are hedges against future price changes. See: Alex Henney, The Privatization of the Electricity Supply Industry in England & Wales (London, England: EEE Limited, 1994), p. 350-351.
    
28. Steve Thomas, "The development of Competition, " The British Electricity Privatization Experiment, Privatization: The Record, the Issues, the Lessons, ed. John Surrey (London, England: Earthscan Publications Limited, 1996), p. 82.
    
29. Colin Robinson, "Profit, Discovery, Entry:The Case for Electricity," Regulating Utilities: A Time for Change? ed. M. E. Beesley (Wiltshire, England: Redwood Press, 1996), pp. 128-129.
    
30. A natural monopoly is defined as a situation where "a single firm can serve the market at lower unit costs than two or more firms." F.M. Scherer, Industrial Market Structure and Economic Performance, Second Edition (Chicago, Illinois: Rand McNally College Publishing Company, 1980), p. 482.
    
31. There is also the issue of regulatory lag. Regulatory lag refers to the period between a rate-case review (after the regulator has agreed upon a base-case) and the next review, when utilities have an incentive to operate more efficiently than what was assumed during the base-case. Through efficiency gains, utilities can realize greater rates of return than those anticipated during the initial rate review. However, although frequent rate reviews can reduce regulatory lag, such reviews might also make long-run investment planning more difficult. In the extreme, regulatory lag could transform rate-of-return regulation into a form of rate-cap regulation.
    
32. In the case of expected future productivity declines, the formula in essence would become RPI+X.
    
33. Ray Rees and John Vickers, "RPI-X Price-cap Regulation," The Regulatory Challenge, ed. Matthew Bishop, John Kay, and Colin Mayer (Oxford University Press, London, 1995), p. 376.
    
34. It should be noted that in rate-of-return regulation, during the interim period between regulatory reviews, utilities have an incentive to cut costs and thereby boost profits. The more infrequent the regulatory review, the stronger this incentive becomes.
    
35. Ray Rees and John Vickers, "RPI-X Price-cap Regulation," The Regulatory Challenge, ed. Matthew Bishop, John Kay, and Colin Mayer (Oxford University Press, London, 1995), p. 376.
    
36. It should be noted that in rate-of-return regulation, during the interim period between regulatory reviews, utilities have an incentive to cut costs and thereby boost profits. The more infrequent the regulatory review, the stronger this incentive becomes.
    
37. In RPI-X, regulation incentives exist for the industry to encourage a passive form of regulation and favorable X factors. Although the initial X factors imposed on the industry have generally been favorable to the industry, that the regulator, OFFER, has engaged in several unscheduled interventions suggests that regulatory capture has not occurred. See: Ray Rees and John Vickers, "RPI-X Price-Cap Regulation," The Regulatory Challenge, ed. Matthew Bishop, John Kay, and Colin Mayer (Oxford University Press, London, 1995), p. 382.
    
38. There are several means of reducing public ownership and control and increasing private ownership and control. One option is to have a public auction with no limitations placed on participants. Another option is to conduct the auction but to limit participation, for instance, to citizens. A company may be sold off partly or fully. A company may be sold off to another company or there maybe restrictions placed on the share of any individual purchase. A company may be privatized simply by issuing ownership shares (vouchers) to all citizens or to selected groups of citizens (e.g., employees). Other more passive forms of reducing government control (but not ownership) include deregulation, the removal of subsidies, and the lifting of restrictions on competitions (e.g., from foreign companies). For more detail on the various privatization methods recently employed around the world, see: Energy Information Administration, Privatization and the Globalization of Energy Markets (DOE/EIA-0609) (Washington, DC, October 1996).
    
39. Catherine Price, "Gas Regulation and Competition: Substitutes or Complements?" Privatization and Economic Performance, ed. Matthew Bishop, John Kay and Colin Mayer (Oxford, England, Oxford University Press, 1994), p. 137 and Tim Jenkinson and Colin Mayer, "Privatization in the UK and France," Privatization and Economic Performance, ed. Matthew Bishop, John Kay and Colin Mayer (Oxford, England, Oxford University Press, 1994), p. 293.
    
40. Alex Henney, "The Restructuring and Privatization of the Electricity Supply Industry," The Privatization of Public Utilities, ed Leonard S. Hyman (Public Utilities Reports, Vienna, Virginia), p. 253.
    
41. "Sale of National Power, PowerGen Shares Seen as "Wildly Successful," Independent Power Report (March 29, 1991), p. 10.
    
42. John Surrey, "Unresolved Issues of Economic Regulation, " The British Electricity Privatization Experiment, Privatization: The Record, the Issues, the Lessons, ed. John Surrey (London, England: Earthscan Publications Limited, 1996), p. 235.
    
43. Mission Energy is a subsidiary of Edison International, the parent of Southern California Edison, the second largest electric utility in the United States.
    
44. "DTI to Keep Share in Electricity, " Times Newspaper (May 3, 1996), p. 19.
    
45. Electricity Association, Electric Industry Review (January 1997), p. 6.
    
46. "Global Independents Power Capacity Hits 113,447 megawatts; Asian Players Gain," Electric Utility Week (July 29, 1996), p. 13. The ranking is measured by net project ownership but not company portfolios with a preponderance of in-house generation, state-funding or vintage capacity.
    
47. Privatization International (September 1, 1996), p.1.
    
48. PowerGen, 1996 Annual Report, p. 12.
    
49. National Power, 1996 Annual Report, p. 3.
    
50. PowerGen, 1996 Annual Report, p. 14.
    
51. National Grid Home Page, http://www.hgc.co.uk.
    
52. The Energy Group is the parent of the Eastern Group REC. The Eastern Group is also the world's largest private coal producer and owner of Peabody, the largest producer of coal in the United States. Source: PR Newswire (May 20, 1997).
    
53. A therm is equivalent to one hundred thousand Btu.
    
54. In 1995, the electricity industry purchased over three quarters of all UK coal production. Source: Department of Trade and Industry, Digest of United Kingdom Energy Statistics 1996, p. 36.
    
55. Mike Parker, "Effects on Demand for Fossil Fuels, " The British Electricity Privatization Experiment, Privatization: The Record, the Issues, the Lessons, ed. John Surrey (London, England: Earthscan Publications Limited, 1996), p. 120.
    
56. Mike Parker, "Effects on the Demand of Fossil Fuels, " The British Electricity Privatization Experiment, Privatization: The Record, the Issues, the Lessons, ed. John Surrey (London, England: Earthscan Publications Limited, 1996), pp. 129-130.
    
57. Colin Robinson, "Profit, Discovery, Entry: The Case of Electricity," Regulating Utilities: A Time for Change? ed. Colin Robinson (London, England: Institute of Economic Affairs, 1996), p. 116.
    
58. Department of Trade and Industry, Digest of the United Kingdom Energy Statistics 1996, p. 156.
    
59. Organization of Economic Cooperation and Development (OECD), Country Annexes, p. 297.
    
60. United Kingdom, Department of Trade and Industry.
    
61. Colin Robinson, "Profit, Discovery, Entry: The Case of Electricity," Regulating Utilities: A Time for Change? ed. Colin Robinson (London, England: Institute of Economic Affairs, 1996), p. 115.
    
62. Organization of Economic Cooperation and Development, Country Annexes, p. 297.
    
63. Mike Parker, "Effects on Demands for Fossil Fuels," The British Electricity Privatization Experiment, Privatization: The Record, the Issues, the Lessons, ed. John Surrey (London, England: Earthscan Publications Limited, 1996), p. 123.
    
64. Electricity Association, Electricity Industry Review, 1996, p. 27.
    
65. Electricity Association, Electricity Industry Review, 1996, p. 27.
    
66. Department of Trade and Industry, Digest of United Kingdom Energy Statistics, 1993 and 1995 editions.
    
67. Matthew W. White, Paul J. Joskow, and Jerry Hausman, "Power Struggles: Explaining Deregulatory Reforms in Electricity Markets," Brookings Papers on Economic Activity, Washington DC, 1996.
    
68. Gordon MacKerron and Isabel-Segarra, "Regulation, "The British Electricity Privatization Experiment, Privatization: The Record, the Issues, the Lessons, ed. John Surrey (London, England: Earthscan Publications Limited, 1996), p. 97.
    
69. See the 1983 article by Stephen Littlechild and Michael Beesley in "Principles, Problems, and Priorities," Privatization & Economic Performance, ed. Matthew Bishop, John Kay, and Collin Mayer (New York, Oxford University Press, 1994), pp. 15-31.
    
70. Irwin M Stelzer, "Lessons for UK Regulation from Recent U.S. Experience," Regulating Utilities: A Time for Change? ed. Michael Beesley (London, England: The Institute of Economic Affairs, 1996), p. 196.
    
71. In some states, PUC commissioners are selected directly by the electorate.
    
72. "UK Electricity Privatization: The Regulator Rides Forth," The Financial Times (September 27, 1990).
    
73. John Surrey, "Unresolved Issues of Economic Regulation, "The British Electricity Privatization Experiment, Privatization: The Record, the Issues, the Lessons, ed. John Surrey (London, England: Earthscan Publications Limited, 1996), p. 235.
    
74. "Labor Threatens REC Incentives, "Public Utilities Forthrightly (June 15, 1995), p. 37.
    
75. "Calif. Oks Price Cap Plan for T&D,"Public Utilities Forthrightly (January, 1997), p. 48.
    
76. George MacKerron and Jim Watson, "The Winners and Losers So Far, " The British Electricity Privatization Experiment, Privatization: The Record, the Issues, the Lessons, ed. John Surrey (London, England: Earthscan Publications Limited, 1996), p. 199.
    
77. Gordon MacKerron and Isabel Boira-Segarra, "Regulation, " The British Electricity Privatization Experiment, Privatization: The Record, the Issues, the Lessons, ed. John Surrey (London, England: Earthscan Publications Limited, 1996), p. 104.
    
78. According to Rees and Vickers, this presents the following situation: "Where it is irrational for one party to make investments ex ante without some guarantee that the other part will not opportunistically exploit the situation ex post." Ray Rees and John Vickers,."RPI-X Price-cap Regulation," The Regulatory Challenge, ed. Matthew Bishop, John Kay, and Colin Mayer (Oxford University Press, London, 1995), p. 365.
    
79. "Labor Threatens REC Incentives," Public Utilities Forthrightly (June 15, 1995), p. 37.
    
80. "Blair, Keeping Up Pace, Pledges Package of Reforms," New York Times (May 15, 1998), p. 3A.
    

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