Royal Commission on Environmental Pollution

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TABLE OF CONTENTS

2. Institutional analysis

  2.1 Factors influencing institutional structures

    2.1.1 The efficiency hypothesis
    2.1.2 Limited information
    2.1.3 Distributional influences on institutional structures
    2.1.4 Public opinion

  2.2 The energy industries

    2.2.1 Inefficiencies associated with "atomistic" systems of energy supply
    2.2.2 Institutional responses to regulatory failures
    2.2.3 Distributional factors
    2.2.4 Opinion

  2.3 Some benchmark institutional models

    2.3.1 The traditional institutional structure for utilities: franchised monopoly
    2.3.2 The regulated access approach
    2.3.3 Facilities-based (intra-network) competition

3. Current institutions

  3.1 General policy institutions

    3.1.1 Public corporations
    3.1.2 The growing influence of competition policy
    3.1.3 The framework of competition policy
    3.1.4 The Environment Agency
    3.1.5 Other bodies

  3.2 The electricity industry

    3.2.1 Electricity regulation in general
    3.2.2 General electricity regulation: comments
    3.2.3 Electricity generation
    3.2.4 Electricity transmission, distribution and supply (wholesale and retail)

  3.3 Gas transportation, storage and (retail) supply

    3.3.1 Privatisation and the development of Ofgas
    3.3.2 Industry structure
    3.3.3 The Transco Network Code
    3.3.4 Activities covered by the Network Code

  3.4 Upstream oil and gas

  3.5 Downstream oil

  3.6 Coal

  3.7 Energy efficiency

    3.7.1 The Energy Environment and Waste Directorate
    3.7.2 The Secretary of State for Trade and Industry
    3.7.3 The Energy Savings Trust
    3.7.4 The Office of Electricity Regulation and the Office of Gas Supply
    3.7.5 Other bodies

  3.8 European Union institutions

    3.8.1 General institutions
    3.8.2 Environmental policy
    3.8.3 An example: the large combustion plants directive
    3.8.4 Euratom

  3.9 International institutions

    3.9.1 The Organisation for Economic Co-operation and Development
    3.9.2 The Nuclear Energy Agency
    3.9.3 The International Energy Agency
    3.9.4 The United Nations
    3.9.5 The World Energy Council
    3.9.6 The Organisation of the Petrol Exporting Countries

4. Assessment

  4.1 What changed?

  4.2 Monopoly and competition

    4.2.1 Fuel mix in electricity generation
    4.2.2 Average prices
    4.2.3 Prices and the electricity pool
    4.2.4 The structure of prices

  4.3 Externalities and environmental policy

    4.3.1 Regulatory failure
    4.3.2 Environmental policy failures

  4.4 Energy Efficiency

    4.4.1 Information and competition
    4.4.2 Regulatory failure again

  4.5 Energy prices, the environment and social policy

5. Assessment of possible institutional developments

  5.1 Will retail competition in electricity and gas be effective?

  5.2 The evolution of EU institutions

  5.3 Institutional design: bargaining versus adjudication in utility regulation

  5.4 The sectoral model of regulation

  5.5 Environmental regulation

    5.5.1 The range of available instruments
    5.5.2 Allocation of rights: international experiences
    5.5.3 Social policy and distributional effects
    5.5.4 Interactions between environmental and competition policies

6. Institutional issues for further consideration

  6.1 Sectoral regulation

  6.2 Energy efficiency

  6.3 Environmental policy

Bibliography

Acronyms

Footnotes

George Yarrow and Tim Keyworth

Energy and the Environment. The Institutional Framework.

Institutional structures are not arbitrary: they are shaped by, and in turn shape, a variety of economic, political, legal, and social factors. Section 2 of the paper is therefore dedicated to providing an overview of some of the accounts that have been provided as to why organisations emerge and develop in the ways that they do, with an emphasis on three groups of explanatory factors: market failure, pressures for redistribution of economic resources, and public or specialist opinion. Following a general overview, the relevant issues are examined in the context of particular characteristics of the energy sector, including the various problems associated with the efficient development and operation of electricity and gas networks. The final part of the section sets out three, benchmark models of institutional structure that are helpful in understanding current trends in the sector.

In section 2, we rely heavily upon the notion of efficiency, a term that has a number of possible meanings, even when used in a technical sense. In what follows, however, the term is used in one and only one way: efficiency is measured by the total benefits less the total costs associated with particular activities or outcomes. For example, if a change in the structure of a market leads to an increase in the net benefits of all parties affected by activities in that market, then we can say there has been an improvement in economic efficiency.

Two points should be emphasised concerning this use of the term:

• It abstracts from distributional issues: all costs and benefits are added together with no attention paid as to which groups gain and which groups lose. Thus a change that conferred benefits of £2.5 billion on the better off and costs of £2bn on the poor would be measured as having the same efficiency effect as a change that produced a total benefit of £500 million, spread evenly through the population and with no losers.

• It includes all parties affected by the activities of interest.

This is not the place for detailed analysis of the relationship between the concepts of efficiency, as just defined, and of sustainable development (which, like efficiency, has more than one meaning). However, it should be clear that, if the measurements are performed correctly (a very big "if"), the social costs of activities that damage the environment will be included in any efficiency evaluations. Moreover, given the physical environment's relative fixity as an economic factor, the valuation placed upon incremental changes in the environmental services enjoyed by mankind is likely to increase with economic development (as demand for those services rises against available supply). In our view, therefore, it is unlikely that any pattern of development that led to a substantial degradation of the environmental resource base available to future generations is likely to warrant the description "efficient": it would amount to redistribution of a resource from periods when it is more valuable to periods when it is less valuable, implying that the benefits of extra use today are less than the costs incurred tomorrow (i.e. a reduction in efficiency). Efficiency, as used here, and the concept of sustainable development may not therefore be very far apart as approaches to evaluation of economic performance.

Having explored a number of relevant analytical themes, in section 3 of the paper we set out, in summary form, details of the current institutional framework for energy policy, demand, supply, and efficiency. The material here is largely descriptive, but some commentary has been added in order to signal backwards to relevant points in section 2 and in the later assessment (section 4). We start with sketches of policy institutions that are of major importance for the energy industries but that have far wider general responsibilities. There follows a series of sub-sections focused on aspects of the current situation in each of the main parts of the energy sector: electricity (including nuclear), gas, oil, and coal. Energy efficiency issues are covered in a separate sub-section, and the section closes with a brief outline of European Community and international institutions.

Section 4 offers an assessment of the strengths and weaknesses of the current institutional framework. As well as reflecting some of the views that have been put forward in relation to the transformation of the institutional framework as a result of liberalisation and regulatory reform, the material also examines one or two detailed issues, such as pricing performance in the context of environmental and social policy objectives and the changing functions of the industry-specific regulatory bodies Ofgas and Offer.

Section 5 carries the assessment forward by comparing the current institutional framework against possible alternatives. These alternatives include possibilities suggested by the earlier analysis in section 2, and also by international experience.

Finally, by way of conclusion, section 6 contains suggestions concerning problems and issues on which future study might usefully be focused. These concern issues where the current institutional arrangements appear to be deficient in some way or another and where it is possible to identify alternative approaches that, prima facie, offer some prospect of improving economic performance.

2. Institutional analysis

At the other end of the spectrum is complete central planning of all resource allocation decisions, approximated for example by the period of "War Communism" in the Soviet Union and some of the smaller Soviet-type economies in later periods. Interestingly, the institutional structure at this other end of the centralised/ decentralised spectrum is also a very simple one: in effect, such a system would operate as one giant hierarchy.

The vast majority of economies operate at some distance from both of these extremes, with much more complex institutional structures, and with substantial variation amongst them. A considerable body of research has sought to provide explanations of the structures that are actually observed.

2.1.1 The efficiency hypothesis. A traditional way of thinking about the issues is first to hypothesise a highly decentralised, atomistic economic system in which all co-ordination is achieved via market transactions and second to consider its possible inefficiencies (usually described as market failures). Centralisation of decision making and the emergence of institutions are then explained as mechanisms for promoting more efficient outcomes when the market fails.

The most familiar examples of this type of analysis concern the case for state intervention in resource allocation decisions. Whenever there is a significant market failure - such as excessive prices due to conditions of monopoly, or excessive pollution associated with undefined property rights and absent markets - it is natural to ask whether public policy can improve matters. If a view is taken that it can, the chosen mechanism for intervention will often be "institutional", for example an agency to control prices or environmental emissions. The public interest theory of regulation is based on this type of approach (see Noll, 1989).²

The institutional response to market failure need not, however, be a governmental one. Both the existence and, more ambitiously, the structures of companies and other forms of productive organisation can be explained by similar factors. Coase (1937), in a classic article, explained the existence of firms in terms of their ability to economise on transactions costs as compared with markets. Transactions costs include the initial costs of negotiating a contract/agreement and the ongoing costs of enforcement of contracts. It will, for example, often be very costly to try to relate contractual performance to all the possible circumstances that might obtain, so many contracts tend to be incomplete (i.e. they do not fully specify performance in all circumstances). On the other hand, incompleteness has costs of its own, including the costs of resolving contractual ambiguities.

Later writers (Alchian and Demsetz, 1972; Williamson, 1975) have followed a similar market failure approach, differing from Coase and from each other largely in relation to the particular market failure or set of market failures that they emphasise most in accounting for the development of complex organisations. Thus Williamson has emphasised contractual problems when one side at the bargaining table can behave opportunistically because the bargaining partner has already made investments that are specific to the particular business relationship. For example, if there is only one buyer and one supplier for a specialised component, the threat of opportunistic behaviour (from either side) may mean that it is efficient for component manufacture and its downstream use to be part of the same organisation.

As background to the later evaluation of policy institutions, it will be useful to distinguish four sets of problems that can give rise to market failures:

• Pure monopoly.
• Imperfect competition.
• Externalities (uncompensated third-party effects).
• Informational problems, which may be divided into problems connected with the production of information (e.g. R&D) and the distribution/use of information (e.g. informed suppliers selling to uninformed buyers).

Spulber (1989), following Breyer (1982), has pointed out that different types of US policy institution can be matched to the different categories of market failure.³ Thus:

A similar list can be drawn up for the UK energy sector (see below), although the distinction between rate regulation and general anti-trust is somewhat problematic (it has also become more blurred in the US). The key point to note is the lack of a clear pattern of association between market inefficiencies and institutional responsibilities. We will consider this characteristic of the current institutional set up in much greater detail in section 5 below.

The efficiency hypothesis is an extremely powerful tool in explaining changing patterns of economic organisation over very long periods. It is, however, clear that, at any one point in time, it is unlikely that institutional structures are such as to ensure that economic outcomes are fully efficient.

There are a number of reasons for this, of which three are particularly important: limited information, distributional issues, and public opinion.

2.1.2 Limited information. In a dynamic economy, it will never be possible to be certain whether a particular set of institutional arrangements is or is not efficient, or close to efficient. As Hayek (1945) and the Austrian School of economists have repeatedly stressed, the economic process is a process of discovery, of finding out what works and what does not work, possibly painfully, by experiencing the consequences of different types of actions in ever changing circumstances.

Within this process innovations and "experiments", including experiments with institutional design as well as the introduction of new products and production methods, will generate new information that might then be used to innovate further. All being well, the process of experimentation and adaptation should lead in the direction of increasing efficiency, but, since circumstances keep changing, convergence will not generally be achieved.

The lags in this process can be long. In the first part of the twentieth century, many people believed that a centrally planned economy would operate more efficiently than the economic systems then prevailing. Experiments were conducted, and different people learned at different rates that the institutional set-up in Soviet-Type Economies (STEs) left much to be desired in terms of economic performance, as well as in terms of democracy and freedom. The institutional structures proved quite durable, however, in large part because of the second of the factors currently under consideration, the distribution of resources.

2.1.3 Distributional influences on institutional structures. If it were ever the case that a particular form of economic organisation reached a state of economic efficiency (i.e. there exist no alternatives that would yield a higher aggregate net benefit), it would be vulnerable to disturbance as a result of pressures to redistribute economic resources from one interest group to another (Yarrow, 1996). For example, set of arrangements A might be more efficient than set of arrangements B, but B may nevertheless be the observed outcome because it is substantially superior for a particular interest group that wields disproportionate influence in the formation and control of relevant institutions (e.g. a relevant ministry).

The reason for the vulnerability of efficient arrangements to disturbance by interest group pressures is that it is usually the case that perturbations from efficient arrangements have much larger effects on the distribution of resources than upon efficiency itself. To illustrate, consider a supplier that is efficiently supplying one million units of a product at £100 per unit which cost £100 per unit to produce (these costs include allowance for a market rate of return on capital employed in production). Suppose that the supplier then increases price by 1% (£1) and that, as a result, sales volume falls by 1% (10,000 units). The effects are as follows:

• Those consumers who continue to buy the product (990,000 of them) pay £990,000 more in aggregate, which is, in effect, redistributed to the supplier.

• There is a loss associated with the 10,000 units that are no longer sold. These are worth at least £100 each to customers (they were bought at that price) but less than £101 (they were not bought at the higher price). Estimating the average value per unit at £100.5, the total value to customers of these "lost" units is £1.005 million. However, since the firm no longer has to produce these units, its costs will be lower by £1 million. Hence, as a result of the price hike, there will be a fall in efficiency (the net gain from trade) of £5,000, resulting from a reduction in consumer benefits of £100.5 million and an associated reduction in company costs of £100 million.

In this example, then, a 1% increase in price above cost will lead to a transfer of income from consumers to suppliers that is nearly two hundred times greater in value than the efficiency loss from excessive pricing.⁴

How far distributional pressures can take economic organisation away from efficient structures will itself depend upon the general institutional framework in a particular case. The organisational structures of companies in market economies adapt quite quickly to new opportunities, since organisational decisions are themselves just another aspect of the competitive process. Public bodies (e.g. regulatory agencies, state owned enterprises), on the other hand, are "supplied" (i.e. created, modified) by a much more monopolistic legislative and administrative process that is highly susceptible to distributional pressures.

Again, the twentieth century evolution of STEs illustrates the general point. Institutional arrangements in STEs survived for long after their severe performance failings were recognised, among other things because of the political control exerted by those with perceived vested interests in the status quo. The political monopoly served to block institutional change that threatened to undermine the economic monopolies.

Even in democratic systems the obstacles to speedy reform of public institutions can be considerable: the long debate about reform of public corporations is one example, and the length of time taken to establish the Environment Agency is another. The obstacles do, of course, vary from case to case, depending among other things on the particular interest groups involved, and it can be noted that the term "interest groups" should be interpreted widely in this context. As well as consumers, producers, bureaucrats, and politicians, when analysing major energy and environment issues there are also the interests of future generations to take into account. Crucially, even in democratic systems, members of the adult population alive today inevitably exert more influence on both the political process and on economic institutions than do the generations to come. The potential political biases that may result, sometimes labelled "short-termism", are a key issue in the energy/environment area.⁵

2.1.4 Public opinion. Another set of factors that can have a major impact on institutional development can be discussed under the general heading of "public opinion". The recognition of the importance of these factors has a distinguished pedigree: David Hume ascribed export restrictions to the "ignorant view that what is considered useful and valuable should be retained"; Adam Smith believed that the intensity of public feeling about "the means of subsistence" meant that governments had to yield to public prejudices in the conduct of agricultural policy; Dicey held that there exists a "close dependence of legislation . upon the varying currents of public opinion"; Keynes, in full rhetorical flow, claimed great influence for the ideas (both right and wrong) of economists and political philosophers; and Milton Friedman, in comparing the policies pursued by India and Japan in the post-war period, stressed "the importance of the climate of opinion, which determines the unthinking preconceptions of most people and their leaders, their conditioned reflexes to one course of action or another." More recently, in assessing the conduct of financial regulation in the UK, Charles Goodhart has argued that public regulation ". often represents a reaction, sometimes an over-hasty reaction, to some scandal which public opinion has put on the political agenda."

In some cases, the force of public opinion is based upon a particular set of values (e.g. the treatment of animals). Changes in opinion then tend to occur relatively slowly. In other cases, opinion is based upon a set of beliefs about relationships between actions and consequences and, in an uncertain world, these can change dramatically over short periods of time (e.g. the health consequences of eating beef). The volatility of opinion is heightened by the fact that, because of uncertainty and complexity, it can often be difficult to show that a particular set of beliefs is likely to be wrong. Experimental evidence on perceptions of risk suggest a general bias towards overstatement of the risk of unpleasant events with very low probabilities and understatement of the risks of unpleasant events that are much more likely to occur. Even in the absence of such biases, many different sets of beliefs can be "data consistent", and, if events occur that draw the attention of the public to certain possible linkages (focal points), those focal points may become common-sense wisdom about an issue, even though quite different linkages are, on detailed examination of the evidence, much more likely.

At this point, the influence of opinion can interact with distributional factors. Again because of complexity, uncertainty and limited information, it is all too easy for particular interest groups to develop beliefs about the world that are favourable to their own interests. That is, from among a set of alternative hypotheses, each of which may be true, it is much more comfortable to believe in one that, if correct, has favourable implications than one which, if correct, has unfavourable implications for the relevant individual or institution. As above, the notion of an "interest" has a general meaning here. It is obvious that, in the event of some uncertainty about the safety of a particular product, there will tend to be a bias in supplier beliefs towards the view that the product is, in fact, safe. It may also be the case, however, that, in issues that have bearing upon the inter-generational distribution of resources, there is a tendency for public opinion to be biased in favour of the interests of the current generations. For example, if we take a complex issue such as whether, in terms of efficient resource allocation, the United Kingdom Continental Shelf (UKCS) oil and gas fields are or are not being depleted at an over-rapid rate, opinions may follow interests.⁶

2.2 The energy industries

2.2.1 Inefficiencies associated with "atomistic" systems of energy supply. Many of the production activities undertaken in the energy sector require complex patterns of co-ordination among large numbers of people, and the transactional problems identified by Williamson and others (see section 2.1.1 above) give rise to various organisational means of achieving co-ordination more efficiently.

The concept of a network is a useful starting point for thinking about the relevant co-ordination problems, and it can be applied to both contractual relationships between producers and to the physical production and distribution systems for energy. A network is simply a set of interconnected nodes. Applied to contractual relationships, the nodes are individuals and firms and the connectors are contractual relationships; applied to physical systems, the nodes are points of production (oil wells, coal mines, power stations) and consumption (industrial sites, homes) and the connectors are transport links (cables, pipes, rails, road). A number of basic questions of institutional design concern the relationship between the contractual structure and the physical network of activities.

An atomistic contractual system would be characterised by bilateral contracting among a large number of nodes. Difficulties arise because the nature of the desired connection between two nodes (which at its simplest might involve the question of whether there should be a connector/contract or not) depends upon what is going on along other connectors and at other nodes, and there can be huge costs in trying to construct and enforce a network of bilateral contracts, each of which is contingent on activities elsewhere in the network. These problems are compounded by the problems of "local" market power: there may be bottlenecks on certain routes, or a particular area might have only one local, monopolistic supplier. The formation of institutions in these circumstances might be viewed as a means of simplifying the contractual structure in the interests of efficiency.

An example illustrating the interaction between physical and contractual structures is the operation of an electric system. Electrical equilibrium must be maintained throughout the network, and failure to do so at a specific node can lead to supply failure across a whole section of the system. Putting this into economic terms, the nodes of the system can be viewed as "markets" where a balance between the production/supply of and demand for power is required to clear the market. Unlike in many markets, where inventories or queues provide ways of responding to imbalances and damping down their effects, failure to achieve electrical equilibrium will lead to the collapse of other markets at other nodes.

The potential market failure associated with the physical properties of electrons needs, therefore, to be addressed via the design of both the physical network and the contractual network or institutional structure. Supply failures in the event of loss of frequency at a particular place can be localised to a greater or lesser extent by the structure of the electricity grid (e.g. by varying the amount and the geographic dispersion of generating capacity and of transmission capacity). Localisation can, however, be expensive, and more centralised systems of co-ordination of activities through the network can, up to a point, serve to economise on the relevant costs.

The traditional arguments for "connectedness" in electricity systems are that it (a) enables the realisation of economies of scale in generation and (b) economises on reserve capacity held to meet spikes in demand (local systems can potentially trade power to meet local peaks in demand). Following liberalisation, there is also an argument that a larger market facilitates greater competition in electricity generation. On the other hand, technological change is arguably undermining some of the traditional advantages of large scale electric systems, particularly in relation to economies of scale in generation. As always, the efficient degree of centralisation is not some given constant, but depends upon changing circumstances.

It is clearly the case that companies of considerable size are to be found across the energy sector, from oil and gas exploration and production, through electricity generation, to the transmission and distribution of gas. The simple joint stock company form, and its public sector analogue, the public corporation, is, however, by no means the only institutional response to what are often called co-ordination costs in network industries (these are just the transactions costs (see 2.1.1 above) that are associated with operating networks when there exist many different suppliers and users of network services). Joint ventures, for example, are relatively common in offshore exploration and production of oil and gas, and they have played some role in power generation since privatisation.

2.2.2 Institutional responses to regulatory failures. It is unfortunately the case that institutions introduced in response to one market failure may give rise to other market failures that then give rise to secondary institutional responses. When this occurs on an extensive scale, the outcome can be a proliferation of institutions, with overlapping functions, that gives rise to sub-optimal performance.

A familiar example in the energy industries is the pricing of electricity. Suppose an electricity distribution utility is subject to price regulation because of its monopolistic position, and suppose further that the allowed price per unit is set to cover average costs, but is well in excess of marginal cost (this is the extra cost that is incurred if one extra unit is distributed, and, particularly at off-peak periods, it can be much lower than average cost).⁷

The utility will then have incentives to increase demand, for example by aggressive marketing. It will not have incentives to provide information to customers that might help them use energy more efficiently, nor will it have incentives to engage in research and development activities designed to discover ways of using energy more efficiently. In the hypothesised, monopoly situation, customers are deprived of some of the information flows about uses of the product that they might expect to find in a competitive market. There may then be a case for additional public intervention on two counts:

• To provide information to utility customers about energy saving options.
• To provide subsidies for research and development in the area of energy efficiency.

The point is that much, if not all, of the secondary policy/institutional response is due to a failure in the primary policy/institutional response.

2.2.3 Distributional factors. A range of pressures associated with the impact of public policy on the distribution of economic resources among different interest groups have tended to influence the conduct of energy policy and the institutional structures that have emerged over time. At this stage, we simply note some of the more important, which will be taken up again in later discussions:

• Successive governments have been keen to ensure that the Exchequer receives the bulk of the rents attributable to oil and gas reserves on the UKCS (i.e. prevents the capture or redistribution of those rents by/to offshore oil and gas producers).
• National security has been a recurrent theme in policy, reflecting (in part) concerns about the distribution of economic and political power at an international level.
• Energy policies have often been influenced by the desire to protect related, UK industries (e.g. equipment suppliers).
• Governments have used institutions such as public corporations to protect the employment position of workers in the sector (e.g. protection of employment in the coal industry).
• Very large industrial users of energy have sometimes been cross-subsidised (i.e. supplied at prices less than costs, where the resulting losses are financed by other consumers who pay in excess of costs⁸), for example by special, politically-brokered tariff schemes for energy-intensive industries.⁹
• Those residential consumers of electricity and gas who have very low demands have been cross-subsidised, as a result of tariff structures that do not fully reflect costs such as metering, invoicing, credit, and collection of monies due.
• Electricity supply to relatively remote, rural areas has been cross-subsidised.

2.2.4 Opinion. By and large, the influence of public opinion on the institutional shape of the energy sector has been relatively limited. Neither the system of public corporations that dominated the sector before privatisation nor the institutional reforms introduced at privatisation have much excited public opinion, and, while media coverage of "fat cat" salaries has led to criticisms of regulators and the regulatory system, it has not been translated into any fundamental pressures for re-design of the industry structure.

The potential for opinion to exert a much more substantial influence remains, however. Activities such as the operation of nuclear power stations involve the kinds of uncertainties that can render expert opinion suspect in the mind of the listener. Thus, one substantial nuclear accident is quite capable of stimulating pressures that can radically affect the conduct of public policy in this area.

2.3 Some benchmark institutional models

The supply conditions in the coal and oil industries are somewhat different, and are much closer to those in industrial products more generally. For example, they rely upon general transport networks for their distribution (road, rail, sea), and tend to be oligopolistic rather than monopolistic (monopolisation tends to result from public ownership driven by objectives other than efficiency).

2.3.1 The traditional institutional structure for utilities: franchised monopoly. The privatisation of British Telecom in 1984 gave birth to a whole new regulatory regime as UK public policy switched from a framework based on state ownership to one based on the regulation of privately owned companies. While this transformation was unprecedented, the product of the first phase of the process, namely a regulated private monopoly, could hardly be described as a radical departure from past experience. Prior to the nationalisation Acts of the late 1940s there had existed in Britain numerous regulated, private utilities in the gas and electric industries, and a number of privately owned (statutory) water companies survived right through the decades in which public ownership was dominant. In America regulated private ownership has for many decades been the principal policy approach to utilities and has given rise to what can be termed the "traditional model" of utility regulation.

In the traditional model the utility is given a franchised monopoly within a designated geographic area (that is, regulation protects the utility from competition within the franchised market). In return, the utility is required to accept certain universal service obligations and is subject to price control by an appropriate regulatory body. In practice, these obligations and controls tend to be associated with price structures characterised by high levels of cross-subsidisation and to price and cost levels such that the firm is not seen to be making excessive profits. For example, a common form of cross-subsidisation is geographic: the regulated utility is required to offer similar services at similar prices at different locations, even when some locations are much more costly to supply than others.

It is often argued that the franchised monopoly structure is a response to problems of natural monopoly: the relevant activities are most efficiently undertaken by a single firm, and regulation is required to ensure that the degree of market concentration required to achieve cost efficiency does not lead to exploitation of customers, for example via excessive pricing. The evidence suggests, however, that the institutional arrangements were developed to meet other objectives. For example:

• The natural monopoly argument suggests that the initial drive for regulation should have come from customers, but American studies of the origins of regulation indicate that regulation tended to be sought by the suppliers themselves, to mitigate the effects of "ruinous competition" (Stigler and Friedland, 1962; MacAvoy, 1965; Stigler, 1971).

• A single, efficient producer would not need to be protected from the threat of new entry, yet the traditional arrangements have almost invariably involved protection of the incumbent from potential competition, for example by means of statutory prohibitions.

• If the primary objective of policy were the promotion of economic efficiency, the prices charged by regulated energy utilities would tend to be cost reflective; in practice, the tariff structures almost invariably imply substantial cross-subsidisation and, since prices do not reflect costs, avoidable inefficiency.

The evolution of the traditional model therefore reflects a number of influences, of which efficiency is one, pressures from established producer interests is another, and redistribution among customer groups is a third.

2.3.2 The regulated access approach. Although the post-1984 UK regulatory regime approximated the traditional model, it nevertheless contained a number of innovations. Following US developments, and stimulated by the opportunities opened up by technological change, regulatory duties to promote competition were grafted on to the older structure, and, less radically, a cost-of-service approach to price setting was rejected in favour of price caps.

The result has been a hybrid system, based upon a mixture of specific legislation, licences, statutory instruments, and informal guidelines, and incorporating two potentially conflicting philosophies. On the one hand there was the traditional utility regulation model, based on the existence of a regulatory body responsible for the control of price levels and price structures; on the other hand there was the policy of promoting competition which, if successful, would necessarily undermine a number of key aspects of the older model.

In the traditional model, regulated utilities tend to be vertically integrated monopolies, operating networks and supplying goods and services that make use of those networks.¹⁰ The promotion of competition objective has, however, led to regulatory unbundling (i.e. to separate, rather than joint, provision) of the various network and supply activities (e.g. electricity generation, transmission, distribution, and supply), in recognition that it is much easier to develop competition quickly in some activities (generation and supply) than in others (transmission and distribution). The result is a modified model of utility regulation that has been highly influential in the post-privatisation period.

In this modified or "regulatory access" model, the utility continues to operate a monopolistic network, but provides network access to companies who wish to compete in retail markets. The utility may or may not be allowed itself to operate at the retail level. Price controls in the retail market are gradually withdrawn, but they are retained, either permanently or for a substantially longer duration, in network provision. Put another way, the domain of the traditional model shrinks to the regulation of network access, while other activities are deregulated and "re-regulated" by general competition policy.

This structure, when fully implemented, undermines many of the traditional cross subsidies that are to be found in franchised monopoly. For example, competition in the supply of electricity and gas will mean that prices will tend to reflect supply costs. Thus, in the absence of additional measures, cross-subsidisation of, say, very small domestic accounts by larger accounts will come to an end. Any company that sought to charge a high margin to one customer segment to cross-subsidise supply to another customer segment, would be vulnerable to losing its high-margin customers to a competitor that targeted precisely those accounts.

It is, nevertheless, feasible to maintain some cross-subsidisation within the framework of the regulated access model. Since the provision of network services remains monopolistic, there is scope for building cross-subsidies into network charges. More specifically, if geographic variations in costs arise from the network costs of transporting energy from one location to another, it is possible to maintain postalised¹¹ prices by establishing a set of network charges that do not depend upon geography (and, therefore, are not cost-related). The simplest case is when a network user is charged a fee for use of the network irrespective of precisely where he puts his electric power or gas into the network or of where he takes it out again (a practice to be found, for example, in parts of the Canadian gas industry).

2.3.3 Facilities-based (intra-network) competition. This regulated access model is, however, also subject to erosion. There is no simple division between naturally monopolistic activities and potentially competitive activities, even where technologies are relatively stable, as in electricity transmission and gas distribution. For example, the provision of meters and the reading of meters might be part of the service offered by a distributor of electricity or gas, the meters being required to calculate the charges for the use of the distribution system. On the other hand, arrangements could be developed in which meter provision and meter reading were unbundled/separated and provided on a competitive basis.

Unbundling possibilities in electricity and gas have been strongly influenced by developments in information technology, which reduce the costs of less integrated structures of supply. Technological change has, therefore, also been an important driver of regulatory reform in these industries, as well as in telecoms. The result has been a further narrowing of the regulatory domain to those parts of networks where there is some bottleneck service or "essential facility" that is supplied monopolistically.

Returning to the picture of a network, facilities-based competition refers to a situation in which there is competition among nodes and among connectors. Remaining monopolistic elements within a network can then be handled in one of two ways:

• The regulatory imposition of price controls.
• General competition law concerning dominance and the more controversial essential facilities doctrine.

3. Current institutions

A number of other ministers are involved in energy policy matters, most notably the Secretary of State for the Environment, Transport and the Regions (see, in particular, the section on energy efficiency below). Co-ordination among ministers and departments takes place through the Cabinet, Ministerial and official committees, and inter-departmental consultation.

In Northern Ireland, energy responsibilities are a matter for the Secretary of State for Northern Ireland, and the Secretary of State is responsible for the electricity industry in Scotland, but not for the other energy industries.

In addition to ministries, there are other public institutions whose roles extend well beyond the energy sector but that are nevertheless of considerable importance for energy policy. In the past, public corporations were centre stage, but privatisation has now reduced this form of institution to a residual role. At the same time, privatisation has enhanced the roles of other types of institution, particularly those concerned with general competition law.

3.1.1 Public corporations. Prior to privatization the energy sector was dominated by a number of major public corporations, including the Central Electricity Generating Board (CEGB), the various regional electricity boards, the UK Atomic Energy Authority (UKAEA), the British Gas Corporation (BGC), the National Coal Board (NCB), and the British National Oil Corporation (BNOC). The public corporation was a particular type of State-Owned Enterprise (SOE) - a category that also includes, for example, joint-stock companies that have the state as the sole or dominant shareholder - and shared with other SOEs the characteristic of being a very specific mechanism for the implementation of public policy. For example, SOEs provide governments with direct means to control a particular set of prices, or a particular investment programme, or particular employment and procurement policies.

In Britain, public corporations were generally discouraged from diversifying from their core activities. Given that they were also national monopolies or near monopolies, organisations such as the CEGB, the BGC, and the NCB were, therefore, in effect, industry-specific agencies of public policy. Thus, a government that desired to promote the use of a specific type of fuel in the generation of electricity, say, could easily do so via ministerial control of the strategic decisions of the CEGB. And, in practice, the CEGB was used in this way as a means of protecting the domestic coal industry, as well as of favouring the UK power engineering industry in its procurement decisions.

3.1.2 The growing influence of competition policy. Privatization, and perhaps even more importantly, the decision to seek to promote competition rather than monopoly in electricity and gas, radically altered this industry-based policy structure (and see section 4.1 below for analysis of the factors influencing this policy change). First, whilst new industry specific institutions were created (Ofgas and Offer), and while these continued to provide great scope for discretionary interventions (by the new regulators), the existence of private shareholders (with rights under company law) and of other companies, together with the greater detachment of regulators (relative to ministers) from the day-to-day political process, has shifted the emphasis of policy toward rule-making and adjudication. Second, the very fact of liberalising markets brought general competition law to bear on the relevant activities in a much more direct way than it had ever done before.

Even at the time of the privatisation of British Gas (BG) in 1986, when the emphasis was on ownership reform rather than on competition, the Monopoly and Mergers Commission (MMC) was allocated a role in the policy process that went well beyond simply the policing of competition in the parts of the commercial and industrial market that were theoretically open to new entry. More specifically, the MMC was required to investigate and report in the event of disputes about licence modifications between Ofgas and BG, including disputes about the licence condition dealing with price controls. Similar provisions exist in the legislation governing other regulated utilities, including in electricity.

At the time of gas privatisation, serious consideration was given to the option of allocating the role of regulator to the Office of Fair Trading (OFT). Although that option was eventually rejected, later liberalisation has extended the influence of general competition law in gas and other energy industries.

In the arrangements to date, industry regulators have exercised powers under general competition law concurrently with the Director General of Fair Trading (DGFT). The division of responsibilities is determined by agreement, but, as competition develops, and linkages between sectors tend to increase, cases where the appropriate allocation of responsibilities is problematic may become more frequent.

The trend will likely continue and be strengthened with the reform of UK competition law that is now in progress. In brief, the new Competition Bill, when it is enacted, will move much (but not all) UK domestic law to an approach closely aligned with European Community Law. The competition authorities will, for example, have greater investigative powers, and will be able to impose substantial fines on firms engaged in anti-competitive conduct or abusing a position of market dominance (subject to appeals to the new Competition Commission - see 3.1.3 below).

European competition law itself can also be expected to have an increasing, direct influence on the UK energy sector. European competition law rests on:

• Article 85 of the Treaty of Rome, which prohibits anti-competitive agreements among firms, subject to certain exemption possibilities.
• Article 86 of the Treaty, which prohibits abuse of market dominance.
• The European Merger Control Regulation (EMCR), which provides a procedure for clearing or prohibiting mergers above a certain size that also have a Community dimension.

In non-merger cases, jurisdiction falls to the Community if the practice in question can be expected to have a significant effect on intra-Community trade. EC cases can, however, be heard in domestic courts.

Policy is implemented by Directorate General IV of the Commission, the Directorate concerned with competition and state aids, which takes decisions and, if necessary, imposes fines. Decisions can be appealed to the Court of First Instance and, on points of law only, to the European Court (see section 3.8 below).

The energy sector has, in the past, been largely shielded from the full rigours of EC competition law by virtue of the high degree of public sector involvement and the relatively small effects on intra-community trade of commercial conduct in UK markets. The position is, however, changing rapidly as markets are liberalised and energy trade is increasing. Both oil and coal are traded internationally, and there is a well established electricity interconnector to France. In gas, there is an existing pipeline link to the Republic of Ireland, and 1998 will see the completion of the gas interconnector to continental Europe, which will have the capacity to ship considerable volumes.

The precise working relationships between the industry regulators and the general competition authorities, including DGIV of the European Commission, remain to be developed, but it is highly likely that the regulatory bodies will find themselves acting more and more frequently as competition authorities (Oftel, the telecommunications watchdog, has already described itself in such terms), applying general law to their particular industries.

3.1.3 The framework of competition policy. Overall responsibility for UK competition policy lies with the Secretary of State for Trade and Industry, and the other key players/bodies are the DGFT, the OFT, and the MMC. The document An outline of United Kingdom competition policy, published by the OFT, provides a summary guide to the institutions and the relevant legislation.

The single most important piece of legislation to date has been the Fair Trading Act (FTA) of 1973, and a fundamental feature of the FTA is that it specifies that the authorities have, in carrying out their duties, to concern themselves with "the public interest". The term is not defined, although examples of factors that might be taken into account are given in the legislation. They include, for example, a reference to regional issues, but not to environmental consequences, reflecting, perhaps, the policy preoccupations of the early 1970s when the FTA was drafted. In principle, however, there is nothing in the legislation to prevent either the DGFT or the MMC or the Secretary of State from taking environmental factors into account when performing their functions.

In practice, environmental concerns have not featured prominently in the work of the general competition authorities, nor in the activities of the industry regulators related to general competition law. Indeed the trend has been to narrow down the interpretation of the public interest so that it has become gradually identified chiefly with the protection or promotion of competition (although it is possible to find plenty of examples over the years where factors other than competition have played a significant role in the outcome). Thus, where environmental issues have arisen in competition cases, the authorities have frequently been concerned with the implications of various aspects of public policy for competition; for example, whether a particular set of environmental obligations has the effect of raising barriers to entry into an industry.¹²

This tendency to focus more exclusively on competition issues will be reinforced by the passage of the new Competition Bill, currently in Parliament. The Monopolies and Mergers Commission will be replaced by a Competition Commission (CC) which, under current proposals, will be divided into two. One section of the CC will deal with appeals against decisions of the DGFT (and the industry regulators acting under general competition law) and will take on the functions of the Restrictive Practices Court in respect of inter-firm agreements. The other part of the Competition Commission will, in effect, be a rebadged MMC, operating in much the same way as it does now.

The new legislation represents a "belt and braces" approach, combining the general features of the European approach to anti-competitive conduct (but not mergers) with features of the previous British system. In electricity and gas, the DGFT's powers will be shared with the Director General of Electricity Supply and the Director General of Gas Supply. It is the industry regulators who are expected to take the lead on most issues, not least because they are in constant touch with the markets, and who will therefore, in effect, become the competition authorities for electricity and gas. The division of responsibilities raises questions concerning the consistency of policy making across industrial sectors, although, since decisions will be subject to appeal to the Competition Commission, there will be checks and balances at that stage.

3.1.4 The Environment Agency. The Environment Agency (EA) was created by the Environment Act 1995, and took up its statutory duties on 1 April 1996. The Agency took over the functions previously carried out by the National Rivers Authority (NRA) and Her Majesty's Inspectorate of Pollution (HMIP), as well as the regulatory functions of 83 local authorities and units of the Department of the Environment dealing with aspects of waste regulation and contaminated land.

The Environment Act also created the Scottish Environment Protection Agency (SEPA) which brought together a similar mix of functions. SEPA does, however, have a narrower regulatory focus on pollution control than the EA, as it is not responsible for the wider non-pollution related issues of water resource management that were transferred to the EA from the NRA. The majority of these functions are the responsibility of the new unitary local authorities created by the Local Government etc. (Scotland) Act 1994. Also unlike the EA, SEPA is responsible for the functions previously carried out by local authorities in relation to the release of substances into the air (not covered by integrated pollution control).¹³ The underlying structure of enforcement of environmental legislation in Scotland is very similar to that in England and Wales.

The Environment Agency is a non-departmental public body, run by an executive board of between eight and fifteen members who are appointed by Ministers. Income is derived from three main sources: charging schemes that fall upon the relevant industries (including integrated pollution control authorisation charges and radioactive substances authorisation charges), levies on local authorities to fund flood defence activities, and government grants. Currently, about seventy per cent of its funding comes from the first two sources, and thirty per cent from government grants.

The Environment Act 1995 defines the principal aim of the Agency in discharging its functions as to protect or enhance the environment, taken as a whole, and to make the contribution towards attaining the objective of achieving sustainable development that Ministers consider appropriate, subject to and in accordance with the provisions of the Act or any other enactment and taking into account any likely costs.

The main functions of the EA derive from those of the constituent parts in its creation. Thus the Agency is primarily a pollution control agency, but it also has a large number of additional functions related to water, such as flood defence, inherited from the NRA. Like the Health and Safety Executive (see 3.1.5 below) it is responsible for the domestic implementation of relevant EU law and of international agreements.

The main regulatory functions of the Agency that relate to pollution from the energy sector had been dealt with by Her Majesty's Inspectorate of Pollution. In relation to nuclear power, HMIP operated the system of authorisation procedures relating to radioactive emissions under the Radioactive Substances Act 1993. Other forms of energy production were regulated under the system of integrated pollution control introduced by the Environmental Protection Act 1990. These functions will be discussed in relation to individual energy industries below.

3.1.5 Other bodies. A number of other general institutions, whose work may impact on the energy sector, can be noted at this point. Further references may be made to their work in later sections.

The Health and Safety Executive (HSE) is an independent public corporate body which has a duty to make arrangements to enforce health and safety legislation. It reports to, and is the operational arm of, the Health and Safety Commission (HSC). HSC was formed in 1974 and is subject to ministerial direction. Its tasks centre on the progressive updating of legislation relating to health and safety at work under both UK and EU law. However, the Commission's responsibilities extend to setting safety standards in the work place for the protection of workers and the public, and it has acknowledged the need for close collaboration with other agencies more directly involved in environmental protection. The functioning of the Commission is subject to inputs from EU Directives and from international agencies such as the International Atomic Energy Agency and the United Nations.

The National Radiological Protection Board (NRPB) was established by the Radiological Protection Act 1970, and is an independent statutory body. The Act gave the board the following responsibilities:

1. by means of research and otherwise, to advance the acquisition of knowledge about the protection of mankind from radiation hazards;

2. to provide information and advice to persons, including Government Departments, with responsibilities in the UK relating to the protection of the community as a whole or of particular sections of the community from radiation hazards.

Under the Act, the NRPB has the power to provide technical services related to radiation hazards, and to charge for those services in appropriate circumstances.

The Board consists of a Chairman and between seven and twelve other members, and is appointed by Health Ministers. They employ about 350 staff. They are part Government funded, and derive the remainder of their income from charges for research and technical services.

The main international bodies that set standards for radiological protection are the International Commission on Radiological Protection and the International Commission on Non-Ionising Radiation Protection. NRPB staff are involved with the work of these and other related international bodies, including the UN Scientific Committee of the Effects of Atomic Radiation and the International Atomic Energy Agency.

The Royal Commission on Environmental Pollution (RCEP) was established in 1970, and is a permanent body that reports to Parliament. Its remit is to advise on national and international matters concerning the pollution of the environment, the adequacy of research into such matters, and on future possible environmental dangers.

Two non-statutory advisory bodies have also been created in relation to the Government's policy on sustainable development: a government Panel on Sustainable Development, to give advice on issues arising in relation to the government's policy on sustainable development, and the UK Round Table on Sustainable Development, a larger panel representing a wide range of groups.

More generally, there is a rich variety of different types of institution concerned with environmental matters from one perspective or another. Among Non-Departmental Public Bodies (NDPBs) are the Rural Development Commission, English Nature, the Joint Nature Conservation Council (see section 3.4), and the Countryside Commission, any of which might deal with energy related matters in certain circumstances. They have significant budgets with which to promote projects in pursuit of their aims, advise government on a variety of issues within their remits, and, in some cases (e.g. English Nature) have responsibilities in relation to the implementation of EC Directives and internationally agreed programmes such as the Biodiversity Action Plan.

More specialised advisory bodies include the Energy Advisory Panel linked to the DTI, which, among other thing, advises on the production of the DTI's annual Energy Report, and the Advisory Committee on Business and the Environment, which, among other things, promotes greater awareness of environmental issues in business, and tends to advocate negotiated or bargained solutions to environmental problems.

There is also a range of institutions concerned with research issues, including the Natural Environment Research Council, the Building Research Energy Conservation Support Unit (BRECSU), and the Energy Technology Support Unit (ETSU), the second and third of which play important roles in the Government's energy efficiency programmes (see section 3.7).

Among industry associations that are relevant to energy and environment issues are the Association of Independent Power Producers (electricity generation), the Electricity Association (electricity companies generally), and the Federation of Environmental Trade Associations (manufacturers of equipment such as heat pumps, refrigerators, air conditioners, etc.). These bodies seek to promote the interests of their members by a variety of means, including lobbying, making submissions to government, producing and disseminating information, and so on.

Finally, a number of consumer bodies are also relevant to the conduct of energy policy. In government, consumer protection is generally dealt with by the DTI and by the OFT. The National Consumer Council acts as an advocate for consumer interest with government and other public bodies. The Consumers' Association is the largest independent consumer organisation, and advice and assistance are provided by Citizen's Advice Bureaux and information centres under the direction of local trading standards departments. Consumer bodies in the electricity and gas industries are discussed below.

3.2 The electricity industry

3.2.1 Electricity regulation in general. The post of Director General of Electricity Supply (DGES), supported by an Office of Electricity Regulation (Offer) was established by the Electricity Act 1989, which set out the legal framework for a privatised industry. Subsequently, along with other utility regulators, the DGES was afforded greater powers in respect of consumer protection by the Competition and Service (Utilities) Act 1992.

The DGES has a range of statutory powers and functions under the Acts, among which are:

• the licensing of electricity generation and supply;
• proposing licence modifications, including of licence conditions relating to maximum charges for electricity supply, transmission and distribution;
• setting and monitoring performance standards designed to protect the interests of consumers and promote efficient use of electricity;
• the exercise of certain powers in respect of Fair Trading and Competition concurrently with the Director General of Fair Trading;
• investigating consumer complaints.

In exercising his powers and functions, the DGES, together with the Secretary of State, has duties to act in the manner that he considers is best calculated to achieve a number of hierarchically specified goals. At the highest level, these are to:

• secure that all reasonable demands for electricity are satisfied;
• secure that licence holders are able to finance the carrying on of their licensed activities;
• promote competition in the generation and supply of electricity.

These are supplemented by provisions to enable geographic equalisation of prices to be imposed in Scotland.

Subject to the above duties, the DGES has further duties to:

• protect the interest of electricity consumers in respect of prices and other terms of supply, security of supply, and quality of service (taking into account, in particular, the interests of consumers in rural areas in respect of prices and terms of supply, and the interests of the disabled and pensioners in respect of quality of service);
• promote efficiency and economy on the part of licence holders, and efficient use of electricity supplied to consumers;
• promote research and development by licence holders;
• protect the public from danger;
• secure the establishment and maintenance of machinery for promoting health and safety at work in the industry.

At this second level of duties, the DGES must also take account, in exercising his functions, of the effects on the physical environment of activities connected with the generation, transmission, or supply of electricity.

3.2.2 General electricity regulation: comments. The detailed specification of duties is of interest in that it shows the influence of different regulatory models and different regulatory pressures. The hierarchical structure suggests the dominance of the regulated access philosophy (see 2.3.2 above), with the centrality of the object of promoting competition in generation and supply, coupled with a form of universal service duty (meeting all reasonable demands) in respect of the scope of the network and a duty to ensure that suppliers are adequately financed.

The preoccupation here is clearly with issues of monopoly, competition, and economic efficiency. Second-level duties in respect of the promotion of energy efficiency, research and development, and environmental protection, although they are not themselves concerned directly with monopoly and competition, are arguably directed also at the promotion of economic efficiency. That is, they may be seen as regulatory powers made necessary by the existence of market failures. From this perspective, the DGES has powers to act in response to all the major sources of market failure set out in section 2.1.1 above: monopoly, imperfect competition, externalities, and information failures.

However, although the DGES is given powers in respect of externalities and information problems, the legislation indicates that they should be viewed as secondary to the DGES's concern with market failures associated with monopoly and market power. This is consistent with the standing of Offer, relative to other institutions, in relation to the conduct of policy in the relevant areas, particularly environmental protection. Thus, the principal responsibilities for the environmental regulation of the industry fall to the Environment Agency and to the Secretary of State, not to the DGES.

Other, rather different, concerns also appear at the second level, however. Geographic equalisation of prices appears in relation to Scotland, and scope for the imposition of various social obligations are present in the references to the interests of rural consumers, the disabled, and the elderly. These distributional concerns are much more typical of the traditional franchised monopoly model of regulation, depending as they do on particular distributional concerns.

3.2.3 Electricity generation. The structure of electricity generation in England and Wales was revolutionised by the privatisation of the industry in 1990/1. At privatisation, the pumped storage facilities of the CEGB were transferred to the National Grid Company (NGC), and the remaining generating assets were divided among:

• National Power (around one half of the capacity),
• PowerGen (around a third of the capacity), and
• Nuclear Electric (itself later split according to type of reactor, with Advanced Gas-Cooled Reactors (AGRs) and Pressurised Water Reactors (PWRs) going to British Energy, now privately owned, and the older Magnox reactors retained in the public sector).

Since the initial flotations there has been a steady de-concentration in the market, as new companies have entered (over twenty) and as National Power and PowerGen have lost market share. The biggest changes have been (a) the increased share Nuclear Electric and its successor companies, to around 27% of the market in 1997, due first to a substantial improvement in the operational performance of the reactors and later to the commissioning of the Sizewell B reactor, and (b) the build up of share by the Eastern Group, chiefly as a result of disposals of capacity by National Power and PowerGen, under pressure from the DGES. By the end of 1996, National Power and PowerGen each had little more than 25% each of the total industry capacity (measured including the capacity available from the French and Scottish interconnectors).

A considerable amount of new capacity has been added to the market since 1990, most of it combined-cycle gas turbine (CCGT) plant (the other major addition being Sizewell B). The transition to gas has had a major effect on environmental emissions, but environmental factors played a relatively minor role in the shift. Indeed, it is arguable that it was the organisational structure chosen at the time of privatization that was the major driving factor in the "dash to gas".

At privatisation the Area Boards in England and Wales, which distributed and supplied electricity in their areas, were converted into Regional Electricity Companies (RECs) and were licensed as Public Electricity Suppliers (PESs). The RECs were heavily dependent upon National Power and PowerGen for their supplies of power, but were given some freedom to enter the business of electricity generation themselves. There were, therefore, strategic advantages to be had from establishing their own electricity generating businesses (i.e. it would reduce their dependence on the big generators and increase their bargaining power in negotiations over supply contracts). And, given the desirability of new investment, CCGT plant was the technology of choice for new investment: the unit cost of generating one kWh of electricity from new facilities was significantly lower for CCGTs than for the coal and nuclear alternatives.

The new institutional structure has also had significant effects on the scale of generating plant. Whereas the CEGB had a tendency to favour large scale projects, the new market structure potentially allows power from plant of any size to be sold into the market (e.g. from small combined heat and power (CHP) facilities, from waste incineration plants, and so on). Alongside important developments in generating technologies (e.g. the achievement of much improved thermal efficiencies at small scale), this has contributed to the emergence of some quite small producers, at least by recent historical standards. At the same time, large scale entry based on CCGT technology has been observed (e.g. the Enron plant on Teesside).

There has been considerable controversy concerning whether or not the post-privatisation wholesale power market has operated in a reasonably competitive way. Much of this controversy has focused upon the way in which the electricity pool operates (to be discussed later), but it can be noted that the market has been subject to other regulatory constraints designed to provide finance for nuclear power (e.g. by raising funds to cover future decommissioning costs) and for the development of renewable sources of energy.

The non fossil fuel obligation (NFFO). The Electricity Act 1989 provided for the Secretary of State to make orders obliging each public electricity supplier (i.e. the new regional electricity companies (RECs), about which see more below) to make such arrangements ("qualifying" arrangements) as would secure that it had available, to meet its power requirements, a specified amount of generating capacity from non fossil fuel generating stations.

Two types NFFO Orders have been made, setting separate obligations for each REC in its capacity as a public electricity supplier (PES). The first relates to nuclear power and, in aggregate, the initial amount of generating capacity it required the RECs to have available was around 8.5 GW, which largely corresponded with the amount of nuclear generating capacity that existed in England and Wales at privatisation. For subsequent periods, the amount has varied to take account of variations in nuclear generating capacity during the life of the Nuclear NFFO Order. The second type of NFFO Order relates to generating capacity from renewable sources. The capacities involved are much smaller than for nuclear, but they have built up over time.

The fossil fuel levy. The Electricity Act provides that, where a PES (REC) incurs additional costs in purchasing electricity from non-fossil fuel sources under qualifying arrangements, compared with the costs of purchasing electricity from fossil fuel sources, those additional costs may be shared with all other licensed suppliers through the fossil fuel levy. The fossil fuel levy is payable by all licensed suppliers to a collector appointed by the DGES. The collector, after deducting its own administrative expenses, pays to the RECs, the balance of the levy payments received.

The proceeds of the fossil fuel levy are therefore available to compensate each REC for the difference between the total costs of purchasing electricity which it has supplied and which was generated in pursuance of qualifying arrangements (i.e. according to contracts that count towards a company's NFFO), and what the total cost to it would have been if that electricity had been generated by a fossil fuel generating station.

The fossil fuel levy is payable by reference to the aggregate amount charged by all licensed suppliers for leviable electricity supplied. Leviable electricity means electricity that was generated either by a fossil fuel generating station or by a non fossil fuel generating station in pursuance of qualifying arrangements (i.e. as part of the NFFO). The fossil fuel levy is charged as a fixed percentage on the value of such sales and it was originally set by the Secretary of State at a little over 10%. In subsequent years it has been calculated annually in advance by the DGES, on the basis of information supplied by licence holders. The calculation includes a correction factor to take account of any over or under-recovery in previous years. By the year beginning 1 April 1997, the levy had fallen to a rate of 2.2%.

Power Station Construction. Under the Electricity Act 1989, the consent of the Secretary of State for Trade and Industry is required for major developments in the electricity industry, which also require planning permission. Major developments include the construction or extension of nuclear and non-nuclear power stations with a capacity of greater than 50 MW, and the construction of overhead lines, unless the capacity is to supply a single customer and does not exceed 20 kV, or it runs entirely on the premises of the person responsible for its installation. The terms of the consent are entirely at the discretion of the Secretary of State, but a decision is often preceded by a public enquiry. In line with the EU Environmental Impact Assessment Directive (1985) an environmental impact assessment must also be carried out in relation to the construction of power stations (nuclear and non-nuclear) that will have a heat output of 300 MW or more. Less extensive changes require planning permission only, from local authorities under the Town and Country Planning Act, 1990.

Environmental aspects. Emissions from non-nuclear power stations with a greater than 50 MW capacity are regulated under the system of integrated pollution control established by the Environmental Protection Act 1990 (EPA 1990). Under the system, generators require an authorisation to discharge polluting matter, which includes discharges to air, water, and land. To operate a power station of this kind without an authorisation is a criminal offence. Prior to the Environment Act 1995, these authorisations were granted by Her Majesty's Inspectorate of Pollution (HMIP), but generators also required a discharge consent from the NRA where they were discharging to water, and a waste disposal licence from the relevant Waste Regulation Authority where they were discharging to land. The creation of the Environment Agency combines these regulatory functions, thus providing a "one-stop shop" for generators with regard to authorisations for their discharges.

When deciding whether and on what terms to grant an authorisation, various statutory objectives must be taken into account by the EA. These include ensuring that the Best Available Techniques Not Entailing Excessive Cost (BATNEEC) will be used, ensuring compliance with any directions given by the Secretary of State regarding the implementation of UK obligations regarding environmental protection under EC Treaties or international law, and ensuring the achievement of any quality standards or quality objectives prescribed by the Secretary of State under any of the relevant enactments.

Power stations with a capacity of less than 50 MW are regulated on a different basis. Where they discharge to water or land, they require a discharge consent and/or a waste disposal licence from the EA as appropriate. Pollution discharges to air require an authorisation from local authorities.

Nuclear generation. In addition to planning permission (discussed above), major nuclear establishments in the UK, including nuclear power stations and nuclear reprocessing facilities, require a site license to operate from Her Majesty's Nuclear Installation Inspectorate (HMNII), under the Nuclear Installations Act 1965. HMNII was set up in 1960 under the Nuclear Installations (Licensing and Insurance) Act 1959, and is the operational arm of the Nuclear Safety Division (NSD) of the Health and Safety Executive. NSD has overall responsibility for meeting the HSE's nuclear health and safety objectives, and HMNII is responsible for enforcing nuclear licensing at sites operating commercially in the UK. HMNII has a staff of about 280 people. Site licences stipulate conditions for the operation and maintenance of the nuclear plant.

Nuclear Generation is not prescribed in the Environmental Protection Act 1990 as a process to be regulated under the system of Integrated Pollution Control. The primary piece of legislation governing the treatment and disposal of radioactive waste is the Radioactive Substances Act 1993. Radioactive waste disposal and its accumulation for disposal is controlled through a system of authorisations. The storage and use of radioactive material is subject to control through registration. Prior to the formation of the Environment Agency, major nuclear sites required a joint authorisation from HMIP (acting on behalf of the Secretary of State for the Environment) and the Minister for Agriculture, Fisheries and Food. Following the Environment Act 1995, an authorisation is now only required from the Environment Agency in line with the aim of offering a "one-stop shop" for such authorisations. Under the Act, the Minister for Agriculture, Fisheries and Food is a statutory consultee prior to the issue of such authorisations, and has the power of veto. The Minister is advised by the Radiological Safety Division of his Ministry (MAFF), who consider the potential impact of granting the authorisation on the food chain. The Secretary of State for the Environment retains a number of residual powers, including the power to establish general limitations or conditions, through which he or she may direct or over-ride the powers of the Environment Agency.

Radioactive wastes from the nuclear industry are classified as low, intermediate, or high level. Low level waste consists of lightly contaminated materials and can be disposed of by incineration and/or burial at approved sites. Intermediate waste is sufficiently radioactive to require shielding during handling and transportation, and is currently stored at nuclear sites. High level waste consists of the highly radioactive liquid waste produced when spent nuclear fuel is reprocessed. It contains over 95% of the radioactive material arising from the nuclear power programme within a very small volume. It is currently being solidified into a glass-like form at Sellafield. The Nuclear Industry Radioactive Waste Executive (NIREX) based at Harwell has the responsibility for developing further disposal routes. NIREX was incorporated in 1985 and is owned by British Nuclear Fuels (BNFL), which is the main UK supplier of nuclear fuel cycle services, Magnox Electric, the United Kingdom Atomic Energy Authority (UKAEA) and British Energy, with the Secretary of State holding a special share.

The UKAEA is now responsible for: decommissioning its own reactors and other nuclear liabilities used for the UK nuclear energy R&D programme, including the Prototype Fast Reactor; the resulting radioactive waste disposal and nuclear fuel reprocessing; fusion research; and the development of its sites (Dounreay, Windscale, Harwell, Risley, Culham, and Winfrith) as science and technology centres.

3.2.4 Electricity transmission, distribution, and supply (wholesale and retail). The transmission and distribution of electricity give rise to the co-ordination and natural monopoly problems that are characteristic of network industries, and which were discussed earlier (see section 2.2.1). They also give rise to a range environmental issues that tend to be more localised than many of the major externalities connected with electricity generation. For example, there are issues arising from the visual impact of overhead transmission and distribution lines, and there has been concern about possible health effects of electro-magnetic fields around power lines.

Electricity supply - the marketing and selling of electricity - raises few environmental issues per se, although it is associated with possible market and regulatory failures in relation to energy efficiency (discussed below). While electricity has traditionally been supplied on a monopoly basis, liberalisation makes it a potentially competitive activity. The wholesale (bulk) supply of electricity and retail supply to end users with maximum demands in excess of 100 kW have been open to competition for some time now, and de-monopolisation of the supply of residential electricity will commence this year (1998). This last stage of liberalisation has been somewhat dogged by technical problems with the required information and accounting systems, and it has absorbed much regulatory effort over the past year or so.

Unlike in gas, competition did not lead to a dramatic fall in the prices of industrial electricity relative to the prices charged to the residential sector by monopolistic suppliers, although there has been some movement in this direction since around 1995. Possible explanations are that (a) industrial prices were relatively low in relation to costs prior to privatisation or (b) electricity generation has not been very competitive. The explanations are not mutually exclusive, and it is likely that both factors contributed to the observed outcome. Price performance is discussed further in sections 4.2.2, 4.2.3 and 4.2.4 below.

Vertical integration. Worldwide, electricity generation has traditionally been vertically integrated with electricity transmission - power generators have usually also owned and controlled substantial amounts of high voltage transmission capacity - since this was seen as the most efficient way of dealing with network co-ordination problems. Thus, the most familiar institutional arrangement has been the integrated and monopolistic Generation and Transmission (G&T) utility, of which the CEGB was a good example.

In some electric systems, G&T functions are or were also integrated with distribution and supply, as in Scotland. In other systems (e.g. pre-privatisation England and Wales) there has been vertical separation between G&T utilities on the one hand and distribution and retail supply (D&S) utilities on the other. Indeed in many countries there are relatively large numbers of distribution organisations (companies, municipally owned systems, co-operatives), some of which are responsible for distribution to very small communities (e.g. in Norway).

The common institutional split between G&T and D&S reflects the relative ease with which the activities of distribution and supply in a local area could be separated from the co-ordination problems across higher-voltage networks. In most countries, however, distribution and retail supply have usually been performed as integrated activities - a local distribution utility has typically also been the local monopoly supplier. In England and Wales, these local distribution utilities were the twelve Area Boards.

The integration of distribution and supply was maintained at privatisation - RECs operated with a single PES licence - but other retail suppliers were allowed to enter those parts of the retail market opened up to competition (i.e. the supply of larger end users), and operated with a somewhat different, second-tier license. This structure remains in place today, although in the course of the Government's review of utilities' policy the DGES has stated that he would welcome primary legislation to alter it in a way that would make for clearer separation between the activities of distribution and supply.

Notwithstanding the fact that electricity distribution and retail supply remain integrated within RECs, perhaps the most radical of all the characteristics of the UK privatisation was the decision to split the two activities for regulatory purposes and to embark upon a policy of opening electricity supply to competition.

Price regulation. Charges for use of transmission and distribution systems, and the supply prices of electricity to small end users, are regulated by Offer. It is currently envisaged that, as supply competition develops - and the final phase of liberalisation is due to commence in 1998 - all price controls on the supply of electricity will be withdrawn.

The introduction of competition into generation (wholesale supply) and into retail supply also has some major consequences for the nature of regulation of transmission and distribution. Traditional regulatory practice has been much influenced by the notion that a major aspect of the regulatory task is to protect large numbers of small customers from possible abuses of market power by large, incumbent monopolists. In regulating transmission and distribution prices, however, the buyers of these transport services are generally small in number and frequently very large (often larger than the utility). These emerging market structures, with oligopsonistic demand structures (few buyers) raise important issues for the future structure and conduct of regulation which will be discussed below.

The electricity pool of England and Wales. Under the new trading arrangements, electricity is sold by generators and purchased by suppliers through the pool at prices that are determined by a daily bidding process. The market in electricity is, in effect, constituted by agreements between, amongst others, the various parties participating in it. Sales and purchases of electricity in this market are made between participating generators and suppliers according to a set of rules (the pool rules) which govern the market's operation and the calculation of payments due to and from each of them. The pool does not itself buy or sell electricity.

A computerised system (the settlement system) is used to calculate prices and to process metered, operational, and other data and to carry out the other procedures necessary to calculate the payments due under the pool trading arrangements. The settlement system is administered on a day to day basis by NGC Settlements Limited (NGCS), a subsidiary of NGC, as settlement system administrator.

The pool rules and the constitutional arrangements relating to the operation of the pool are set out in the Pooling and Settlement Agreement. Those who wish to participate in this market are required to become parties to, and (as a general rule) pool members under, the Pooling and Settlement Agreement.

Under the Pooling and Settlement Agreement, overall supervision of the settlement system and its operation is the responsibility of the Executive Committee, composed of individuals elected by separate classes of pool members. Some matters, however, such as changes in the settlement system software and the appointment and removal of the pool auditor, are reserved to the pool members in general meeting. Voting rights at Executive Committee meetings and at general meetings of pool members are balanced equally between generators and suppliers, taken as a whole. In certain circumstances pool members and others enjoy a right of appeal to the DGES who also has a veto over particular changes to the Pooling and Settlement Agreement, most notably with respect to the pool rules.

Initially, end users had no representation in the management of the pool. Relatively recently, two consumer representatives have been allowed to participate in a non-voting capacity.

Network co-ordination. In an exercise that is separate from, but related to. the financial transactions in the pool, NGC, as operator of the national grid (the grid operator), seeks to schedule and despatch generating sets (subject to certain technical restrictions) to meet demand (including a margin for reserve), principally on the basis of a merit order using prices and availabilities offered by generators, with those generators offering the lowest prices generally being used first.

Other aspects of co-ordination are managed through the Network Code, a complex set of contractual relationships that govern technical aspects of the connection to and use of the grid by the various parties that rely on the transmission grid. The general aim is to accommodate the wishes of generators as to the connection of new power stations to the system - NGC is required to act in ways that facilitate competition in electricity generation - but there are trade-offs to be resolved in so far as a new connection may trigger requirements for investment in the transmission system itself. Similarly, investment in the transmission, for example to ease an existing constraint or bottleneck, has implications for the siting of new power stations.

Characteristics of the type of contractual arrangements embodied in the Network Code, which has substituted for internal planning procedures within the earlier nationalised industry, are discussed more fully in the section on the gas industry below (see 3.3.3 and 3.3.4).

Consumer committees. Under the Electricity Act 1989 the DGES has set up consumers' committees for areas corresponding to the areas of the Regional Electricity Companies and the Scottish power companies. The committees' main functions are to review and advise the DGES on matters relating to the supply of electricity in their own areas, to pursue unresolved complaints, and to make representations to the RECs, Scottish Power, and Hydro-Electric on all matters affecting consumer interests. Accommodation and certain support services for the committees are provided by the DGES.

The chairmen of the committees form the National Consumers' Consultative Committee (NCCC), which is chaired by the DGES. This committee is required to keep under review matters affecting the interests of electricity consumers generally and to facilitate the exchange of information about such matters.

3.3 Gas transportation, storage and (retail) supply

3.3.1 Privatisation and the development of Ofgas. Although energy privatisation began with the sale of state shareholdings in oil companies, it was the flotation of British Gas in November 1986 that saw the introduction of major institutional reforms into the UK energy sector. The 1986 Gas Act provided for the establishment of a Director General of Gas Supply (DGGS), appointed by the Secretary of State, and an Office of Gas Supply (Ofgas).¹⁴ As in the case of electricity, the initial legislation was buttressed by the Competition and Service (Utilities) Act 1992. This has been followed subsequently by the Gas Act 1995, whose primary purpose was to enable the introduction of competition into gas supply to residential customers.

Under the legislation, the functions and powers of the DGGS are now broadly similar to those of the DGES, although the initial privatisation legislation was much closer to the traditional franchised monopoly model of regulation (for example, BG was, in 1986, granted an indefinite monopoly in supplies to customers purchasing less than 25,000 therms per annum). The differences relate to obvious divergences between supply conditions as between the two fuels, such as the facts that:

• Gas is storable at much lower cost than electric energy - implying that storage activities are much more significant in gas - and gas storage is a potentially competitive activity;

• BG's transport and storage network is national in scope, unlike electricity transmission (where the Scottish Grid is separate from, albeit interconnected with, the grid in England and Wales) and electricity distribution which is regionalised (there are twelve major distributors in England and Wales, two in Scotland, and one in Northern Ireland).

The second of these features is reflected, for example, in the structure of consumer representation in gas, where the national Gas Consumer's Council (GCC), set up at privatisation to provide advice to the DGES and to replace the National Gas Consumers' Council and the various Regional Gas Consumers' Councils plays the central role.

The 1995 Gas Act is of particular interest because it sets out the legal framework for implementation of the radical policy decision to abolish all monopoly franchises in the British market. The rapid implementation of this decision, taken by the Secretary of State in 1993 following an investigation by the MMC, has meant that gas has overtaken electricity in the race to full liberalisation of retail markets, making the UK a world pioneer in this venture.

The conduct of public policy in respect of competition in gas supply indicates, however, the difficulties that are involved in the process of opening markets. As in electricity, liberalisation requires far more than the simple abolition of statutory barriers to entry: a whole new institutional structure has to be developed in order that the individual actions upon which competition depends do not lead back to the types of market failures or unwanted distributional effects that account for monopolisation and nationalisation in the first place (see section 2.3.1).

Institutional developments such as the introduction and elaboration of the Gas Network Code will be discussed below, but here it can be noted that the 1995 legislation envisaged licences for gas suppliers that contain a number of significant restrictions upon their commercial conduct. Among these are requirements:

• not to refuse supply to customers consuming 2,500 therms per annum or less who are connected to the system, and
• to take out and maintain a bond, so that, in the event of revocation or suspension of its licence (e.g. as a result of default), another supplier that is directed by the DGGS to take over particular supply obligations can be compensated for extra costs thereby incurred.

The imposition of a range of social obligations on gas suppliers is also an important feature of the new arrangements, reflecting the political sensitivities of possible increases in gas prices to identifiable social groups as competition erodes any pre-existing cross subsidies. For example, suppliers are required to:

• provide energy efficiency advice on request to small customers,
• to provide special equipment for appliances and advice on gas use to the elderly and the disabled, and
• to provide credit terms or a pre-payment meter, as well as advice, to customers in debt.

As a result of the various regulatory constraints, therefore, it should not be possible for a gas supplier to "cherry pick" the market by refusing to supply to very small accounts, or to those in debt, or to the disabled and elderly in order to avoid the higher unit costs that might be involved. Nevertheless, as a further defence against such conduct, the arrangements provide for the possibility of compensation being paid to any supplier that turns out to have, by chance or otherwise, a significantly greater proportion of higher cost accounts (the elderly, disabled, those in default) among its customers. The finance for any such compensatory payments can, under the legislation, be raised by a levy on charges made for gas transport. Further protection against the possibility of rising gas prices for smaller customers as competition moved prices toward costs was provided by the DGGS via the most recent pricing review; and the GCC has been an active participant in discussions about the transition to competitive markets for residential supply.

The legislation does not place any duty on the Director General to take account of environmental issues when carrying out her functions. However, an interesting aspect of BG's Authorisation was that the condition governing allowable charges (the RPI-X+Y formula¹⁵) explicitly includes reference to an allowable energy efficiency cost, generally referred to as the E factor. This comprises the "costs incurred by the supplier for the purpose of promoting the efficient use of gas". That is, BG was, in principle, allowed to recover the costs of such promotions in higher prices.

Schemes designed to promote the efficient use of gas had, however, to be approved by the DGGS before they could be counted in the E factor. Here, as in other aspects of the regulatory system, considerable discretionary powers were afforded to the industry regulator in deciding how tough to be in allowing costs to be passed through to consumers, and hence, implicitly, in deciding how big a role Ofgas would play in the promotion of energy efficiency.

In practice, the DGGS took the view that energy efficiency was not one her principal concerns and, in 1994, set out criteria for approval of schemes that made clear that her priority was to push ahead quickly with full liberalisation of the gas market (i.e. the priority was the promotion of competition). Thus, the criteria emphasised that the sorts of schemes most likely to meet with approval would be those that focused on issues such as the opportunity to offer households "total energy packages", including energy efficiency advice and equipment/materials as well as gas itself, in a competitive market.

The 1994 criteria also made it clear that schemes should not rely on funding beyond 1997 when the new price control would come into effect and the first areas of the country would be open to full competition. In the event, the E factor was abandoned in 1997.

3.3.2 Industry structure. Unlike in electricity, gas transmission and distribution are fully (vertically) integrated on a national basis. The industry structure once had a strong regional element, and before that it was highly localised, but the discovery of oil and gas on the UK continental shelf, and the consequent programme of conversion from town gas, led to a highly centralised form of organisation that has been carried forward into the post-privatisation period. Today, therefore, BG is the monopoly owner of both the high pressure transmission system and the regional and local distribution systems, from Caithness to Cornwall.

Gas supply has, however, been fully separated from transmission and distribution, with BG's supply interests now hived off into the company Centrica (although, in supplying the UK markets, Centrica retains use of the British Gas trade mark and its supply operations go under the name of British Gas Trading (BGT)). Residential gas markets have already been opened to competition in large parts of the country, and the "roll-out" of liberalisation will likely be extended to all areas by the summer of 1998. At the time of writing, over twenty companies are active in some or other parts of the liberalised market, although Centrica still accounts for the bulk of supply, even in those areas that have been open to competition for some time.

3.3.3 The Transco Network Code. Network co-ordination is a responsibility that is assigned to Transco, the transportation arm of BG¹⁶, and Transco's interactions with users of the network are set out in the Gas Network Code. The users of the network are gas "shippers", companies licensed to buy gas from producers and sell gas to suppliers. Shippers are to be distinguished from suppliers, who are licensed to buy gas from shippers and sell it to consumers, although in practice companies engaged in supplying gas will also hold shipper's licence. A supplier who is not a shipper would have no direct relationship with Transco or any other public gas transporter.¹⁷

The Principal Document of the Code contains over twenty sections and several hundred pages that define in detail the relationships between the parties. Some sections cover topics that are common to many contracts (e.g. confidentiality, dispute resolution, limitations of liability) whilst others cover those topics that are specific to gas transportation and storage.

One section of the Principal Document deals with how Transco and shippers communicate their business transactions with one another (financial co-ordination). This is done via UK Link, the computer system developed by Transco, and the technical details of how the legal principles of the Principal Document are to be implemented in practice are set out in the UK Link Manual.

An important aspect of the Network Code is a set of modification rules, since these rules affect how the system responds and adapts to new problems and opportunities, including opportunities opened up by technical change and innovation. The modification rules enable:

• shippers and Transco to make proposals for change;
• shippers and other interested parties, who are likely to be materially affected, to make representations to proposed changes; and
• Transco to consider these representations.

The Transco Modification Rules create a Modifications Panel with Transco and shipper members and non-voting representatives from Ofgas and delivery facilities operators (the companies who operate the gas processing facilities at terminals around the coast). The panel is convened (by Transco) at least once a month to consider Modification Proposals which have been received, in writing, from Transco or a shipper. After possible review and/or investigation, Transco is responsible for preparing Modification Reports, which recommend acceptance or rejection of the proposal, and for obtaining Ofgas consent to the changes.

Since the Network Code governs the relationship between Transco and the shippers, and since the assets whose use is at issue are owned by Transco, it is unsurprising that the principal roles in the modification procedures are played by Transco itself and, to a lesser extent the shippers. However, the gas network is also a monopolistic facility, and decisions about its use carry with them potential for monopolistic abuse. This is reflected in Ofgas participation in the modification process, a