However they both find that third party and retail

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definitions of regulatory reform indicators. However, they both find that third party and retail access tend to lower industrial electricity prices and also lower the ratio of industrial to domestic prices, which in many countries represents an improvement in allocative efficiency. Steiner (2001) finds that privatisation improves operating efficiency and capacity utilisation. Arocena and Waddams-Price (1999) find that in Spain public generators are on average more efficient than private generators under the earlier cost-of-service regulation. However, private generators catch up and overtake the public firms once cost-of-service regulation is replaced by price cap regulation, suggesting that private firms are more responsive to the kinds of market signals to be expected with liberalisation and good regulation. UK electricity reform provides an excellent example of the benefits of restructuring and the importance of structural decisions. The UK tried all three possible models: in England and Wales the Central Electricity Generating Board (CEGB) was unbundled into three generating companies and the grid, the 12 distribution companies were privatised, and a wholesale market - the Electricity Pool - created. After the three years of transitional contracts, consumer prices were set by free generation and (for larger customers) supply markets, combined with the regulated costs of transmission and distribution. Scotland retained the two incumbent vertically integrated companies with minimal restructuring and constrained export links to England. Northern Ireland adopted the Single Buyer model with the combined transmission/distribution company NIE holding long-term power purchase agreements (PPAs) with the three independent generating companies. 21
Newbery and Pollitt (1997) and Pollitt (1997, 1998) have completed social cost benefit analyses of the three different models, with striking and intuitively plausible results. The restructuring of the CEGB immediately introduced daily competitive price bidding for each power station. All generating companies dramatically increased productivity and drove down costs, including the state-owned Nuclear Electric. The audit of the first five years was that the social benefits amounted to a reduction of costs of six per cent for ever compared to the counterfactual, equivalent to a 100% return on the sales price (when discounted at 6% real). These benefits were initially almost entirely captured by companies, for profits rose as costs fell and prices remained stubbornly high until continued and aggressive regulatory intervention forced extensive divestment of capacity. Figure 2 shows the gradual erosion of market shares of the two fossil generators, National Power and PowerGen, as they sold plant and Independent Power Producers (IPPs) entered. 0

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