Prior to privatization, in England and Wales, the nationalized Central Electricity Generating Board (CEGB) owned all power stations and transmission grids. On the national level, the initial steps toward privatization involved the restructuring of the CEGB into four separate companies, still owned by the British government. Later, the two power generation companies, PowerGen and National Power, both issued equity shares in 1990. National Power is the larger of the two companies and accounts for nearly a quarter of UK electricity generating capacity {see Endnote 204}. The national electric transmission grid is managed by the National Grid Company which was initially owned by twelve regional electricity distribution companies but became an independent company in 1995. The 12 regional companies are: East Midlands Electricity, Eastern Group, London Electricity, Manweb, Midlands Electricity, Northern Electric, Norweb, Seeboard, Southern Electric, South Wales Electric, South Western Electricity, and Yorkshire Electricity. The fourth company, Nuclear Electric, (which consists of eight nuclear-fired electricity generating plants) was privatized in July 1996 as the company British Energy {see Endnote 205}. It should be noted that privatization did not mean complete deregulation and in the aftermath of privatization retail rates were still regulated and wholesale rates frozen.

In Scotland, privatization involved the creation of two integrated companies, Scottish Hydro-Electric and Scottish Power (a distribution and generation company for Scotland), and in Northern Ireland, Northern Ireland Electricity was formed.

Soon after privatization, the structure of Britain's electric industry began to change dramatically, particularly at the distribution stage. Through a series of mergers and acquisitions, the twelve regional electricity distribution companies, as a group, became more vertically integrated. Both National Power and PowerGen (the two newly-created generation companies) placed bids on distribution companies. Foreign electricity companies, particularly from the United States, also placed bids on both the power and distribution companies.

Since going public, several of the 12 regional distribution companies and one power company have been takeover targets (Table 4). The largest foreign acquisition of a UK electric utility thus far has been the purchase of Midlands Electricity (one of the regional distribution companies) by the U.S. companies General Public Utilities and Cinergy for $2.6 billion. The next largest involved the purchase of another regional electricity distribution company (Seeboard) for $2.5 billion by Central and South West of Dallas, Texas. Southern Company, of Atlanta, Georgia (the second largest utility in the United States), purchased South Western Electricity, another regional electricity distribution company, for $1.7 billion. Meanwhile, Prudential took a 4.9-percent equity stake in Yorkshire Electricity, yet another regional distribution company.

There has also been some internal consolidation of Great Britain's electric power and distribution industries and integration with the UK's recently-privatized water utilities. Both Norweb and South Wales Electricity were acquired/merged with local water power utilities, while Scottish Power acquired Manweb. North West Water, which purchased Norweb, outbid the U.S. utilities Houston Industries and Central and South West Corp. In addition, Southern Electric outbid Scottish Power to acquire Southern Water PLC for $2.4 billion {see Endnote 206}. The UK's Southern Electric is the second largest electricity distribution company in England and Wales. With its acquisition of Southern Water and its recently-obtained license to become a natural gas distributor, it could become the first full service regional utility
{see Endnote 207}.

In early 1996, there were several attempted acquisitions which were in the end rejected by the British government. Among recent takeover targets, those involving Britain's electrical power generation assets have been among the most controversial. National Power PLC had attempted a takeover of Southern Electric PLC, the second largest regional distribution company in the United Kingdom, for $4.4 billion {see Endnote 208}. In turn, National Power was a takeover target of the U.S.-based Southern Company, which had just earlier purchased South Western Electricity. PowerGen, the other major generation company, had mounted a takeover attempt of Midlands Electricity. However, the British government blocked the proposed merger of Southern Electric and National Power, and the purchase of Midlands Electricity by PowerGen because of concerns about maintaining competitive markets. Had the Southern Company/National Power merger and the National Power/Southern Electric acquisition gone through, Southern Company would have owned two of the twelve regional distribution companies (with neighboring territories) along with the largest generation company {see Endnote 209}. A U.S. company would then have become both the largest power generation company and the largest power distribution company in the United Kingdom.

Meanwhile, Hanson Corporation's electric distribution subsidiary, Eastern Group, has purchased power plants from both National Power and PowerGen, making the Eastern Group an integrated electricity company. (Hanson Corporation is a UK-based conglomerate with interests in U.S. and Australian coal mining.) The Eastern Group is the largest regional distribution company in the UK and accounts for roughly 10 percent of the national electricity distribution market.

Independent Power Producers

There have also been some foreign investments in Northern Ireland following the auction of all power stations to private companies in March 1992. Two coal-fired plants were bought by NIGEN, a consortium of the U.S. company AES and the Belgian company Tractabel. In addition, British Gas bought an oil-fired plant {see Endnote 211}.

Nuclear Power Privatization

As a result of such concerns, during its initial offering, the $2.1 billion value the market placed on British Energy proved even less than the cost of building its last nuclear power plant. Further, since the flotation of shares, the market value has dropped even further. In addition to safety and liability concerns, the relatively high operating costs of British Energy has raised doubts over the company's ability to compete--particularly in the new competitive free market atmosphere.

Natural Gas Privatization in the United Kingdom

Natural gas plays an important and growing role in UK energy supply. Between 1989 and 1994, coal production in the United Kingdom had fallen by half, while natural gas production increased 56 percent {see Endnote 212}. Since 1970, the UK's production of natural gas has grown sixfold {see Endnote 213}. Consumption patterns of both fuels has largely paralleled demand. Between 1989 and 1994, natural gasconsumption in the United Kingdom has risen 31 percent, while coal consumption has fallen by 44 percent {see Endnote 214}.

Britain's move away from coal-fired power towards natural gas power is the result of the rapidly changing prospects for both industries in the United Kingdom (See "Chapter 6, Recent Trends in International Investment and Trade in Coal"). The closure of uneconomic coal mines in the United Kingdom is coinciding with the increasingly available natural gas supplies that have come onstream from fields in the North Sea.

Environmental concerns have also promoted the switch to gas as coal burning has long been a major contributant to air pollution in the United Kingdom. Ironically, Britain's natural gas industry's beginnings stem from Britain's early abundance of coal resources from which town gas was manufactured. A network of essentially privately-owned local gas operations was nationalized in 1948, when the state-owned monopoly British Gas Corporation was created as a vertically-integrated company. However, British Gas was not a major producer of natural gas until the late 1970's, when North Sea production came onstream. Subsequently, British Gas came to represent the gas industry.

Great Britain started to privatize its natural gas industry 10 years ago--shortly after passage of the Natural Gas Act of 1986, which resulted in the selloff of British Gas by the UK government. In addition to privatization, the Natural Gas Act required that British Gas' transmission pipelines provide open access for all sellers of gas. However, the privatization of British Gas did not result in immediate unbridled competition. Rates still remain controlled by a natural gas regulatory body, the British Office of Gas Supply (Ofgas). Essentially, Britain has gradually introduced free markets in natural gas in three stages. In late 1986, the first stage involved allowing large users of natural gas (over 25,000 therms a year) to seek alternative sources of supply {see Endnote 215}. These users consisted largely of Britain's industrial users of natural gas. Next, in August 1992, users of natural gas in excess of 2,500 therms (primarily commercial demand) were allowed to bypass British Gas in favor of other suppliers. Both actions greatly diminished British Gas's share in the market for industrial and commercial uses. The final stage of privatization is currently being implemented and is creating a very different natural gas industry in Britain.

The newly-enacted Gas Act of 1995 introduced competition into the residential gas market. Following passage of the Act, the UK initiated a free market experiment in natural gas distribution by allowing a half million residential and small business consumers in three southwestern counties to choose their natural gas suppliers {see Endnote 216}. Previously, the sole supplier of natural gas to thesemarkets had been British Gas. This pilot program is designed to provide a test ground for the eventual deregulation of the entire natural gas market in the UK, scheduled to take place in 1998. As of April of 1996, Ofgas had licensed 10 companies to supply natural gas in the pilot area. The nature of these companies' operations suggests how dramatically the natural gas industry in the UK is evolving.

Included in the ten companies awarded licenses are several U.S. electric utilities and petroleum companies from the United States, Norway, France, as well as from the United Kingdom (Table 6). These companies also include some of the UK's recently-privatized regional electrical companies and PowerGen, one of the two recently-privatized power generation companies.

The petroleum companies entering the UK's newly-opened natural gas distribution business have all substantial North Sea natural gas operations. The primary purpose of obtaining these licenses is to integrate their upstream North Sea operations with downstream residential natural gas demand in the UK. Amerada Hess, Amoco, Conoco (DuPont), Phillips, and Texaco of the United States, Statoil and Norsk Hydro of Norway, and TOTAL of France have all obtained licenses or conditional licenses to market natural gas in the newly-opened regions.

A number of electric utility companies (both from the UK as well as from the U.S.) have also set up subsidiaries in the newly-deregulated regions. This may eventually result in the creation of a residential energy utility industry in the UK with a variety of single service and mixed service companies {see Endnote 217}. This would be a marked difference from the structure of Britain's electric power and natural gas distribution structures in the past, when two single companies (the Central Electricity Generating Board and British Gas) were the primary providers of these services.

Several of the newly-created natural gas distribution companies are subsidiaries of the current twelve regional electric distribution utilities--and are, in some cases, foreign-owned. London Electricity, the Eastern Group, Northern Electric, Norweb, Southern Electric, and South Western Electricity have all created natural gas distribution subsidiaries. One former coal company, British Fuels Gas Ltd. (a former subsidiary of British Coal), has also obtained a natural gas distribution license, as has Calor through its joint venture with Texaco {see Endnote 218}.

An additional three companies have been granted conditional licenses: Alliance Gas (a joint venture between British Petroleum and two Norwegian companies), Kinetica (controlled by PowerGen and Conoco UK), and Southern Gas (controlled by Amoco and Seeboard).

The privatization of the UK's natural gas industry has also involved the privatization of the former gas monopoly, British Gas. Privatization of British Gas has had a major impact on the structure of Britain's natural gas industry and on the structure and operating performance of British Gas. One facet of the 1986 Natural Gas Act allowed independent producers to market gas, which resulted in a greatly reduced British Gas share of the U.K. natural gas market. Greater competition spurred British Gas to reorganize. In 1994, British Gas split itself in two separated businesses. Transco, by far the larger of British Gas' two newly-created businesses, consists of British Gas' former natural gas transport and storage business, exploration and production business, and the overseas business {see Endnote 219}. The other newly-created business, British Gas Energy, consists of the domestic supply arm for 19 million customers, the Morecambe Bay gas fields (which contain 4.5 trillion cubic meters of gas and account for most of British Gas Energy's assets, see Endnote 220), and the service and retail gas business.

British Gas has subsequently looked overseas for growth. In 1995, British Gas merged purchased shares in NGC Corporation, a major purchaser, marketer, and transporter of natural gas in North America {see Endnote 221}. British Gas is currently building pipelines in South America and planning natural gas distribution facilities in India and Thailand. British Gas is also pursuing natural gas transmission and distribution, and electrical power opportunities in Indonesia, Pakistan, the Philippines, and Vietnam.

British Gas' experience with privatization in many ways resembles the experience that a number of natural gas transportation companies have undergone as a result of deregulation in the United States. For instance, compounding British Gas's introduction to market forces has been the burden of "take-or-pay" contracts {see Endnote 222}. Prior to its privatization in 1986, British Gas entered into a number of long-term contracts with North Sea producers--agreeing to set prices for 25-30 years. However, in the meantime, an oversupply of North Sea gas, coupled with the entree of new competition, put downward pressure on domestic natural gas prices in the United Kingdom. As a consequence, British Gas is operating under the burden of having accumulated several billion dollars worth of take-or-pay liabilities.