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28 | 11TH - 17TH DECEMBER 2015 | UTILITY WEEK Markets & Trading Market view B liss was it in that dawn to be alive, But to be young was very heaven.' So wrote William Wordsworth, famously, of the French Revolution. That was also how many of us involved in preparing the electric- ity industry for privatisation felt at the time. Actually, most of us who did the donkey work for this huge restructuring project were already on the wrong side of 40, and were thus to be denied the experience of heaven. Of course, if we had thought a bit harder, we might have remembered that Wordsworth's initial fervour quickly gave way to disenchantment with the revolu- tion as it mutated into the despotism of Napoleon Bonaparte. But these were heady days for all concerned. Whether as lawyers, economists, engineers, or good old- fashioned generalists, we all knew that what we were doing was both histori- cally important and risky, because it would funda- mentally alter the structures and motivations of an essential public service. Most of the intellectual heavy liing before the target flotation date of 11 Decem- ber – the draing of legislation, codes, licences, and core contractual agreements – had been done in the hectic 12 months lead- ing up to April 1990. That was when the 12 area electricity boards of England and Wales (the Scottish boards were to come later) became regional electricity companies (Recs) and the holders of licences that would be policed by the new Office of Electricity Regu- lation (Offer, later to become Ofgem). But during the summer and autumn of 1990, while political events were moving towards the momentous resignation of Mar- garet Thatcher as prime minister, there still remained the immense task of assembling and carrying out due diligence on the 800- page prospectus that would underpin the sale of the Recs to the general public and their transformation into stock exchange companies through the largest series of share offerings the UK had ever seen. For the government and its advisers, this was to be Big P, the most challenging privatisa- tion of them all. Indeed, it was probably the last occasion when we would see the British civil service pulling out all the stops under pressure to deliver a significant, technically complex, and radically new public policy objective to a demanding deadline. An entirely new wholesale market, the Electricity Pool, had to be designed from scratch, along with a set of special contracts between power generators and the Recs to support the British coal industry for the next eight years. At the same time, a sceptical 150,000-strong workforce mostly commit- ted to the idea of public ownership had to be placated with cast-iron legal guarantees of their pension rights in per- petuity. And the international background for all this intense activity was not promising: in fact, the Treasury wanted the flotation to be pulled because it feared that an American- led war against Iraq in early December would wreck west- ern financial markets (in the event, the bombardment of Kuwait – which marked the beginning of the First Gulf War – was deferred for a month to January 1991). The privatisation could not have been prepared and executed without the substan- tial and willing input of the industry's own formidable brainpower. John Wakeham, who succeeded Cecil Parkinson as the cabinet minister responsible for the project, told a meeting of Rec chairmen that this was eas- ily the cleverest industry the government had grappled with in either the public or the private sector. But though such flattery was well-deserved, it seems unlikely that any of us then realised that the Pandora's Box we had opened would release the stream of sales, swaps, restructurings, mergers, insol- vencies, foreign takeovers, and corporate consolidations that have marked the indus- try's first 25 years in private hands. Nor could we have predicted that the his- tory of the era would consist, essentially, of the history of regulation and of the way in which Ofgem's values and personalities, supported by an armoury of legal powers, would mould the industry's operations and activities. Although we were not to know it in 1990, Ofgem was to become perhaps the most creative example of the British model of utility regulation through independent agen- cies governed by statutory objectives set by Parliament. This approach in the energy sec- tor has delivered large public benefits while also enabling the UK to attract substantial investments at a reasonable cost of capital. Apart from high executive salaries, the most visible and enduring symbol of privatisa- tion's impact has been the regulatory regime it created for the industry. Delivery at a high price Looking back from the vantage point of its silver anniversary, however, the overall thrust of the project has been disfigured by some serious failures. The achievements of regulation as practised by Ofgem were deliv- ered at a high price in terms of the eventual political and media distrust of the industry, the loss of its intellectual self-confidence, and the plumbing of new depths in con- sumer hostility towards it. All this has pro- gressively undermined and in some respects destroyed the industry's public credibility and internal morale. The abnormally high but inevitable tariff increases of the past five years have played their part in this sad outcome, but so has the dominant governing role of regulation in the industry's affairs. The government's original view that light-touch regulation of the newly licensed companies would be suf- ficient to protect consumer interests did not long survive. What had begun as a supposedly benign mechanism, designed to incentivise effi- ciency and hold down consumer prices, quickly evolved into a profoundly dynamic process with its own highly discretionary agenda – oen conflicting with public aspi- rations – and a forward momentum that the industry has been quite unable to roll back. A related failure was the industry's early capitulation to the full force of financial engineering and the resulting domination of the market by foreign ownership. In 1990, the idea that most of the power networks of the Recs – the most important service pro- viders in the country – would end up being owned by special overseas investment vehi- Was privatisation worth it? The electricity industry was privatised on 11 December 1990. Roger Barnard looks back on 25 years of non-stop revolution. ' "The dogged pursuit of competition under Ofgem's jurisdiction has been essentially a policy contrivance sustained only by regulatory artifice"