This article covers the privatisation and the initial regulatory settlement for electricity distribution around the Electricity Act 1989. Strictly, the 1989 act was the enabling legislation. Vesting and restructuring came at the end of March and on 1 April 1990, and the twelve England and Wales Regional Electricity Companies were sold in December 1990.The article focuses on the immediate post-privatisation period, before the main review sequence that revised controls from 1995/96 and then from 1 April 2000. Those reviews will be covered in future articles in this series.
Table 1: Timeline from the Electricity Act 1989 to the first revision of distribution controls in 2000.
Distribution was privatised operationally in 1990, even though the enabling Electricity Act received Royal Assent on 27 July 1989. The public debate and the law belong to 1989, but investors bought the network shares only after vesting, licensing, capital restructuring and the initial price controls were in place.
The long title of the Act illustrates the breadth of the reform. It provided for the appointment and functions of a Director General of Electricity Supply, created consumer committees, set new rules for supply through electric lines, and determined the vesting of the property, rights and liabilities of the Electricity Boards and the Electricity Council in successor companies.
That legal framework became a new industrial structure on 1 April 1990. In England and Wales, the Central Electricity Generating Board was replaced by Nuclear Electric, National Power, PowerGen and National Grid. The latter was initially owned jointly by the twelve Regional Electricity Companies, until it was floated separately in 1995. The Regional Electricity Companies, in turn, replaced the previous Area Boards.
At privatisation, distribution meant the local wires monopoly: the regional network of substations, transformers, overhead lines, underground cables and low-voltage assets that carried electricity from the transmission system to homes and businesses. The government described the area supply companies as holding a monopoly on distribution, with National Grid holding the monopoly on transmission.
The Regional Electricity Companies were not, however, pure network companies in the modern sense. Each combined a regional distribution network with a public supply business. They bought electricity through the newly created Electricity Pool, distributed it across their local networks, and sold it to customers. Their generation ownership was restricted, with each company permitted to own no more than 15% of its power generation requirements.
This hybrid structure explains the later pressure to separate supply, metering and distribution. Supply was intended to become competitive, while distribution stayed a regional monopoly requiring continued price regulation.This dual framework was a large reason for the separation of these activities into different businesses later on.
The twelve Regional Electricity Companies were Eastern Electricity, East Midlands Electricity, London Electricity, MANWEB, Midlands Electricity, Northern Electric, NORWEB, Southern Electric, SEEBOARD, South Wales Electricity, South Western Electricity and Yorkshire Electricity. Each replaced its corresponding Area Boards and became the regional distribution and public supply companies for its territory.
The regional structure mattered because the networks differed sharply in customer density, terrain, urbanisation and underground assets. The costs and operating risks of serving London were very different from those of serving a rural or semi-rural region. Every later review had to compare these companies while allowing for those inherent differences.
The twelve companies were sold in December 1990 through a fixed-price public offer of the government’s shareholding at 240 pence per share. Payment was made in three instalments: 1 pound at flotation, 70 pence in October 1991, and 70 pence in September 1992. The Commons Library records that the offer was about ten times subscribed and describes it as one of the most popular privatisations of the period.
These figures should not be treated as separate amounts that can be added together. On the government’s own account, the share proceeds were about 5 billion pounds, so the 7.713 billion figure is best read as the return incorporating both equity and debt, rather than equity proceeds by themselves. Reusing these numbers warrants a verification on its precise basis in the National Audit Office report on the sale (HC 10, 6 May 1992).
The companies’ debt levels were set deliberately before the sale. On 23 July 1990, the Secretary of State reported total debt of 2,843.5 million pounds for the twelve companies plus National Grid, split as 1,942.5 million pounds for the Regional Electricity Companies and 901 million pounds for National Grid.
Yes. The networks were privatised with price controls already attached. Distribution charges for the twelve companies were capped at the RPI plus a company-specific X factor between 0 and 2.5 percentage points per year, with a weighted average for the sector of about 1.1. At vesting, the controls were set for five years and typically allowed real increases in distribution charges.
The initial formula of RPI plus X is worth distinguishing from the later and more familiar description of RPI minus X. The X factor was set at a positive level upon privatisation to encourage investment, while future price controls prioritised spending efficiency when setting allowances. National Grid’s transmission charges were capped at the RPI alone. The government stated that transmission and distribution represented about 10 and 20% respectively of the final customer price, and that the controls would allow about 5 billion pounds of investment in the capital-intensive distribution network while maintaining security standards.
Figure 1: Share of final customer price at privatisation
Figure 2: Initial distribution X factors, 1990 (Retail Prices Index plus X, per year)
Table 2: Initial distribution X factors announced in March 1990 (Retail Prices Index plus X cap, per year)
Source: Hansard, Electricity Privatisation, 22 March 1990. The five-year range from 0 to +2.5 and the weighted average of about +1.1 are confirmed by the first Director General of Electricity Supply.
Competition was introduced progressively in supply, according to customer size. Customers with demand above 1 megawatt, about 30% of the market, were opened to competition in March 1990. The 100 kilowatt to 1 megawatt tier, about 15% of the market, followed in April 1994. The remaining market below 100 kilowatts, about 55%, opened in stages from September 1998 to June 1999.
Figure 3: When supply competition opened, by market share
Distribution followed a different path. It remained a regulated regional monopoly because it would have been neither practical nor economic to build competing local networks of poles, wires and substations. The Regional Electricity Companies therefore carried both competitive exposure and monopoly protection inside the same corporate group.
This distinction became one of the defining features of the post-privatisation regime. Supply could be opened to entry and customer choice, while distribution had to be disciplined through periodic price controls, efficiency assumptions and limits on the revenue that each regional network could recover. This difference in treatment was one of the main drivers of the later breakdown of the activities into separate supply and distribution companies.
The initial controls soon looked generous, as the companies reduced costs and earned high profits under caps that allowed real price increases. The 1998 consultation by the electricity regulator recorded that the government’s initial five-year controls typically allowed distribution charges to rise in real terms, and that over that period the Regional Electricity Companies in particular increased profits significantly.
The accounting figures were striking. Distribution operating profit was 34% of turnover in 1990/91 and then ran between 40% and 43% in each year to 1996/97. For low-risk regional monopolies, that profitability level helped justify tougher controls later.
Figure 4: Distribution operation profit as a share of turnover
Regional Electricity Companies, England and Wales
The regulatory response is the subject of later articles in this series, but it illustrates well how generous the original settlement was. In brief, the regulatory controls in England and Wales were tightened from the mid-1990s. Distribution charges were reduced in real terms by 11% to 17% in 1995/96, by a further 10% to 13% in 1996/97, and then by 3% a year in real terms until March 2000. By 1998, average distribution charges were about 25% lower in real terms than in 1994/95, and average domestic electricity prices about 15% lower.
The initial settlement also set the template that every later review inherited. Control periods ran for a set number of years, five at vesting. Charges were governed by a single RPI plus or minus X formula. The revenue a network could earn was tied to the value of its assets and an allowed return on them, with the starting asset value taken from the flotation price and the original return assumption set at around 6%. Later reviews changed the numbers and sharpened the method, but the shape of the regime, multi-year price caps built on an asset base and a cost of capital, was set here. This is the same regulated cost of capital machinery that MCC Economics analyses in today’s water and energy price reviews.
For distribution specifically, the most important pre-review fact is that the electricity distribution monopolies were privatised with price controls already attached. While there was no absence of regulation, the early price controls were deliberately investment-supportive, and in retrospect were too generous. Every review that followed reflected that experience.
The privatisation of electricity distribution was a staged process: the enabling law in 1989, vesting and capital restructuring in early 1990, and flotation of the Regional Electricity Companies in December 1990. This was underpinned by an initial RPI plus X price control, and was followed by the promotion of competition in the supply business, phased by customer size, and tougher regulatory reviews for the distribution businesses.
Scotland and Northern Ireland followed different paths from England and Wales. Scottish Power and Scottish Hydro-Electric stayed vertically integrated, generating and distributing electricity, with the Scottish nuclear assets vested in Scottish Nuclear. The first two companies were sold in June 1991 through a fixed-price offer for all of each company at 240 pence per share, combined with a back-end tender, while the latter was kept under government ownership. The offer was about three times subscribed and net proceeds were 3.5 billion pounds.
Northern Ireland followed a different legal and commercial route. Its industry was smaller, isolated from the rest of the United Kingdom and from the Republic of Ireland, heavily reliant on oil-fired plant, and without an immediate prospect of a competitive market. Its restructuring used the Electricity (Northern Ireland) Order 1992. The power stations raised 708 million pounds and Northern Ireland Electricity raised 362 million pounds when sold in June 1993.
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