This article covers the privatisation and the initial regulatory settlement for electricity distribution around the Electricity Act 1989. Strictly, 1989 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 later Distribution Price Control Reviews appear here only as context, to show what the initial settlement had allowed. The article stops before the main review sequence that revised controls from 1995/96 and then from 1 April 2000. Those reviews are the subject of later 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 shows the breadth of the reform: appointment and functions of a Director General of Electricity Supply, consumer committees, new rules for supply through electric lines, and 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 in 1990. In England and Wales the industry was restructured on 1 April 1990. The Central Electricity Generating Board was replaced by Nuclear Electric, National Power, PowerGen and National Grid, which the twelve Regional Electricity Companies owned between them until it was floated separately in 1995. Twelve Regional Electricity Companies 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 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, and sold it to customers. Their generation ownership was restricted: each of the twelve companies could own no more than 15 per cent of its power generation requirements. This hybrid structure explains the later pressure to separate supply, metering and distribution. Supply was intended to become competitive; distribution stayed a regional monopoly and therefore needed price control.
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. They replaced the Area Boards and became the regional distribution and public supply companies for their territories.
The regional structure mattered because the networks differed sharply in customer density, terrain, urbanisation and undergrounding. A London network had very different costs and operational risks from a rural or semi-rural one. Every later review had to compare these companies while allowing for those inherited differences.
The twelve companies were sold in December 1990 in a fixed-price offer for all the shares at 240 pence each, and the House of Commons Library records net proceeds of 7.713 billion pounds. Payment was staged: 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.
Debt was 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 Retail Prices Index plus X, with company-specific X factors between 0 and 2.5 per year and a weighted average of about 1.1. At vesting the controls ran for five years and typically allowed real increases in distribution charges. That was the settlement investors bought into.
The initial formula was the Retail Prices Index plus X, not the later and more familiar Retail Prices Index minus X. National Grid’s transmission charges were capped at the Retail Prices Index alone. The government said transmission and distribution represented about 10 and 20 per cent 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 in supply, in stages by customer size, while distribution stayed a regulated monopoly. Customers with demand above 1 megawatt, about 30 per cent of the market, were opened to competition in March 1990. The 100 kilowatt to 1 megawatt tier, about 15 per cent of the market, followed in April 1994. The remaining market below 100 kilowatts, about 55 per cent, opened in stages from September 1998 to June 1999.
Figure 3: When supply competition opened, by market share
This sequence is central to the original model. Supply became contestable in stages; distribution did not. The Regional Electricity Companies therefore carried both competitive exposure and monopoly protection inside the same corporate group.
The initial controls soon looked generous because the companies cut costs and earned high profits under caps that allowed real price increases. The 1998 consultation by the electricity regulator recorded that at vesting the government’s five-year controls typically allowed real increases in distribution charges, and that over that period the Regional Electricity Companies in particular increased profits significantly.
The accounting record was striking. Distribution operating profit was 34 per cent of turnover in 1990/91 and then ran between 40 and 43 per cent in each year to 1996/97. For a low-risk regional monopoly, that profitability helped justify tougher controls later.
Figure 4: Distribution operation profit as a share of turnover
Regional Electricity Companies, England and Wales
The corrections that followed are the subject of later articles in this series. In brief, the regulator tightened the controls in England and Wales from the mid-1990s. Charges were cut in real terms by 11 to 17 per cent in 1995/96, by a further 10 to 13 per cent in 1996/97, and then by 3 per cent a year in real terms to March 2000. By 1998 average distribution charges were about 25 per cent lower in real terms than in 1994/95, and average domestic electricity prices about 15 per cent lower. Here these figures matter only as evidence that the starting settlement had been set too loosely.
The initial settlement also fixed 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 Retail Prices Index 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 per cent. 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.
Scotland and Northern Ireland followed different paths. Scotland did not copy the England and Wales model. Scottish Power and Scottish Hydro-Electric stayed vertically integrated, generating and distributing electricity, with the Scottish nuclear assets vested in Scottish Nuclear. The 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. 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. The 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.
For distribution specifically, the most important pre-review fact is that the wires monopolies were privatised with price controls already attached. The problem was not the absence of regulation. It was that the early controls were deliberately financeable and investment-supportive, and in retrospect too generous. Every review that followed began from that experience.
The privatisation of electricity distribution was not a simple sale of wires. It was a staged design: law in 1989, vesting and restructuring in 1990, flotation of the Regional Electricity Companies in December 1990, initial Retail Prices Index plus X controls, deliberate debt restructuring, supply competition phased by customer size, and later correction through tougher reviews.
Explore MCC Economics’ analysis of the Phoenix Energy acquisition—a critical review of valuation, regulatory challenges, and the evolving energy landscape in Northern Ireland highlighting the risks and opportunities within the energy transition and the implications for investors in regulated utilities.
2023
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I was delighted that MCC's work was completed on time, and within budget, helping us deliver important changes and improvements, to the benefit of our stakeholders. MCC's report is published on the CCC website.
I am delighted to recommend MCC Economics. Specifically, I worked closely with PJ, who helped us with our Nuclear and CCUS projects. PJ helped us develop new policies and answer questions from our stakeholders. His support helped us deliver important changes and improvements, to the benefit of our stakeholders.
MCC Economics has helped us better understand the most important issues for our stakeholders, including: charges, shareholder returns, debt payments and inflation impacts.
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I am delighted to recommend PJ and his team from MCC Economics. They helped us with our price controls for Heathrow airport and for NATS (En Route) plc (the air traffic services provider). Specifically, the MCC team helped us deliver important changes and improvements to our financial models and supporting policy documents, to the benefit of our stakeholders.
I am delighted to confirm that I worked with PJ on a retail project in 2015. The project helped stakeholders understand electricity costs and charges. Specifically, the project helped us explain to stakeholders, internally and externally, why electricity charges differed across the regions (GB, NI & Ireland). PJ was a key member on the project team, which helped deliver changes and improvements in the understanding of energy retail.
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