Gas Privatization
More competition in the pipeline?

The British Government intends to privatize the British Gas Corporation (BGC) in the autumn of 1986. At the end of 1985 the government published the Gas Bill, setting out its legislative intentions, although some of the proposals will be changed before the Bill finally becomes law. In Discussion Paper No. 101, David Newbery, Co-Director of the Centre's International Trade programme, attempts to predict the implications of BGC privatization for the United Kingdom and its consequences for the European gas market.

The US experience suggests that the main economic benefits of deregulation arise from increased competition, and that in some cases these benefits have been substantial. It seems plausible, Newbery argues, that the British economy would derive the greatest benefit from BGC privatization if it were associated with measures to increase competition. As it stands, however, the Bill proposes that BGC shall be sold intact in its present form, subject to what appears to be rather weak regulation by a Director of the Office of Gas Supply.

Newbery thinks it likely that privatization will replace the nationalized monopoly with a private regulated monopoly. The exact form that privatization will take is, however, uncertain. There is still some chance that privatization will be accompanied by more measures to increase competition, and Newbery considers two scenarios. The first case is one in which there is a conscious effort to increase competition in the industry, whilst the alternative case involves the transfer of BGC as an intact monopoly. Newbery argues that much will depend on whether the Government chooses to relinquish its control over trade in gas, and in particular whether it allows the construction of a pipeline link into the European gas grid.

Newbery discusses several features of the UK gas market which discourage competition. BGC's statutory monopoly of the purchase of gas from UK suppliers and of gas sales to UK consumers was ended in 1982. Despite this, gas supply to the UK market is controlled almost entirely by BGC. One reason for this has been BGC's control over the National Transmission System (NTS): although other UK gas suppliers are now entitled to sell directly to industrial consumers, they need to use the NTS to do so, and BGC has done nothing to make the NTS more available. Furthermore, BGC's ability to cross-subsidize and undercut any prices quoted by other suppliers acts as a very real entry deterrent. Newbery argues that privatization should include measures to increase competition in the UK gas market, by laying down conditions on the use of the NTS and forcing BGC to sell at 'efficient' prices to prevent unfair competition.

Newbery argues that British refusal to construct a pipeline link into the European gas grid also inhibits competition. Opposition to such a pipeline may result from a desire to control imports, particularly from Norway. On the other hand, the failure to construct a link can also be explained by the understandable motivation of BGC to maintain its bargaining position in the UK market. He concludes that linking the UK market into the European gas grid would bring major benefits to the United Kingdom. It would encourage the NTS to operate as a more effective common carrier of gas, and allow the United Kingdom to balance supply and demand by adjusting its exports and imports of gas. 'Disruption contracts' could also be concluded with the Dutch to supply gas in the event of supply problems with the USSR, Norway or North Africa.

Newbery finds that the construction of the link could benefit not only the United Kingdom but also Norway and European gas consumers. If a pipeline link were to be constructed to the Continent, then it would not only allow a more efficient depletion policy for the UK gas fields but might also have important implications for the European gas market, although its precise consequences would depend to some extent on the form of privatization in the United Kingdom. Newbery argues that the construction of the link, combined with a more competitive BGC, would have a catalytic effect on the European market. Governments may find that deregulation and increased competition have beneficial effects and do not lead to market disruptions. The European market would be more competitive and flexible, and less vulnerable to supply disruptions. Finally, a market which is more integrated across national borders would encourage a greater variety of contracts with major consumers.


The Privatization of British Gas and Possible Consequences for the European Gas Market
David M Newbery

Discussion Paper No. 101, April 1986 (IT)