Deregulation in Europe

In energy deregulation, there are few useful compromises. If the U.S. experience with the procedure offers any practical lesson to the rest of the world, this is it.

Europeans seem to want to deregulate yet resist comparisons between their energy circumstances and those of the U.S., which indeed differ. Comparisons are nevertheless irresistible and might even be instructive.

In natural gas, the U.S. government scored few deregulatory triumphs until it decided to run the whole course. Phased price decontrol created more problems than it solved. Piecemeal efforts to repair regulations backfired as pent-up market forces on lengthening tethers responded to each new move in unanticipated ways. It wasn't until the government began treating itself as the market's biggest problem that overall improvement came into view.

Power deregulation

Deregulation of electricity started later than it did for gas in the U.S. but is moving faster. Differences exist between the two processes, especially in the area of stranded costs. In both cases, however, the government role is lapsing into that of referee. For the most part, buyers and sellers of gas and power increasingly make their own decisions about whom to do business with and what prices to charge or pay. The government's exertions aim at ensuring that buyers and sellers have generally equivalent opportunities to do business.

In Europe, energy deregulation has progressed in small steps. The U.K. has done the most, starting with its power industry and lately trying to finish a 10 year effort to deregulate natural gas. The rest of Europe is watching closely.

Like many of its neighbors, the U.K. began with a gas industry dominated by a single state-owned company. In 1986, it privatized its gas holdings and required the resulting monopoly, British Gas, to provide transportation service to anyone who wanted it. Legislation last year set up a licensing system for transporters, shippers, and suppliers. It also imposed a penalty scheme to enforce system balancing and made TransCo, the British Gas subsidiary that owns the gas grid, market-maker of last resort.

More recently, the gas regulator Ofgas has been carping at British Gas about rates, last month ordering TransCo to cut tariffs by 20% next April and by 2.5% in each of the following 4 years. Initially, it wanted the cuts to be as much as 28% the first year and 5%/year afterward. In a parallel development, the U.K. electricity regulator has proposed to cut its assessment of the transmission grid's asset base and slash rates.

For governments on the European continent watching all this in search of insights into deregulation, the instructive observation is that this is not deregulation.

In a deregulated environment, regulators do not substitute their judgments about prices and the worth of assets for values that emerge naturally and more accurately in the interplay of market forces. In a deregulated environment, penalties implicit in commerce guarantee continuity of supply-and regulators allow them to work.

The tentative approach

For its own set of starting conditions, the U.S., too, tried the tentative approach to natural gas deregulation, beginning with the Natural Gas Policy Act of 1978. It didn't work. The U.S. ended up with consumers paying too much for gas, shippers and pipelines negotiating prices too frequently in court or before regulators, and a crushing problem called take-or-pay.

To Europeans contemplating deregulation, all that should sound familiar. It roughly describes present circumstances in the U.K. gas industry. It is the inevitable consequence of partial deregulation, which is still, after all, too much regulation. Whether they take the lesson from the U.S. or learn it on their own, Europeans must come to recognize that deregulation means disengaging governments from markets. The alternative is to founder in the wake of a rapidly deregulating world.