UK's OFFER proposes to separate the distribution and supply businesses

New proposals, which would separate the distribution and supply businesses of Britain's 14 Public Electricity Suppliers (PESs) to make the electricity market more competitive and protect customers, were published by OFFER. The document also proposes new arrangements for metering and meter reading.

OFFER says the present integration of distribution and supply is likely to protect dominant suppliers to the disadvantage of customers and competitors. With the close interactions between the competitive electricity and gas markets, it could also distort competition in gas supply and inhibit the convergence of gas and electricity.
OFFER outlines five main concerns about integrated supply and distribution business within a PES:
- PESs may operate the supply and distribution businesses to maximise benefits to the company in a way that disadvantages competing suppliers.
-The PES supply business may have access to information about competitors as a result of their use of the distribution service, which is not available to other suppliers.
- Ownership of supply and distribution business gives PESs the opportunity to cross-subsidise by allocating costs to the distribution business which more properly should be met by supply.
- The present integration of distribution and supply may deter customers from switching to a new supplier. Customers may be misled to believe that switching supplier might lead to a poorer response from the distribution business during a power cut.
- The present metering and meter reading monopoly held by distribution companies is likely to reduce incentives for innovation and efficiency gains. Retention of the monopoly is also likely to distort the development of competition in metering and meter reading in gas.

Callum McCarthy, Director General of Electricity and Gas Supply, said: "It has long been recognised that ownership of distribution and the supply side of a utility is an impediment to competition. In the gas market, the Monopolies and Mergers Commission found that British Gas' operation of the pipeline system and the supply of gas was against the public interest. As a result of separation in the gas industry, Transco, the pipeline company is now a separate regulated company, transporting gas for a large number of gas shippers, and without gas supply responsibilities.
"We now wish to bring the same clarity of responsibility and business purpose to distribution and supply of electricity. Many companies are already recognising the separate characteristics of these two businesses, and organising their affairs accordingly. OFFER is now setting out the clear regulatory framework which both competition and business pressure need."
1. This document follows initial proposals by OFFER published in November 1998, and reviews the responses and sets out conclusions on the issues raised. As well as guiding the next stages of work on separation and metering, these conclusions will help form the basis for further work on the PES distribution price control, the transmission controls in Scotland and the supply price restraints.
2. The present Electricity Act does not distinguish clearly between distribution and supply or provide a separate licensing regime for distribution. The Government has indicated that it intends to legislate, as soon as Parliamentary time allows, to introduce separate licensing of distribution and supply. This will clarify the responsibilities of the two functions and allow separate ownership of supply and distribution.