DISTORTIONS IN ELECTRICITY PRICING IN THE U.K.
| Date | 01 November 1983 |
| DOI | http://doi.org/10.1111/j.1468-0084.1983.mp45004001.x |
| Author | M. D. E. Slater,G. K. Yarrow |
| Published date | 01 November 1983 |
OXFORD BULLETIN
of
ECONOMICS and STATISTICS
DISTORTIONS IN ELECTRICITY PRICING IN
THE U.K.
M. D. E. Sla ter and G. K. Yarrow
'The Bulk Supply Tariff is intended to reflect long-run marginal
costs; but we believe that the way this principle is being applied
creates the danger that the basis of the BST may become arbitrary.'
Monopolies and Mergers Commission,
Report on the Central Electricity Generating Board
(1981), p. 285.
I. INTRODUCTION
In recent years there has been considerable controversy in the UK
about electricity prices (and energy prices in general). The average level
of prices has exhibited some sharp increases relative to the RPI over
the past decade, partly because of higher input prices following the oil
shocks of the 1 970's, and partly because of the more severe financial
targets imposed by the government after the White Paper of 1978.
There has also been concern about the distribution of the burden of
these higher prices amongst different classes of consumer. Industrial
interests have complained bitterly that the price structure discriminates
against them, and that electricity prices to their competitors in Europe
are substantially lower. The National Economic Development Office
set up a Task Force to investigate this matter, and their report (NEDO,
1981) gave qualified support to this complaint. Equally, pressure groups
acting on behalf of various domestic consumers, particularly the old,
have argued for more favourable treatment.
The centrepiece of electricity pricing in England and Wales1 is the
Bulk Supply Tariff (BST) of the Central Electricity Generating Board
(CEGB). The nationalized electricity industry is organized in a two-tier
Electricity supply in Scotland and Northern Ireland is organized separately.
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318 BULLETIN
fashion, with the CEGB responsible for all generation and bulk distri-
buion and 1 2 Area Electricity Boards responsible for ultimate distribu-
tion to consumers. The CEGB sells almost all2 its electricity in bulk to
these Area Boards at prices determined by the BST, and the Area
Boards then decide on their own price schedules to final consumers.
Consequently the actual prices faced by final consumers in different
parts of the country are not in fact determined by one internally con-
sistent pricing plan (this being in itself a possible source of inefficiency).
The aim of the BST, however, is to influence the final price schedules
by presenting the Area Boards with the true opportunity costs of
demands at different times.
The CEGB maintains that the BST is a long-run marginal cost (LRMC)
pricing system. It was set up in its present form in the 1960's, largely
under the influence of Ralph Turvey when he was Chief Economist at
the Electricity Council. The system is complex, and is not easy for
outsiders to comprehend. In all the recent controversies about pricing
the electricity industry has tended to take the view that 'the BST does
not lie' - that electricity prices, as calculated by the BST, correctly
reflect long-run marginal costs, and if the results are unpalatable to
certain interests that is just unfortunate. This uncomprising position
has not, however, done much to explain to the various groups of dis-
gruntled consumers the anomalies that they allegedly find in the
system, and the result has been a serious discrediting in the eyes of
many of the whole philosophy of marginal cost pricing. This is seen
in its most extreme form in the Second Report of the House of
Commons Select Committee on Energy (1981), where the MPs argue
very strongly, and in a hopelessly confused fashion, for the replacement
of marginal-cost by average-cost concepts in energy pricing.
Pressure of events has brought a certain amount of outside investiga-
tion to bear on the CEGB. The Monopolies and Mergers Commission, in
the course of their general inquiries, briefly considered the operation of
the BST. They put their finger correctly on the weak spots (MMC, Ch.
4 and Appendix 12) but their recommendations were not delivered
wih sufficient force. Subsequently the Secretary of State for Energy
commissioned a report by outside consultants on the CEGB's pricing
policies. This unpublished report presumably convinced The Secretary
of State that nothing was seriously amiss, since only minor changes
were made to the BST for 1982-83. According to the government,
therefore, all is well after all.
In this paper we argue that the truth is somewhat different. We con-
tend that, despite the CEGB's claims, the way in which the BST is
2A very small number of users are entitled to buy electricity direct from the CEGB. They
include the UK Atomic Energy Authority, British Nuclear Fuels, British Rail, London Trans-
port, and Anglesey Aluminium Metal.
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