The Regulator’s Review of the English Electricity Pool

Background The Electricity Pool of England and Wales has received constant criticism by the media, from the regulatory body, Offer, and from the House of Commons Trade and Industry Committee since its launch in 1990. The Committee’s report of February 1992 presents many of the criticisms which continued to be levelled at the Pool, and reveals the difficulty the Committee had in deciding whether the complex arrangements and behaviour observed in the Pool were evidence that it either was or was not fulfilling its tasks. Indeed, they noted that the purpose of the Pool had no-where been set out, but they understood its three main functions to be determining the merit order, determining the prices for services traded, and ensuring sufficient capacity to maintain the system security. ‘The Director General found “an element of artificiality about Pool prices which is unsettling for customers and generators alike, and which gives misleading signals to both groups” thereby casting doubt on the Pool's ability to fulfil any of its three functions’ (HC, 1992, §103). In May 1997 a Labour Government was elected, ending 18 years of Conservative rule under which the electricity supply industry had been restructured and privatised. In October 1997, the Minister for Science, Energy and Technology asked the Director General of Electricity Supply (DGES, the regulator) to consider how a review of electricity trading arrangements might be undertaken and to report results by July 1998. Offer’s objectives, approved by the Government, were to consider whether, and if so what, changes in the electricity arrangements will best meet the needs of customers with respect to price, choice, quality and security of supply; enable demand to be met efficiently and economically; enable costs and risks to be reduced and shared efficiently, provide transparency; respond flexibly to changing circumstances; promote competition in electricity markets, facilitating entry and exit from such markets; avoid discrimination against particular energy sources; and be compatible with Government policies (Offer, 1998d, pp83-4). The Pool also set up a Pool Review Steering Group to propose a set of objectives for these trading arrangements. They agreed the overall objective was ‘that trading arrangements should deliver the lowest possible sustainable prices to all customers, for a supply that is reliable in both the short and long run’ (Electricity Pool, 1998). They also