industries. To what extent will this be allowed in light of the potential good effects in the market for corporate control versus national concern about foreign ownership?

2. It is not clear whether the limitations on privatization and competition process are political perceptions or underlying realities such as the case of technical risks or public goods aspects. i) In the case of nuclear assets, the stakes for failure are quite high, so my own personal view is that nuclear assets can't be privatized. On the other hand, whether hydro assets should be privatized is just a matter of perception. ii) In the case of maintaining unprofitable services because uniform rates are politically desired in spite of large geographical variation in cost, bidding for subsidies is an interesting regulatory approach, but there is a political perception of just how far you want to go in the cost-de-averaging process. iii) The third case of the limitations is that the regulator is at a serious information disadvantage.

3. Vertical ties among fuel industries and electricity can inhibit competition. Privatization may be viewed as a way to decrease the economic power of a strong vertically tied fuel industry, such as coal and gas industries tied with electricity. But the British Coal case was only feasible because there was a substitute available in the form of natural gas. In Japan the fuel issues are extremely sensitive because Japan imports virtually all of its fuel for electricity. Whether this particular endowment issue is going to limit the potential for competition in Japan is an interesting question.

4. There has been a little discussion about the relationship between electric distribution and telecoms. There is some potential complementary. It is very difficult to set up a regulatory system to deal with these interindustry issues.

## MARSHALL:

1. There was little liberalization of the market on privatization. In case of British Gas, at the initial stage there was very little attempt to liberalize the gas industry. The statutory monopoly of supply was removed but none of the economic barriers were removed, so there was no entry. From 1986 until really this year the regulator constantly tried to get effective pro-competitive regulation into the market, and many restrictions were placed on British Gas to try to counterbalance its incumbent power. However, eventually the industry has been substantially restructured, and the distribution network of pipes has been entirely separated from the supply of gas to customers. The industrial and commercial market for gas is now very competitive and essentially free of regulation. A very similar story can be told in relation to electricity generation, where the coal and oil-fired power stations were a duopoly. The decision was taken in 1994 to require the two generators to divest themselves of about six large generating stations in two years, and in the meantime the prices were controlled. Generation, which was not regulated at privatization, was thus deregulated, but that deregulation really stemmed from the initial flawed privatization.

2. In terms of regulating the natural monopolies, RPI-X regulation has been used.