Silviase/jgov_v1.4_full_ann huggingface dataset:
fully deregulated long-distance bus travel (defined as journeys in excess of 30 miles) by abolishing entry barriers arising from licensing requirements and by removing other restrictions on market conduct,

- partially deregulated local bus travel by easing both price and entry restrictions in local bus services, and

- allowed the Minister of Transport to conduct “experiments” in further deregulation of local bus services by dropping the remaining licensing requirements.

On the other hand, the Act retained, and indeed strengthened, regulation of quality in that it required tighter “fitness” standards to be met in terms of the physical conditions of vehicles that were allowed to operate.

The British Telecommunications Act 1981 established British Telecom (BT) as a public corporation separate from the Post Office (with which it had previously been combined) and provided for deregulation in equipment markets, in network operation and in the provision of services. Deregulation was accomplished by:

Abolishing BT's exclusive privilege to supply customer apparatus (although, for a period, BT retained the right to supply a customer's first telephone).

- Establishing independent machinery to set standards and approve equipment, so that BT could not use equipment approval procedures to block entry.

Giving the Secretary of State for Industry powers to license firms other than BT to run telecommunications systems, a power that was quickly used to grant a license (in 1982) to Mercury to compete with BT as a second public telecommunications operator.

- Allowing competition in value-added network services (VANS).

The Oil and Gas (Enterprise) Act 1982 created a new company, Enterprise Oil, earmarked for quick privatization, to take over the offshore oil interests of British Gas (which were peripheral to BG's main business) and provided for the use of British Gas's pipeline and storage network by competing suppliers or by any other persons wishing to transport gas. Access to the network did, however, depend upon obtaining consent from the Secretary of State for Energy, and the Government made it clear that such consent would be denied to anyone seeking to supply in volumes less than 25,000 therms (approximately 733,000 kWh) per annum to persons located less than 25 yards from an existing British Gas pipe. What this meant was that only the market for larger industrial/commercial loads was open to potential competition; supply to households and to smaller industrial or commercial premises remained a British Gas monopoly. Nevertheless, as well as providing for some competition in gas markets, the Act also implicitly ended British Gas's monopsony position in respect of the purchase of natural gas produced from offshore fields in the UK sector of the North Sea.
The Energy Act 1983 sought to encourage competition in the generation and supply of electricity by:

- removing provisions in earlier Acts of Parliament that had (i) prohibited persons other than Electricity Boards from supplying or distributing electricity as a main business and (ii) restricted the establishment and extension of generating stations (i.e. the Act removed statutory barriers to entry and growth),

requiring state-owned electricity corporations to make their transmission and distribution networks available for use by others, and

requiring the state-owned electricity distribution corporations to purchase supplies from private power producers at prices that reflected avoidable costs (i.e. the monies the distributors would save if they ceased buying equivalent supplies from the SOE sector).

#### 6.1.3 Asset sales

In respect of ownership transfers, asset sales in the first policy phase were concentrated on enterprises other than the major monopolies that lay at the heart of the public sector. These sales included Associated British Ports, British Aerospace, Britoil, Cable and Wireless, National Freight, and sales of stock in British Petroleum (already part privately owned). Although some of these firms possessed significant pockets of market power, they were all to some degree exposed to competitive pressures both before and after privatization. In general, therefore, asset transfers were not accompanied by any major regulatory reforms.

The characteristics of these privatizations indicate that a mixture of efficiency and revenue objectives were being pursued at the time, with case-to-case variations in the balance of priorities (in part reflecting the views of the different ministers responsible for handling the flotation). $ ^{1} $ For example, National Freight was a deeply discounted management/worker buyout that raised little revenue for the Government but which fundamentally transformed incentives. On the other hand, the sales of shares in British Petroleum raised substantial amounts of cash for the Government but had very little impact upon how the company operated. More generally, sales of oil companies over the period can be seen largely as representing sales of rights to the oil supplies lying under the North Sea, aimed at helping cover a large fiscal deficit rather than at improving industrial efficiency or deregulating and liberalizing markets.

### 6.2 Phase 2, 1983-87

Sales of enterprises operating in reasonably competitive industries continued in this
second period, including Enterprise Oil, Jaguar (motor cars), the Trustee Savings Bank, British Airways and Rolls Royce. Deregulating measures in advance of privatization also continued, particularly in the transport sector.

The Transport Act 1985 completed the process of deregulation and reform in the bus industry by:

- extending full deregulation to local bus services by abolishing licensing restrictions,

providing for the reorganization of the state-owned National Bus Company into smaller units and for the privatization of those new units,

requiring that the bus operations of Passenger Transport Executives (metropolitan transport authorities) and of local councils be transferred to separate companies (to prevent such authorities biasing local policy decisions in favour of their own operations), and

requiring authorities responsible for public expenditure on subsidized bus services (for example, services in rural areas or transport of the elderly) to invite tenders for the supply of such services on a competitive basis.

The 1984 Government White Paper Airline Competition Policy set out the framework for the UK airline industry in anticipation of the forthcoming privatization of British Airways (BA). It signalled a substantial deregulation of domestic prices and entry conditions, but was nevertheless significantly less radical in its measures to promote domestic competition than had been recommended in a preceding report from the Civil Aviation Authority in the same year. It is therefore possible to see in this White Paper an attenuation of the drive toward greater domestic competition in favour of the pursuit of the conflicting objective of strengthening British Airways (in turn motivated by desires to (i) promote BA in its competition with other leading world airlines and (ii) raise greater revenues from privatization).

The distinguishing feature of phase 2 of the Conservative Government’s economic policy was, however, the first sale of a major utility/network industry, in the form of the flotation of a little over 50% of British Telecom shares in November 1984. This was relatively quickly followed by the (100%) sale of British Gas in December 1986. These two privatizations marked a decisive shift in emphasis in the privatization programme, away from flotations of companies that operated in reasonably competitive markets and toward the sale of the monopolistic heartland of the public sector.

The White Paper setting out the Government's plans for the privatization of British Telecom (published in 1982 at a time when the fiscal position of the Government was still a very difficult one) gave particular emphasis to the financial motive of allowing British Telecom access to capital markets without increasing state borrowings. By late 1984, however, the objective of gaining political advantage by means of selling shares at a discount to expected market value was beginning to be much more in evidence. Thus, an important innovation of the British Telecom
flotation was the extent to which the share issue was targeted at small investors. For the first time successful applicants for shares were numbered in millions, and the offer price was such that first day capital gains amounted to 33% on the full price and 86% on a partly paid basis.

A similar pattern was followed in other privatizations during the second phase of privatization, including British Airways, Rolls Royce, British Gas and the Trustee Savings Bank (see Table 4). In this context it can be noted that, while it is typical for new equity issues to go to a premium on the opening of trading, the mean first-day capital gain on this portfolio of privatization stocks was substantially larger than the market norm.

The privatization of the monopoly supplier of telecommunications services raised, for the first time in the privatization programme, issues of redesigning UK regulatory structures to accommodate the creation of privately owned utilities. The solution favoured was that of establishing new regulatory bodies -- the Office of Telecommunications (Oftel) and the Office of Gas Supply (Ofgas) -- independent of the relevant sponsoring ministries. Their remit is broadly twofold:

to apply price controls to the regulated firms in those economic activities where competition is largely absent (i.e. the classic function of a utility regulator), and

where feasible, to promote competition (i.e. to regulate for competition).

Since the BT privatization, price control in the UK has taken the form of price-cap regulation according to some or other variant of the RPI-X formula. This requires that either the price index of a basket of regulated services or the average revenue from regulated activities increase in any one year by no more than the increase in the retail prices index (RPI) less (or, later, in the cases of water and electricity, plus) some efficiency target (X). For BT X was initially set at 3% on the basis of estimates of the potential for unit cost reductions from scale economies and from technical progress. For British Gas X was set at 2%, although in this case the firm was allowed to pass through into final prices any increases in its gas purchase costs -- denoted Y, so that the formula became RPI-X+Y -- on grounds that these costs were determined by long-term contracts and were therefore largely beyond the control of the firm in the short- to medium-term.
Table 4. Pricing of shares (values in £).

Company	Gross proceeds	Offer price	First instalment price	Opening	% gain	Value of gain
BT	3,900m	1.30	0.50	0.93	86%	1,290m
Trustee Savings Bank	1,360m	1.00	0.50	0.85	70%	476m
British Gas	5,600m	1.35	0.50	0.625	25%	518m
British Airways	900m	1.25	0.65	1.09	68%	317m
Rolls Royce	1,360m	1.70	0.85	1.47	73%	496m
British Airports	920m	2.45	1.00	1.46	46%	172m

Source: Financial Times.
The initial RPI-X(+Y) formulae for BT and BG were set for a period of five years, at the end of which regulatory reviews occurred which reset the formulae (see section 6.3 below). This inbuilt “regulatory lag” was considered a key factor in the incentive structure being created, since it allowed the regulated company to benefit directly from any cost efficiencies it could achieve within that period (i.e. the benefits of cost reductions would not be taken away immediately by downward price adjustments). Under existing legislation, the Director General of the relevant regulatory body makes the decision as to what the new price control formula will be. If the regulated company accepts the decision, the necessary licence amendments are made and the new price control comes into effect. If the firm does not accept the decision, the matter is referred to the Monopolies and Mergers Commission (MMC), which serves as an appeals mechanism in these cases. $ ^{2} $

In adopting price-cap regulation based on the application of RPI-X formulae for periods of several years, UK policy makers were very much concerned to avoid some of the perceived pitfalls of US-style cost-of-service (or rate-of-return) regulation. In particular, the weak incentives for cost reduction of a cost-of-service approach were considered a particularly negative feature of that approach. It was believed that newly privatized utilities were likely to be highly cost-inefficient as a consequence of their earlier subjection to political interventions, and hence that strong incentives to reduce costs would yield substantial performance improvements. What quickly became clear, however, was that RPI-X regulation has incentive problems of its own, including, for example, a tendency to give regulated firms incentives to degrade the quality of their products and services. It also had potentially negative implications for incentives to invest: in the absence of any explicit guarantees that shareholder investment would be adequately remunerated in the future, the discretionary powers available to regulators clearly give rise to problems of policy credibility.

The second type of duty assigned to the new regulatory agencies, the promotion of competition, represented a radical departure from previous approaches to the industries concerned in that it (i) envisaged a much larger role for competition than was earlier thought efficient and (ii) entrusted regulatory agencies with the task of actively using their powers to promote competition. That is, rather than seeing regulation as a substitute for competition (the traditional approach), the new perspective was that regulation could itself be a means of achieving more competitive outcomes.

The first practical examples of regulation for competition occurred naturally enough in telecoms, the first industry to be privatized and subject to a new regulatory regime. Mercury was deliberately assisted, first by the Government and then by Oftel, with the aim of developing the company into a major competitor for BT. The Mercury case showed, however, the ambiguities in the “promotion of competition” objective. The Government decided that, for an initial period,
competition. In England and Wales the monopoly generation and transmission enterprise, the Central Electricity Generating Board (CEGB), was split into four parts: two non-nuclear generating companies, one nuclear generating company which remained in state ownership, and a transmission company that was transferred to the joint ownership of the twelve soon-to-be-privatized regional distribution companies. While there remained a number of significant limitations on competition associated with this structure and with the associated regulatory regime, by international standards the measures taken in respect of electricity supply were the most radical of the whole privatization programme up to that time.

In Scotland the pre-privatization restructuring of the industry was less dramatic. As in England and Wales, nuclear assets were separated out into a new SOE, Scottish Nuclear. The rest of the industry was then sold in the form of two vertically integrated regional companies which were the natural successors to the two regionally-based SOEs of the earlier period. Among other things, the policy approach in Scotland reflected the Government's view that the prospects for greater competition were rather bleaker than in England and Wales. Factors contributing to this perception included the smaller size of the market $ ^{3} $ , the greater importance of hydro power, the much greater importance of nuclear power, and the existence of substantial excess capacity.

In respect of more general developments in regulation, the period 1987-92 saw a number of highly significant events. The first reviews of RPI-X led to the imposition of much tighter price caps, with X rising from 3% to 4.5% in telecoms and from 2% to 5% in gas. These reviews also marked an important transition for the industries concerned: from these first reviews onwards the prices of the utilities have been constrained by the new regulatory agencies rather than by sponsoring ministries (which were responsible for the setting of the first price-caps immediately prior to the flotations).

Quality of service issues also began to become more prominent in debates about the performance and control of utilities (in telecoms and energy as well as in water, where water quality and general environmental issues were central from the outset). Recognising the weaknesses of the simple RPI-X approach, regulators tended to become more active in monitoring quality of service, although their powers to act varied from industry to industry as a consequence of differences among the various pieces of legislation. This latter problem was remedied in 1992 by the passage of legislation which gave all the new regulatory bodies powers to set and monitor quality of service. As a consequence of these developments, much of the simplicity of the original regulatory approach was necessarily lost, and there was a trend over the period towards more intrusive regulation. Widespread deregulation therefore remained a future potentiality rather than a current reality.

There were nevertheless, significant steps toward deregulation and liberalization in a
number of specific areas. The introduction of competition into electricity generation and into the supply of electricity to large industrial and commercial customers, together with the absence of price-controls on these activities, represented a very major change, as did the abandonment of the duopoly policy and the move to permissive licensing in telecoms. In gas, both the Monopolies and Mergers Commission and the Office of Fair Trading were active in trying to correct some of the earlier defects of the privatization legislation which had left British Gas with a very high degree of market power. In particular, a number of measures were implemented which had the effect of reducing barriers to entry into gas supply, for example by (i) clarifying the access conditions for use of BG's pipelines and storage system, (ii) impeding predatory behaviour by BG and (iii) enabling potential entrants to gain access to supplies of gas from the North Sea. In all three of the industries the result has been that new competitors have been willing to enter the industries and levels of concentration have fallen.

### 6.4 Phase 4, 1992-

By 1992 much of the momentum had gone out of the privatization programme. Mrs. Thatcher had been replaced by Mr. Major as leader of the Conservative Party and, following the general election of 1992, the Government had a much reduced parliamentary majority. Most of the SOE sector had already been privatized and the enterprises that remained in the public sector were naturally those for which ownership transfer had been regarded as particularly difficult in earlier periods.

The changed political circumstances are reflected in the Government's failure to carry through plans to privatize the Post Office. Despite the enthusiastic support of the Secretary of State for Trade and Industry, opposition from within the ranks of Conservative members of parliament made it impossible for the Government to find sufficient political support for its proposals. The chief concern of the opposition was the potential impact of privatization on the future existence of thousands of small post offices in rural areas.

The Government did manage to privatize British Coal in 1994, although by that date the company was only a fraction of its size in 1979 (see Table 5). Following the defeat of a year long miners' strike in 1984/5 there had been very widespread closures of higher-cost coal mines. Electricity privatization subsequently led to further substantial contraction in the size of the industry as (i) nuclear electricity increased its market share and (ii) gas replaced coal as the preferred fuel input in new thermal stations.
Table 5. The decline of British Coal

1979/80	1986/87	1993/94
Output (million tonnes)	108.6	87.1	42.5
Number of employees (000s)	232.5	125.4	19.4
Number of mines operating	219	110	19

More significant is the privatization of British Rail. Following the precedent set in electricity, the rail industry has been substantially restructured in preparation for transfer to the private sector. In particular, the rail infrastructure (rails, signals, etc.) has been separated out and the assets assigned to a new company, Railtrack. The plan is that train operating companies will be able to bid (competitively) for franchises to operate particular passenger routes and services, using Railtrack's infrastructure. In addition there will be limited access to the infrastructure for non-franchised operators.

A new regulatory office (the Office of the Rail Regulator) has been established which will operate in a manner similar to Oftel, Ofgas, Ofwat and Offer. In particular it will regulate the charges paid by train operating companies for use of Railtrack's infrastructure. A novelty of the approach is, however, the creation of a second and separate agency which will be concerned with the allocation of franchises. One issue here is the problem that many routes and services are loss making. Thus, as in the case of certain local bus services, the competition for franchises will, in some cases, take the form of companies bidding for subsidies to operate the designated services.

The details of the rail privatization are extremely complex, and there is considerable opposition to the Government's plans in both parliament and outside. It remains to be seen, therefore, whether it will be possible for the Government to complete most of the privatization by the time of the next general election (due by Spring 1997 at the latest).

There are likewise doubts about the other, substantial SOE privatization still on the policy agenda, nuclear electricity. It was originally intended that nuclear power stations be sold along with the rest of the electricity supply industry in 1990/1, but the potential liabilities surrounding nuclear power proved too much for the capital market to handle at the time. The Government has since revisited the nuclear issue and intends to privatize the newer nuclear power stations, which are responsible for the bulk of nuclear output, whilst retaining the older stations, for which the liabilities issue is more difficult, in the public sector for closure and decommissioning.

While the programme of privatizing SOEs clearly slowed down in phase 4, developments in regulatory policy continued apace and this whole policy area has tended to become more controversial politically. That is, the balance of policy has shifted decisively from a focus on