price boom created excess capacity in pipeline networks, ideal conditions for the introduction of competition (IEA, 1994). Various Federal Energy Regulatory Commission orders from 1984 on finally unbundled and restructured the industry to one of third party access that facilitated active competition.

As with the privatisation of BT, Britain was slow to learn the importance of competition for enhancing performance, and thus also slow to realise the importance of restructuring utilities to achieve effective competition. In the case of BT, the legislation had at least envisaged a review of the duopoly in 1991. The Duopoly Review recommended full liberalisation of entry, which duly occurred. By 1995 there were over 150 operators licensed to compete with BT, including 125 cable TV companies who could offer telephony with cable, of which 80 were actually providing service, (Bell, 1995). Rapid entry was followed by substantial consolidation, but cable companies now have more than half the broadband market. The failure to create a more competitive structure at privatisation and the delay in allowing competition led Armstrong, Cowan and Vickers (1994) to the judgement that ‘the duopoly policy has been detrimental to development of competition, and its main beneficiary has been BT itself’ (p.240).

Unfortunately, the American liberalisation experience (in both gas and telecoms) was not exploited when British Gas was privatised as a vertically integrated monopoly in 1986, although Vickers and Yarrow (1988, p267) criticised the failure to introduce competition. Under intense regulatory pressure, supported by the Office of Fair Trading and via references to the Monopolies and Mergers Commission, British Gas was persuaded to first functionally unbundle the competitive services from the natural monopoly networks, and then finally to break up the company into competitive and monopoly parts. The latter, Transco, in turn sold off storage activities and finally merged with the already unbundled electricity National Grid Company, consolidating the regulated energy networks in one company. Even here, regulatory activism has attempted to replace regulated prices by market mechanisms of auctions, first for storage, and then for scarce entry capacity from the beach-head (to which gas is delivered by various oil and gas companies using their own pipelines). Fortunately, by the time the electricity supply industry (ESI) came to be privatised in 1990, the message of restructuring to introduce competition before privatisation had finally been learned.

## Unbundling the competitive services

The new conventional wisdom is that network utilities should be unbundled, with the potentially competitive network services under separate ownership from the natural monopoly network, so that the network owner has no incentive to favour its own service provider. Such vertical separation of network service from the network risks losing economies of scope and hence raising costs. In the case of electricity and gas, these economies of scope appear small compared to the potential efficiency gains, but in the case of telecoms this is less obvious. The operator of a switched network has to create end-to-end connectivity and at the same time calculate the cost of the call in order to bill the customer. The design of switches to route and record such information have natural synergies that would take considerable investment and design to replicate at comparable cost in unbundled form. In those parts of the network where economies of scale are not significant (long-distance, international) facilities-based