competition is feasible and now fairly standard, but where there are important natural monopolies (arguably still in the local loop), vertical integration between call delivery, billing and network ownership is still common. Positive steps to overcome the advantages of incumbency are then required (such as number portability and carrier pre-selection).

The attraction of ownership unbundling is two-fold - it allows competition to give companies better incentives to drive down costs, and it also offers the prospect of removing costly regulation. The new wisdom of “competition where feasible, regulation where not” suggests that regulation should be confined to the natural monopoly elements, typically the networks, with network services subject only to competition law. Indeed, in transcribing the EU Electricity Directive 96/92 into national legislation, some Continental countries adopted this approach. Britain followed an earlier and different path. The difficulty of creating credible regulatory structures through primary legislation led the designers to propose licences that would contain the important regulatory details. These licences had the force of contracts, enforceable through the courts. They could only be changed by mutual agreement between the utility and the regulator, or if the regulator found that continuing the existing licence conditions unchanged would be against the public interest (normally at the periodic price control review). The regulator could then propose a licence modification (normally a change in the level of the price cap for the start of the next regulatory period, and/or a change in the X-factor in the RPI-X formula). This could either be accepted or appealed to the Competition Commission – an alternative costly to both utility and regulator, and hence to be avoided if possible.

Licences were clearly central to the British style of price-cap regulation of the network natural monopolies, but were also retained for the potentially competitive network services. Their licence conditions typically contained rules of market behaviour, and provided for information disclosure to the regulator, who was thus able to exercise a market surveillance role. The position now is that, after the New Zealand experience, it is widely accepted that ex ante regulation is required for network natural monopolies, but there is less agreement whether such regulation is required for network services, or under what circumstances and in what form such regulation might be desirable.

## Regulating network services

Regulatory design in Britain, the United States and in the EU has followed quite different routes. In the United States, utilities were already for the most part investor owned and regulated as vertically integrated franchise monopolies, under existing legislation. To take a good example, the Federal Energy Regulatory Commission, FERC, has extensive powers under the 1935 Federal Power Act. Individual States have devolved regulatory powers, but FERC has a statutory obligation to ensure that wholesale prices are “just and reasonable”. This gives FERC considerable powers to intervene if liberalisation fails to deliver satisfactory outcomes. Britain, as already noted, had to design a system of regulation at short notice and evolved a system of licences. Where the industry was liberalised or restructured, the major companies were typically required to hold licences. On the Continent, competitive services were frequently subject only to normal competition legislation. The Single European Act mandated the European Commission to propose policies to bring about a single market in gas, electricity,