concerned about the ability of certain generators to influence the price setting mechanism (Ofgem, 1999).

In October 1999 Ofgem concluded that a Market Abuse Licence Condition (MALC), better known as the “good behaviour condition”, needed to be introduced into the licenses of the seven generators most likely to have market power. This provided that “The Licensee shall not engage in conduct, whether alone or with one or more other undertakings, which amounts to an abuse of a position of substantial market power in the determination of wholesale prices for electricity under the relevant trading arrangements.” Possible examples of such abuse would be price bidding strategies, capacity withholding, manipulation of complex market rules and using the influence of contractual positions.

To minimise regulatory uncertainty about the operation of the condition, Ofgem issued Guidelines about its interpretation. These provided that a Licensee will be regarded as having a position of substantial market power if it has the ability to bring about, independently of any changes in market demand or cost conditions, a substantial change (over £30 million) in wholesale electricity prices. Substantial changes in price might refer to a few very large effects or a series of lesser ones. For example, it would include a change of 5 per cent for more than 30 days (1440 half hours), or 15 per cent over 10 days (480 half hours) or 45 per cent over 160 half hours (3 1/3 days), all within a one year period (Ofgem, 2000a). It is worth noting that the required increase in prices would amount to about one-third of one per cent of turnover in the wholesale electricity market.

After a lengthy discussion process lasting until April 2000, five generators consented to the condition: Magnox Electric, TXU Europe (formerly Eastern, the purchaser of the 1996 divested coal-fired plant), Edison Mission Energy, National Power/Innogy and PowerGen. Two generators (AES and British Energy) did not consent, and Ofgem referred them to the Competition Commission in May. Ofgem argued that other possible remedies and developments (further divestment or revised generation market structure, modification of Pool and NETA rules, the introduction of NETA itself, the Competition Act 1998 and Financial Services Regulation) would not suffice to prevent such abuse. This was because of the specific conditions of electricity: the need to match demand and supply instantaneously, the non-storability of electricity and the limited demand side response.

Shortly afterwards, Ofgem carried out its first investigation under the market abuse condition, in the licence of Edison First Power (Ofgem, 2000b). The company had withdrawn 480MW of capacity from the system. Ofgem concluded that the company had substantial market power, which it had exploited to the detriment of consumers. Specifically, the continued withdrawal of capacity was not justified on the basis of avoiding losses, and had materially increased prices in the Pool and the forwards markets. This was to the detriment of over 200 large customers purchasing electricity on Pool-related terms, and other respondents were harmed by the increase in Pool Uplift. Because the company announced that it would return the capacity to the system, Ofgem took no further action.

The Competition Commission published its decision in December 2000 and rejected Ofgem’s requirement that AES and British Energy’s licences be modified to include the MALC (CC, 2001). The Competition Commission was critical of Ofgem, noting that it did