not define the relevant market and did not demonstrate that it would be profitable for either company to attempt to exercise market power by withdrawing capacity. AES had a long-term contract with TXU that made reducing output unprofitable, while 90 per cent of British Energy’s potential output came from inflexible base-load nuclear power plant. The Competition Commission considered that a condition prohibiting abuse of market power “would cause uncertainty, because of the difficulty of distinguishing between abusive and acceptable conduct, and would risk deterring normal competitive behaviour.” (CC 2001, 1.12). “We are mindful of the disadvantages of a broad, effects-based prohibition … such a prohibition would not be suitable for dealing with manipulation of market rules.” (para 1.18). “We see manipulation of the market as conduct for which a sufficient remedy would in principle be the modification of the market rules or mechanisms.” (para 1.13).

## Assessment of regulatory policy in electricity

There is no doubt that a specialist energy regulatory authority is valuable in dealing with the natural monopoly networks, as the new EU Energy Directive recognises. The issue is whether generation and supply should also be regulated or whether normal competition law is adequate. The AES and British Energy case is instructive. The case required a time extension as the Competition Commission found it very difficult to understand the complexities of the wholesale electricity market, even though Ofgem supplied a large amount of explanatory material. Electricity market surveillance is a critical element in ensuring that market participants do not abuse positions of collective dominance, and such surveillance requires timely information that is commercially sensitive and not normally made available without a licence (or grid code) condition making it a condition of operation. Market surveillance needs to be a continuing activity if market participants are to be assured of non-abusive behaviour, and it needs to be analytically well-founded if market rules found wanting are to be improved.

All this suggests that the energy regulatory authority should take on the task of market surveillance, and should be adequately empowered to monitor the relevant markets, and make rule changes. Competition authorities are likely to be far less well-equipped to do this, and will be far slower to act. The Californian electricity industry went from crisis to bankruptcy in the space of a few weeks, and the state made expensive and irresponsible decisions in the resulting panic. Whether regulators need additional powers in addition to being able to make rule changes will depend on market circumstances. Britain suggests that the ability to impose conditions (price caps, cost-based contracting or even cost-based bidding) might be a useful lever to achieve market restructuring, although in the hands of a less trusted regulator might discourage private investment in generation, which might be far worse than accepting some market abuse.

## Conclusions

Post-modern utilities like telecoms, in which facilities-based competition is possible, lend themselves to the approach laid out in the EU Telecommunications Directives. Regulators must first conduct market reviews to determine whether markets are effectively competitive