Market Abuse License Condition for Generator Companies

The Situation

In 1999, Ofgem (the British energy regulator) proposed a new license condition for eight major generator companies, which was intended to prohibit abuses of the electricity market. Some of the companies felt they had no option but to accept the new "Market Abuse License Condition", but two - AES and British Energy - rejected it. In early 2000, Ofgem referred their licenses to the Competition Commission for review under the Electricity Act 1989.

NERA's Role

Separate NERA teams supported AES and British Energy, before and during the Competition Commission review. NERA personnel helped each company write its submissions and attended key meetings with the Commission. NERA helped to show that Ofgem's proposal was unnecessary (because it replicated competition law) and/or inefficient (because it used a subjective definition of abuse that was likely to stifle competitive behavior). NERA also analyzed the incentives of the companies, to show that the potential for abuse was limited.

The Result

In December 2000, the Competition Commission rejected the proposed license amendment so comprehensively that Ofgem felt obliged to remove it from all generators' licenses. Ofgem later tried to persuade the Department of Trade and Industry to impose a similar condition, but the DTI formally dropped the proposal in December 2001, after consideration of the same arguments.