A Critique of Light-Handed Regulation: The Case of British Gas February 1999

Carpenter, Paul, Lapuerta, Carlos | January 1, 1999

Although attractive in theory, the implementation of light-handed regulation in the United Kingdom has faced several problems. First, light-handed regulation has not worked as anticipated to avoid the need for lengthy regulatory proceedings. Second, light-handed regulation has unintentionally created inefficient incentives for regulated companies. Third, light-handed regulation has not successfully constrained the monopoly power of incumbents. We illustrate the problems with light-handed regulation principally by reference to the experience of British Gas. The British government established the Office of Gas Regulation, known as Ofgas, to regulate British Gas after its privatization. However, Ofgas was not able to set reasonable prices without instigating lengthy proceedings before the Monopolies and Mergers Commission that examined the costs of British Gas. We analyze a particular dispute over British Gas prices that took over four years to resolve. The desire to avoid “heavy-handed” regulation of British Gas also created inefficient incentives for the pipeline to add new customers. Light-handed regulation further left British Gas the scope to abuse its monopoly position over existing customers. We conclude from the British Gas experience that the United Kingdom’s privatization policy in the 1980s did not adequately anticipate the complexities of regulating private companies with monopoly power. The United States regulatory experience may have seemed quite unattractive when compared to an optimistic vision of light-handed regulation, but appears less so when compared to the difficulties encountered by British regulation in practice. Other countries now establishing regulatory systems will benefit from a careful comparison of international experience, and would do well to avoid the extremes of either heavy-handed or light-handed regulation.