Review of Industrial Organization 15: 135–147, 1999.
© 1999 Kluwer Academic Publishers. Printed in the Netherlands.
Regulation and the Development of Competition in
the U.K. Gas Supply Industry
Aberdeen Business School, The Robert Gordon University, Garthdee Road, Aberdeen AB10 7QA,
Abstract. When the U.K. gas supply industry was privatised, it retained its monopoly vertically
integrated structure. We discuss the forces which led to the deregulation of the U.K. gas supply
industry. Important factors in the process include a number of critical reports by the regulatory
authorities, the growth of alternative gas supplies including the development of the spot-market,
and the success of independents in gaining market share in markets opened up to competition. We
also present surveys of gas users and independent gas suppliers and ﬁnd that price advantage has
been the critical factor in the increase in market share gained by the independent gas suppliers.
Key words: Regulation, competition, gas supply.
JEL Citation Index: L12, L22, L43, L95.
Privatisation has been a central part of U.K. government economic policy since
the mid-1980s. One consequence of this, as in the case of the privatisation of
British Gas in 1986, has been the substitution of private monopolies for public
monopolies. At privatisation, British Gas consisted of two distinct elements. First,
the natural monopoly part which involved the ownership of the national pipe net-
work for which direct competition was not a realistic option. Second, the parts of
the business for which competition was possible, for example gas purchase or gas
supply to the ﬁnal consumer.
The industry was privatised as a vertically integrated structure which allowed
limited competition in gas supply market. The chosen structure therefore created
signiﬁcant barriers to entry and helped to stiﬂe competition in the post-privatisation
period. This article examines the forces which led to the deregulation of the gas
supply market and ﬁnds that a combination of actions by the regulatory authorities
and market forces combined to provide the necessary changes.
The author gratefully acknowledges the helpful comments and suggestions made by Prof. H. W.
de Jong on an earlier draft of the article.