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 A Briefing Paper: 'Ownership Changes and Downstream Investment by UK Gas Companies 1985-2005.' In two recent documents published by the European Commission and the European Regulators Group for Electricity and Gas, it is stressed that: 'Investment on a huge scale will be required in the coming decade to upgrade and reinforce networks', that 'Creating a stable and attractive environment for investment must be a priority of future action at EU level,' and that 'the objective will be to ensure …that sufficient incentives are in place for Transmission System Operators (TSOs) to provide adequate capacity, notably through new infrastructure'. However the same documents assert that, 'Economic evidence shows that ownership unbundling is the most effective means to … encourage investment.' SERIS has tested this assertion against the evidence provided by the UK experience of gas market liberalisation where ownership unbundling commenced in 1997 with the separation of Centrica (gas supply) from BG Transco, (gas transmission and distribution). Using a 20 year period (1985-2005) we have periodised the investment data into three periods: [1] Public Ownership, (1985-1986), [2] Integrated and Internally Unbundled privatised gas company (1987-1996) - with 'internal unbundling' during the last three years - and [3] Unbundled Ownership (1997-2005). Our findings are that in period [1] the Annual Average Total Investment Expenditure in Real Terms (£m at constant 2000 prices) was £1,315 million; in period [2] it was £1,126 million, and in period [3] it was £809 million. In SERIS's view these findings cast serious doubt upon the Commission's assertion that full ownership unbundling will 'encourage investment'. The link below opens the full briefing paper as a PDF document. 
The advantages of full ownership unbundling in gas transportation and supply: how the European Commission got it wrong about the UK The European Commission is now pushing ahead strongly with its plans for the full Liberalisation of gas markets in Continental Europe. Arguing that integrated European gas companies should be split up into separately owned gas transportation and gas supply companies as in the UK, the EC claims that "The UK market experience of full ownership unbundling suggests that it significantly changes the behaviour of the transport undertaking: a fully unbundled Transportation System Operator (TSO) will focus on optimizing the use of its network." However SERIS finds that: – Full ownership unbundling of British Gas which involved (a) the demerger of the previously internally unbundled supply function into Centrica plc in 1997, and (b) the demerger of transportation into the Lattice Group in 2000, was not driven by the objective of 'optimizing the use of the network' but by purely commercial considerations. With respect to the possibility that full ownership unbundling in the UK (driven by purely commercial considerations) coincidentally resulted in 'optimization of the network’, we identify five possible indicators of ‘network optimization'. With respect to three of these indicators (degree of capacity utilization, access arrangements and gas balancing) we find no observable relationship between ownership unbundling and 'optimization'. The improvements which did occur in these indicators were entirely due to other factors - the mandatory release of gas previously controlled by British Gas, the introduction of the Network Code, and regulatory intervention, none of which had anything to do with ownership unbundling. In the case of the remaining two indicators (suppliers’ transportation costs and adequate levels of capital investment), there is some evidence to suggest that these actually deteriorated following the ownership changes. The empirical evidence of full ownership unbundling in the UK does not support any assertion that gas network ownership unbundling 'significantly changes the behaviour of the transport undertaking' or that 'a fully unbundled TSO will focus on optimizing the use of its network.' The link below opens the full briefing paper as a PDF document. 
This is SERIS's response to OFGEM's critique of our briefing paper: 
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