1. Bringing about beneficial change... POLICY DIALOGUE ON CORPORATE GOVERNANCE IN CHINA Presentation by Patricia Leahy, Director, UK National Audit Office February 2004 Privatisation, competition and regulation

2. Bringing about beneficial change... Some potential privatisation benefits Economy Improved budget and debt position More competitive economy Boost to domestic capital markets The business Improved efficiency Increased flexibility to deal with change Greater access to capital markets Other stakeholders Lower prices Improved quality of service

3. Bringing about beneficial change... Achieving maximum benefits Corporatisation alone achieves benefits Privatisation can double the benefits Competition and liberalisation necessary to achieve maximum benefits Regulation needed to allow fair distribution of benefits

4. Bringing about beneficial change... UK experience – competition BT – privatised intact, duopoly policy, now full competition British Gas - privatised intact, now regulated Transco and commercial businesses Electricity – restructured then privatised, initially limited competition, now fully competitive market

5. Bringing about beneficial change... Electricity privatisation in England and Wales Comparison of structure pre and post privatisation 12 Supply Boards CEGB Customers PowerGen Pre privatisation Post privatisation 12 Regional Electricity Companies Pool run by National Grid National Power Nuclear Electric Customers

6. Bringing about beneficial change... Electricity privatisation in England and Wales Pros and Cons of initial privatisation structure New competitive markets created in generation and supply Provision at privatisation for supply competition to be extended gradually to all customers Capacity payments meant considerable security of supply Pool prices kept artificially high

7. Bringing about beneficial change... Electricity privatisation in England and Wales Subsequent market changes 1996 - privatisation of nuclear generation – British Energy 1998-99- domestic customers able to choose their electricity supplier -National Power/PowerGen forced to sell off generation and allowed to buy Supply Companies 2001- new market based arrangements for trading introduced Future -single UK market to be achieved

8. Bringing about beneficial change... Electricity privatisation in England and Wales Current structure of the market More generators (some 40 major ones) More suppliers (some 20 licensed) Vertical and horizontal integration of many utility companies Large transparent wholesale market

9. Bringing about beneficial change... Electricity privatisation in England and Wales Generation (Contracted) Supply Company Transmission Distribution Company Customer Generation (Available ) Distribution Charge Tariff Contract Price Transmission Charges 75%Transmission Charges 25% Un-contracted generation receives no revenue UK Electricity arrangements since 2001 Flow of Electricity Flow of Payments Balancing Market Imbalance Payments

10. Bringing about beneficial change... Economic regulation Only needed if effective competition lacking Crucial that independent of Government General principles - Transparency - Consistency - Predictability - Accountability Regulatory risk

11. Bringing about beneficial change... Privatisation, competition, regulation – impact on stakeholders in the UK Management Shareholders Customers Employees