An economist and energy regulation

An economist and
energy regulation
Pippo Ranci
Professor of economic policy, Università Cattolica, Milano
Director, Florence School of Regulation
Course on Public Regulation and Competition
CEDIPRE, Universidade de Coimbra
28 October 2005
1
An economist and energy regulation
a few personal notes
 a professor of economic policy
 1996-2003: chaired the Italian regulatory
authority for electricity and gas
 a period of intense change in utilities:
liberalisation and privatisation, new regulation
 description of developments, analysis of
reasons, and a report from experience
2
An economist and energy regulation
Three fundamental changes, three
chapters of my story:
1. Incentive-oriented regulation of
monopoly
2. From monopoly to competition:
liberalisation and the role of the
regulator
3. A different public administration
3
1.

Historically, public utilities had no
incentive to be efficient, to increase
productivity
Innovation in the UK, 1983 (the
Littlechild report on telecoms)
The recipe for efficiency:





Incentive-oriented regulation of
monopoly: the origin
Competition wherever possible
Incentive oriented regulation of monopoly,
where inevitable
Adopted universally in the 1990s
4
1.
Incentive-oriented regulation of monopoly:
price caps
a) regulation of prices (tariffs)




A “price cap” set for a number of years
Decreasing at a predetermined rate
If the company reduces costs it makes
profits
If costs stay constant, the company faces
losses
5
1.
Incentive-oriented regulation of monopoly:
how price caps work
25
values
20
tariff
15
costs - no
incentive
costs under
price cap
10
5
0
1
2
3
4
5
6
7
year
6
1.
Incentive-oriented regulation of monopoly:
problems in tariff setting
Tariff setting requires many hard choices:
 Measuring running costs
 Evaluating assets
 Setting a recognised rate of return on
assets
 Setting a rate of productivity increase
 Determining the period of regulation
7
1.
Incentive-oriented regulation of monopoly:
quality regulation
b) regulation of quality



Quality standards (time of connection,
change of contract, repairs, response to
complaints, meter reading, frequency of
billing, treatment of customers)
The tariff corresponds to a minimum level
of quality
Lower quality implies fines or
compensation of customers
8
1.
Incentive-oriented regulation of monopoly
Regulating technical quality of electricity:
continuity of service in Italy (number and
duration of interruptions)
Gruppo Enel - Miglioramenti di continuità obbligatori
300
270
240
Nord
Minuti
210
Centro
180
150
Sud (senza
Sic.Camp.Cal.)
120
90
Sud (solo
Sic.Camp.Cal.)
60
Italia
30
0
1998
1999
2000
2001
2002
2003
2004
Anno
9
1.





Incentive-oriented regulation of
monopoly:
conditions for effectiveness
An incentive-oriented regulation only
works if the utility is a profit-oriented
company
(this may allow privatisation)
Usually, profits increase…
…and consumers benefit
If government does not interfere: the
framework must be stable
10
2.
From monopoly to competition:
liberalisation
The European strategy for energy liberalisation





Electricity directives: 1996, 2003
Gas directives: 1998, 2003
Separate the networks (unbundling)
All other activities are free in a single
European market
Regulation ensures access to the
networks
Applications differ across Europe
11
2.
From monopoly to competition
an unbundled tariff: electricity in Italy
ELETTRICITÀ: ANDAMENTO DELLE COMPONENTI TARIFFARIE
centesimi di euro/kWh
10,59
9,54
10,30
9,85
9,26
9,30
8,91
2,60
0,86
2,56
2,13
1,18
5,55
3,16
4,34
4,10
0,99
0,86
1,00
1,21
4,69
4,75
4,75
gen 2001
gen 2002*
nov 2002
0,35
5,79
mag 1997
5,79
gen 1998
5,79
gen 1999
5,28
gen 2000
* Sino al 2001 il valore medio della componente a copertura dei costi fissi di generazione, trasporto e distribuzione
è calcolato sull'insieme dei clienti liberi e vincolati, mentre dal 2002 è calcolato sui soli clienti vincolati.
componente a copertura del costo del combustibile
componente a copertura dei costi sostenuti nell'interesse generale
componente a copertura dei costi fissi relativi al servizio di generazione, trasmissione e distribuzione
12
2.


From monopoly to competition
market power
Incumbent energy companies
have market power
In a market for a commodity or a
manufactured product a market share of
50% does not necessarily create a
competition problem
In electricity there is no storage: if a
company’s plants are necessary at peak
time, the company can set the price
(residual supply criterion)
13
2.
From monopoly to competition
market power in the UK
(from David Newbery, Cambridge University )
14
2.
From monopoly to competition
market power
How can we create competition in the
electricity market?
 Enlarge the market: remove barriers,
build interconnectors
 Impose a slimming of companies:


Italy’s Enel was forced to sell 30% of its
generating capacity
Impose sales of capacity for a few
years, on fixed price contracts (virtual
power plants)
15
3.




A different public administration:
new institutions
In 1995 a regulatory body existed only
in the UK and in the Nordic countries
Today we have 25 energy regulators in
the Union, linked in an association
(CEER) and in a group (ERGEG)
providing advice to the EC
Regulators in Eastern Europe, in other
continents
Good practices develop
16
3.





A different public administration:
new procedures
Stakeholders consulted openly and
publicly
Decisions preceded by documents for
consultation
Motivations expressed
Decisions can be appealed
The Courts check that decisions are
consistent with mandate
17
3.


A different public administration:
a new frame for policy
A weakening of politics? No
As in the historic case of the central
bank: the advantage of tying one’s
hands



To avoid temptation of abuse
To reduce uncertainty (the regulatory risk)
To maximise the contribution of private
decisions to public goals
18
3.



A different public administration
needed in the 21st century
Essential frame for public policy
A balance of powers and a role for
technical bodies
Reliance on markets, corrected for
imperfections
Parliament and government set goals
and take basic decisions, independent
regulators ensure the working of the
markets
19

Download Report