an economist and energy regulation
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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. An economist and energy regulation. - PowerPoint PPT PresentationTRANSCRIPT
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An economist and energy regulation
Pippo RanciProfessor of economic policy, Università Cattolica, Milano
Director, Florence School of Regulation Course on Public Regulation and Competition
CEDIPRE, Universidade de Coimbra 28 October 2005
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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
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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
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1. Incentive-oriented regulation of monopoly: the origin
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: Competition wherever possible Incentive oriented regulation of monopoly,
where inevitable Adopted universally in the 1990s
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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
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1. Incentive-oriented regulation of monopoly:how price caps work
0
5
10
15
20
25
1 2 3 4 5 6 7
year
va
lue
s
tariff
costs - noincentive
costs underprice cap
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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
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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
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1. Incentive-oriented regulation of monopolyRegulating technical quality of electricity: continuity of service in Italy (number and
duration of interruptions)
Gruppo Enel - Miglioramenti di continuità obbligatori
0
30
60
90
120
150
180
210
240
270
300
1998 1999 2000 2001 2002 2003 2004
Anno
Min
uti
Nord
Centro
Sud (senzaSic.Camp.Cal.)
Sud (soloSic.Camp.Cal.)
Italia
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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
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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
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2. From monopoly to competition an unbundled tariff: electricity in Italy
ELETTRICITÀ: ANDAMENTO DELLE COMPONENTI TARIFFARIEcentesimi di euro/kWh
5,79 5,79 5,795,28
4,69 4,75 4,75
0,86 1,18 0,99
0,86
0,351,00 1,21
2,602,56
2,13 3,16 5,55 4,104,34
mag 1997 gen 1998 gen 1999 gen 2000 gen 2001 gen 2002* nov 2002
* 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
9,269,54
8,919,30
10,59
9,85
10,30
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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)
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2. From monopoly to competition market power in the UK
(from David Newbery, Cambridge University )
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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)
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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
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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
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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
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3. A different public administrationneeded 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