regulation and competition policy in the electricity market: economic ...

REGULATION AND COMPETITION POLICY
IN THE ELECTRICITY MARKET:
ECONOMIC ANALYSIS AND GERMAN EXPERIENCE
GERT BRUNEKREEFT
Univ. Habil. April 2002
Institut für Verkehrswissenschaft und Regionalpolitik
Albert-Ludwigs-Universität Freiburg
Freiburg i.Br.
Germany
Chapter:-
Title: Contents
Forthcoming: Nomos, Baden-Baden, 2003
Corresponding address:
Gert Brunekreeft
Department of Applied Economics
University of Cambridge
Sidgwick Avenue
CB3 9DE Cambridge
UK
Tel. (0044)-(0)1223-335473
Fax. (0044)-(0)1223-335299
Email. g.brunekreeft@econ.cam.ac.uk

CONTENTS
ACKNOWLEDGEMENTS 5
CONTENTS 7
LIST OF ABBREVIATIONS 11
1 INTRODUCTION AND PRELIMINARIES 13
1.1 THE PROBLEM OF THE ELECTRICITY SUPPLY INDUSTRY IN GERMANY 13
1.2 VERTICAL STRUCTURE AND NON-DISCRIMINATORY THIRD-PARTY ACCESS 16
1.2.1 Deregulation, restructuring and privatisation 17
1.2.2 Vertically disaggregated network industries 20
1.3 REGULATORY INTERVENTIONS 23
1.3.1 Minimal and disaggregated regulation 23
1.3.2 Issues on regulatory institutions 25
1.4 OUTLINE OF THE BOOK 27
2 THE ELECTRICITY SUPPLY INDUSTRY 29
2.1 INTRODUCTION 29
2.2 VERTICAL STAGES IN THE ESI 30
2.2.1 Generation 30
2.2.2 Transmission 32
2.2.3 Distribution 32
2.2.4 Retail 33
2.3 THE INSTITUTIONAL APPROACH 34
2.3.1 Free entry and end-user eligibility 35
2.3.2 The approach to the vertical industry structure 36
2.3.3 Third-party access and regulation of the access charges 39
2.3.4 The basics of other issues 43
2.4 CONCLUDING REMARKS 47
3 THIRD-PARTY DISCRIMINATION IN POWER MARKETS 49
3.1 INTRODUCTION 49
3.2 ASPECTS OF AN ELECTRICAL SYSTEM 50
3.3 CORE ISSUES 52
3.3.1 Imbalances 52
3.3.2 Load profiles 55
3.3.3 Quality-of-supply 58
3.4 FRINGE ISSUES 60
3.4.1 Refusal to provide TPA 60
3.4.2 Switching costs 63
3.5 CONCLUDING REMARKS 66
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4 PRICE-CAP REGULATION 69
4.1 INTRODUCTION 69
4.2 PRICE CAPPING: THE TARIFF BASKET VERSUS THE AVERAGE REVENUE CAP 72
4.3 STRIKING A BALANCE: THE VALUE OF X 79
4.3.1 Setting X 79
4.3.2 Determining X 81
4.4 A SELECTION OF OTHER ISSUES 82
4.4.1 Price structure 83
4.4.2 Investment, quality-of-supply and innovation 86
4.5 CONCLUDING REMARKS 87
5 THIRD-PARTY DISCRIMINATION AND THE REGULATION OF THE
ACCESS CHARGES: THE INCENTIVES 89
5.1 INTRODUCTION 89
5.2 THE LITERATURE 89
5.2.1 The Chicago-benchmark 89
5.2.2 Relative efficiency 90
5.2.3 Imperfect competition 92
5.2.4 Price discrimination 93
5.2.5 Regulation of the access charge 94
5.3 THE SETTING 96
5.4 RESULTS 100
5.5 THE SWITCHING LEVEL 104
5.6 CONCLUDING REMARKS 106
5.7 APPENDIX 108
6 REGULATION IN VERTICALLY RELATED MARKETS 111
6.1 INTRODUCTION 111
6.2 SOCIAL-WELFARE MAXIMISATION 112
6.2.1 The disaggregated approach - regulating r and z 112
6.2.2 Reflections on the exceptional case of z > 0: "inefficient entry" 117
6.2.3 Some further remarks on the global price cap 119
6.3 THE STIGLER-PELTZMAN APPROACH 121
6.4 CONCLUDING REMARKS 125
7 THE UNITED KINGDOM: DESIGNING THE STRUCTURE 127
7.1 INTRODUCTION 127
7.2 THE SECTOR 128
7.2.1 Generation 128
7.2.2 Distribution and retail 129
7.2.3 Trading: The Pool 130
7.2.4 Regulation 133
7.3 STRUCTURAL INTERVENTION AND COMPETITIVENESS 135
7.3.1 Developments 135
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7.3.2 The market abuse licence condition (MALC) 137
7.3.3 From Pool to NETA 140
7.3.4 Vertical separation of retail and distribution 143
7.4 CONCLUDING REMARKS 145
8 THE NETHERLANDS: PRICE-CAP REGULATION 147
8.1 INTRODUCTION 147
8.2 THE SECTOR 148
8.3 THE LEGISLATIVE FRAME 150
8.3.1 Historical overview 150
8.3.2 The Electricity Act 1998 152
8.3.3 Price caps: The consultation documents 154
8.4 PRICE-CAP REGULATION 157
8.4.1 Data Envelopment Analysis (DEA) 157
8.4.2 The distribution networks 159
8.4.3 The transmission network - TenneT 161
8.4.4 Retail charges for captive customers 164
8.5 CONCLUDING REMARKS 166
9 REGULATORY THREAT IN VERTICALLY RELATED MARKETS 169
9.1 INTRODUCTION 169
9.2 PRELIMINARIES 171
9.2.1 The incentives to use r and z in the unregulated case 172
9.2.2 The legislator's decision 173
9.3 REGULATORY THREAT 175
9.3.1 The global threat 176
9.3.2 The free-rider problem 178
9.3.3 Regulatory threat can induce the incentives to discriminate 180
9.4 CONCLUDING REMARKS 182
9.5 APPENDIX: THE SECOND-ORDER CONDITIONS 183
10 REGULATORY THREAT IN NEW ZEALAND 185
10.1 INTRODUCTION 185
10.2 THE SECTOR 186
10.3 THE LEGISLATIVE FRAME 188
10.3.1 Light-handed regulation and the Commerce Act 1986 188
10.3.2 Developments of the Electricity Act 191
10.4 REGULATORY THREAT 195
10.4.1 Developments 195
10.4.2 Threat of price control in the Electricity Industry Reform Act 1998 197
10.4.3 Further increase of the threat of price control 201
10.5 CONCLUDING REMARKS 203
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11 NEGOTIATED THIRD-PARTY ACCESS IN GERMANY 205
11.1 INTRODUCTION 205
11.2 THE SECTOR 206
11.3 NEGOTIATED THIRD-PARTY ACCES 211
11.3.1 The institutional frame 211
11.3.2 The Association Agreements for network access 214
11.4 DEVELOPMENTS: ANALYSIS AND ASSESSMENT 218
11.4.1 End-user prices 218
11.4.2 Network-access charges 222
11.4.3 Third-party discrimination 225
11.5 CONCLUDING REMARK 228
12 SUMMARY, CONCLUSIONS AND OUTLOOK 231
12.1 SUMMARY AND MAIN CONCLUSIONS 231
12.2 GERMAN EXPERIENCE 237
12.3 COMPETITION LAW OR SECTOR-SPECIFIC REGULATION 241
12.4 OUTLOOK 244
REFERENCES 247
INDEX 257
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