1.B REGULATING ENERGY MARKETS AND THE ERRA
by Dr. Vidmantas Jankauskas, Chairman, National Control for Prices and Energy, Lithuania; Chairman, ERRA
Dr. Jankauskas first gave a brief overview of the history of energy regulation. Then, he gave a list of the driving forces for the development of independent energy regulation and its subsequent and ongoing results: market liberalization and privatization. Finally, he presented the development of energy regulatory organization in the Central Eastern European and Commonwealth of Independent States region, including the establishment and growth of the Energy Regulators Regional Association.
1.C THEORY AND PRINCIPLES OF REGULATION
by Dr. Peter Kaderjak, Director, Regional Center for Energy Policy Research, Hungary
Dr. Kaderjak presented the following economic definitions and principles related to energy regulation: conditions for effective markets, market failures, market concentration (origins of concentration), external costs (origins of externalities), regulation, major regulatory options, environment of regulators, regulatory institutions, typical areas for regulatory actions. Finally, he briefly introduced the following select issues facing regulators: pricing, effect of subsidies, effect of asymmetric information, liberalization.
1.D ENERGY SECTOR LIBERALIZATION AND MARKET REFORM – GLOBAL TRENDS AND DEVELOPMENTS IN EU COUNTRIES
by Dr. Vidmantas Jankauskas, Chairman, National Control for Prices and Energy, Lithuania; Chairman, ERRA
Dr. Jankauskas started with giving some characteristics of the energy sector until the nineties (vertical integration, heavy regulation, state-ownership, natural monopolies), Then, he introduced the British experience of the eighties, the reforms in the electricity sector, the purpose of the reforms, the 1996 EC Directive, the implementation of the electricity directive, the EU Gas Directive of 2000. Among the global trends and developments he spoke about the gradual market opening, the newly proposed directives on security of supply, on renewable energy sources and on promotion of cogeneration, He stressed the following issues facing the new EU member states: market opening, concentration of generation, liberalization, regional trade and its obstacles, implementation of the Gas Directive. Finally, in a case study he introduced the electricity market opening process of Lithuania.
1.E ROLE AND FUNCTIONS OF THE REGULATOR
by Dr. Vidmantas Jankauskas, Chairman, National Control for Prices and Energy, Lithuania; Chairman, ERRA
Dr. Vidmantas emphasized the following objectives of regulation: customer protection, investor protection, ensuring the financial viability of companies, promotion of competition, collection and dissemination of information. He compared the old style regulation with the new style from the following perspectives: why to protect investors, main requirements to a new regulator (independence, transparency, accountability, autonomy, authority), reasons for independence, multi-industry agencies, local vs. national agencies, extent of regulatory power, roles of regulators. He introduced the US and UK regulatory framework and the German model in detail.
1.F BASICS ON THE LEGAL ASPECTS OF REGULATORY WORK
by Ms. Carmen Oprea, National Electricity and Heat Regulatory Authority, Romania
Ms. Oprea’s lecture started with the introduction of the authority of a regulatory organization, the decision making process of the regulators and then went into details regarding the key components of the regulatory process and the legal work in a regulatory institution. Finally, Ms. Oprea presented a case study on the regulatory process at her organization.
2.A RESTRUCTURING OF THE ELECTRICITY INDUSTRY: BASIC ELEMENTS AND MODELS
by Dr. Gabor Szorenyi, Director, Hungarian Energy Office
As an introduction, Dr. Szorenyi outlined the development of market structures and introduced 4 market models in detail: monopoly markets, purchasing agency, wholesale competition, retail competition. He gave another type of classification of market models: single buyer model, mandatory pool, voluntary pool, hybrid model. Then he looked at various aspects determining the schedule of events regarding restructuring, privatization and the introduction of competition. He listed the conditions for effective competition and showed some basic data for EU countries regarding market opening. Finally, he presented a case study on the development of the Hungarian electricity market.
2.B RESTRUCTURING OF THE GAS INDUSTRY: BASIC ELEMENTS AND MODELS
by Mr. Jacques de Jong, Clingendale Institute, the Netherlands
As an introduction Mr. Jacques de Jong gave an overview of old and new gas industry structures and presented the current Dutch Gas Market Model. Then he explained the following broad tendencies related to the natural gas industry: natural gas demand, fuel price developments, uncertainties around demand development, supply outlook, gas pipes, Russian gas outlook, potential gas supply outlooks for South East Europe and the issues of LNG. Finally, he touched upon the challenge facing Energy Regulators, such as: the Madrid Forum, Guidelines on good practices, cross border issues, Energy policy and EU fuel mix, Energy policy and environment.
2.C REGULATION OF UNBUNDLED NETWORKS IN ELECTRICITY: ACCESS RULES, INVESTMENT AND ACCESS PRICING, SYSTEM OPERATION
by Mr. Marko Sencar, Energy Regulatory Agency of Slovenia
Ms. Sencar first introduced the key participants of the electricity market, then presented the idea of network access in terms of network use. System operation was introduced from physical and financial terms and in terms of the roles of the market participants. Access pricing looked at the following aspects: network pricing: regulatory approaches, building blocks of price regulation, allowed revenues. The lecture was closed by a Slovenian case study.
2.D SERVICE QUALITY REGULATION IN THE NETWORK INDUSTRY
by Dr. Gabor Szorenyi, Director, Hungarian Energy Office
First, Dr. Szorenyi introduced Directive 2003/54/EC regarding the common rules for the internal electricity market, public service obligations and customer protection, monitoring and security of supply, price cap regulation on network tariffs and supply quality. Then, he went into details regarding the following issues: consumer expectations on supply quality, components of the standards of distribution and supply, reports of breakdowns and their evaluations, assessment of consumer satisfaction with distribution and supply, overall standards of performance, possibility for international benchmarking, incentive mechanisms, call center requirements and complaints handling.
3.A ENERGY WHOLESALE AND BALANCING MARKETS. LONG-TERM CONTRACTS
by Dr. Peter Kaderjak, Director, Regional Center for Energy Policy Research, Hungary
Dr. Kaderjak gave a detailed analysis how generation is dispatched in different market models: vertically integrated, single buyer, wholesale and retail competition. Under the single buyer model he introduced the issue of power purchase agreements (PPAs). PPAs in transition economies, their integration with competitive markets are introduced. Then, potential benefits and drawbacks of PPAs were analyzed. Finally, Dr. Kaderjak introduced 4 types of organized markets: pool, energy exchanges, balancing markets and capacity markets.
3.B CROSS-BORDER TRADING AND REGIONAL MARKET INITIATIVES – SOUTH EAST EUROPEAN MARKET
by Mr. Ion Lungu, Former President, National Electricity and Heat Regulatory Authority, Romania
The lecture started with the introduction of regional political decisions such as the Athens Memorandum, then regional institutions were presented. The idea of cross border trading (CBT) was introduced by asking the question whether CBT is an option or necessity. CBT brought along the following issues: principles for inter-TSO (transmission system operation) compensation mechanisms (who pays and who receives, cost structures and congestion costs), CBT in the South East European (SEE) region, transit key: transit share in cost claim, cost claim assessment, compensation fund: definition of horizontal network. Finally, some lessons learned from the virtual SEE CBT process were introduced along with the further developments in SEE.
3.C LICENSING: REGULATING ENTRY, SUPERVISION AND ENFORCEMENT
by Ms. Michaela Popescu, National Electricity and Heat Regulatory Authority, Romania
As an introduction Ms. Popescu gave a short overview of the legal regulatory framework: primary and secondary legislation. Then, the following steps of Licensing were presented in detail: license granting process, supervision, compliance monitoring, enforcement. The licensing process was also analyzed in terms of its goals, its content, the licensing authority, its procedure, steps of issuing a license, terms & conditions. Financial qualifications, license supervision and the revoking process were introduced as well. In addition, the legal basis of enforcement, the supervision tools (data collection, investigation, inspection and benchmarking) took center stage in the lecture.
3.D PUBLIC INVOLVEMENT AND DISPUTE RESOLUTION TECHNIQUES AT REGULATORY AUTHORITIES
by Ms. Carmen Oprea, National Electricity and Heat Regulatory Authority, Romania
Public involvement was analyzed by Ms. Oprea by looking at consumers, the state’s and the industry’s role in the regulatory process. Benchmarks of public involvement were listed in addition to the characteristics of effective public involvement and to the transparency of public involvement. Then, Ms. Oprea introduced the dispute resolution process employed by the National Electricity and Heat Regulatory Authority of Romania: types of disputes, principles to be applied, competencies, aims, disputes on the spot market, complaints and the relevant EU Directive on Complaints.
4.A ECONOMICS OF OPEN MARKETS
by Mr. Laszlo Varro, Director, Hungarian Energy Office
In his presentation Mr. Varro introduced the following basic market concepts to participants: demand and supply curves, price elasticity, economics of production and cost.
4.B NETWORK TARIFF SYSTEM: PRICING FOR THE MONOPOLY ELEMENT
by Mr. Laszlo Varro, Director, Hungarian Energy Office
For networks - competition is not feasible in most cases. The most important cause of this is the natural monopoly characteristic of these industries. The important concept is the sub-additivity of costs which means that it is cheaper to produce the given good by one firm than by any other combination of firms. In network industries the costs are usually sub-additive, as connecting a customer to an existing network is always cheaper than building a new network.
On electricity networks the consensus is that these networks are natural monopoly, thus regulatory oversight of access and prices is essential. There are other special features of this industry as well. There are significant fixed costs and in the case of networks there are no secondary markets.
The traditional method of price regulation is the cost plus method, thus the price equals the cost plus some decent return. In this case operational costs are passed through. The price increases are individually negotiated. This method of price regulation can create very bad incentives to monopolies to increase costs artificially (goldplatting). On the other hand companies do not have incentives to use efficient technologies, and their budget constraint is soft, as their costs are fully covered form the price.
The second fundamental kind of regulation is the incentive regulation, which has two forms: price cap and benchmarking. Here the efficiency gains realised by the company lead to an increase in profits, and not fully transferred to prices. A price cap means a pre-announced price path: every year the price increases with the rate of consumer price index change minus a so called “efficiency factor” (X), which represents the change in technology and can be positive or negative. Such a scheme can only be successful if it is transparent and credible. Within the regulatory period the company realizes all the profits because of efficiency gains, and at the end of the period the price is set such a way, that after it consumers can enjoy it. The price cap is easy to understand, leads to clear incentives and the transaction costs are low. There are some problems with this method as well. It is not easy, especially in ERRA countries – to find a reasonable starting price and X factor. Sometimes the change in the consumer price index is not a good measure of inflation for the firm, as consumer goods behave differently than industrial input prices. It can be very difficult politically to behave in a credible way as there is a great incentive for politicians to review the price earlier than announced.
The other type of incentive regulation is benchmarking which means that the price is based on the costs of a comparable company (real or ideal). There are several techniques which can be used to implement benchmarking. In ERRA countries the most important factor that affects decision from these is the available data. There are easy one dimensional methods when the cost/customer or something like it can be used as a benchmark. Unfortunately this method can be very misleading because firms can be very different in many aspects. From the more complicated methods we can use total factor productivity (TFP) as a theoretical justification for the X factor. We can decompose the change in TFP to the effect of technological progress, returns to scale and efficiency gains. Another complicated technique is stochastic frontier analysis in which we estimate dynamically the production possibilities of firms, and then compare the real productivity to this. This method needs large sample size and reliable data, which is not available in most ERRA countries. A similar but simpler technique is data envelopment analysis, which is can be applied in ERRA countries as well. In practice these techniques are used to estimate the optimal starting price and the X factor. The most important pitfall of these econometric methods is that in most cases very good data is needed, which is not available in most countries.
Network tariff systems have their desirable properties, from which only two can be satisfied: easily understandable, maps the cost structure, and provides proper efficiency incentives.
An important question is the effect of the regulatory methods on service quality. The traditional cost plus regulation leads to good quality, but very inefficient. In the case of normal price caps there is no incentive for quality improvement, which can hardly be improved by administrative methods.
4.C BASIC ELEMENTS OF TARIFF DESIGN
by Former Commissioner Florin Gugu, Romania
After defining “tariffs”, Mr. Gugu introduced the main issues of price control (setting initial price/revenue, revenue adjustments, efficiency assessment, integration of efficiency results, implementation in the tariff system). Then, the following types of costs were presented and analyzed: average, short-run marginal, long-run marginal, fixed and variable). The issue of one-part and two-part tariffs were looked at as well. Before giving an overview of tariff reforms in the ERRA region, the class had to complete an exercise on tariff design.
4.D NETWORK TARIFFS: TRANSMISSION AND DISTRIBUTION
by Former Commissioner Florin Gugu, National Electricity and Heat Regulatory Authority, Romania
It is fair to say that among all the elements of the electricity price, it is the network price that is the most difficult to price, as it is very difficult to distribute different cost elements of a network to different customers. The network elements of the electricity industry are usually not competitive, they can be considered as natural monopolies, as there is no natural way to do it.
Mr. Gugu in his presentation introduces and compares the advantages and disadvantages of the three fundamental ways of regulating the price of these services.
The rate of return regulation means a form of cost plus regulation, under which firms have weak incentives for being effective, has high administrative costs and have the danger of gold platting and overcapitalization. The second solution is performance based regulation where firms are rewarded or penalized if they can or can’t achieve some, usually non-monetary, preset performance indicators. It is however relatively complex to use, and sometimes it is intrusive. The third tool is the so-called yardstick regulation, when the performance of the firms is compared to the industry average. This method has some practical problems: firms can be very different, there is an incentive for collusion and it is not likely that the regulator will accept the bankruptcy of some firms.
4.E END-USER TARIFFS
by Former Commissioner Florin Gugu, National Electricity and Heat Regulatory Authority, Romania
The regulation of end-user tariffs has a great importance because it determines the ultimate price signal sent to the final consumers of electricity, thus end-user tariffs determine who uses what kind of energy. It is very important to send clear signals for efficient use. On the other hand the end-user price can be subject to political pressure, as this price directly affects the expenditures of the electorate thus politicians have clear incentives to distort these prices.
In his presentation Mr. Gugu looks at eligible and captive consumers, at the price components of eligible costumers and at different end-user activities. He introduces tariff differentiations and some special tariffs. In addition, he lists the guiding principles when setting regulated end-user tariffs.
Finally, he analyses in detail the progress of the tariff reforms shaping in the countries of Central/Eastern Europe and the Commonwealth of Independent States.
5.A TARIFF SOLUTIONS FOR LOW-INCOME CONSUMERS
by Former Commissioner Florin Gugu, National Electricity and Heat Regulatory Authority, Romania
Energy builds up a very high portion of low-income customers’ budget, it would be very difficult to design cost-based prices for this layer of the society. It is the state’s responsibility to assist low-income customers to assist them in accessing fairly priced electricity.
Mr. Gugu presents three key solutions for this problem: social payments, regulatory mechanism, and energy efficiency. He introduces the recommendations of UNECE for tariff reform in CEE/CIS countries and then Romanian example (tariff reforms, qualification and introduction of social tariffs).
5.B GAS NETWORK AND PRODUCT PRICING
by Ms. Ligia Medrea, General Director, National Natural Gas Regulatory Authority, Romania
In the first part of the lecture, Ms. Medrea looked at the issue of gas networks by introducing the classification of activities (exploration, storage, transmission and distribution). Then, the following issues are presented: European storage facilities, transmission networks, LNG chains and third party access. In the second part of the lecture the establishment of regulated prices and tariffs for storage, transmission, distribution and supply is introduced. Calculation methodologies are presented along with the total regulated revenue and unit regulated revenue schemes. Finally, the average value of a gas bill is analyzed.
5.C PRICING ELECTRICITY FROM RENEWABLE SOURCES AND COGENERATION
by Dr. Peter Kaderjak, Director, Regional Center for Energy Policy Research, Hungary
The price of electricity should reflect the total cost of electricity consumption, including direct and external costs. External costs mean such costs, which are present at another user or producer, a third party. The presence of such costs means a market failure, as prices do not reflect all the social costs. This problem can be solved by creating new markets, defining property rights or adequate regulation.
In his presentation Dr. Kaderjak introduces two solutions: energy taxes and emissions trading and gives different examples for both solutions. Later he presents the green energy regulation practices of some CEE countries and lists the future challenges of these countries.
5.D. BENCHMARKING OF REGULATORY COMMISSIONS
by Ms. Catherine Connors, Pierce Atwood, USA
Ms. Connors first looks at the definition of benchmarking in general, its goals, the data collection process, identification of standards, why do we benchmark, who benchmarks and who is benchmarked. Then, the regulatory benchmarking of the European Union is introduced in detail from the aspects of the following categories: independence, competencies, internal organization, procedure for core regulatory activities, international activities, enforcement and accountability. Finally, a preliminary analysis is given on the need for particular attention in areas such as secondary legislation, unbundling, institutional strengthening.
