2. The Traditional Model of Electricity Reform and Regulation
The model of electricity reform as it first emerged in Chile (1982), UK
(1990) and Norway (1991), and subsequently in many other jurisdictions including
Australia and Texas, had four key elements.
1. The introduction of a competitive wholesale power market.
2. The gradual extension of competition in the retail market.
3. The regulation of network services via CPI-X regulation
4. The introduction of additional incentives for quality of
service and loss reduction.
The reform model was supported by rules on the separation of generation,
transmission, distribution and retail businesses in order to improve third
party access to the monopoly networks.
In many jurisdictions reform involved the privatization and restructuring
of state owned monopolies (Pollitt, 1997). In some other jurisdictions with
initially private monopolies, legislation and voluntary agreements resulted in divestitures
of generation assets in order to facilitate competition in the wholesale
power market (see Joskow, 2008, for a detailed description of both the ‘standard
liberalization model’ and a comprehensive review of the lessons learned from the
implementation of its many variants internationally).
Reform was often accompanied by the introduction of an independent
regulatory agency, with an arms’ length relationship to government departments
and with statutory duties to promote competition and to set regulated tariffs.3 This
new regulatory agency was usually a specialist in energy regulation and often
combined electricity and gas regulation, where gas was available.
To understand the role of such economic regulators it is worth examining
the mandate of the Gas and Electricity Markets Authority in the UK. This is the
governing board of Ofgem, the energy regulatory agency in Great Britain (GB)
(see Box 1).4
The legislation governing Ofgem has arisen principally from the Gas Act
1986 and the Electricity Act 1989 which privatized the state owned industries.
The duties of Ofgem were modified in the Utilities Act 2000 which introduced,
inter alia, the protection of vulnerable customers and the Energy Act 2004 which
included provisions about such things as energy security and having regard to best
regulatory practice. In addition Ofgem’s duties also arise from general competition
legislation, namely the Competition Act 1998 and the Enterprise Act 2002, as
well as arising from national implementation of European Community directives.
Reading the summary in Box 1 suggests that while Ofgem has a principal
objective – captured in its current strap-line: ‘promoting choice and value for
all gas and electricity customers’5, several other elements of economic regulation
seem largely tacked on to Ofgem’s duties. In particular climate change objectives
for the sector are things that Ofgem should have regard to rather than objectives.
There is also a loose requirement to have regard to energy security issues.
I would want to suggest, that at the very least, Ofgem’s mandate with regard to
implementing government policy towards climate change in the energy sector is
rather vague and that Ofgem’s regulatory role in the politically sensitive areas of
vulnerable customers, energy security and de-carbonization of the electricity sector
is ill-defined and reflects the incremental addition of matters to which it should
have regard to. This lack of clarity is reflected in a lack of associated powers in
these areas.
Taking Ofgem as an example of a leading independent energy regulator,
we take the traditional model of electricity and gas market regulation in the reform
period to centrally be aiming at promoting competition and effective monopoly
regulation (a perfect complement to competition in generation and retail) with
additional concerns secondary. This is not to say that many other jurisdictions,
especially in Europe and many of the states of the United States, only ever aspired
to fully implement the ‘traditional’ reform model (see Pollitt, 2008a, for more
expansion of this in a global context).
Looking to the wider context it is important to point out that few jurisdictions
have gone as far as the UK in implementing the ‘traditional reform model’.
The proposed EU Third Energy Package envisages further requirements in the
EU towards independent regulation and greater market structure reform. However
wide differences remain between EU countries, particularly with respect to the
strength and functions of energy regulatory agencies (see Green et al., 2006).
The model of electricity reform as it first emerged in Chile (1982), UK(1990) and Norway (1991), and subsequently in many other jurisdictions including
Australia and Texas, had four key elements.
1. The introduction of a competitive wholesale power market.
2. The gradual extension of competition in the retail market.
3. The regulation of network services via CPI-X regulation
4. The introduction of additional incentives for quality of
service and loss reduction.
The reform model was supported by rules on the separation of generation,
transmission, distribution and retail businesses in order to improve third
party access to the monopoly networks.
In many jurisdictions reform involved the privatization and restructuring
of state owned monopolies (Pollitt, 1997). In some other jurisdictions with
initially private monopolies, legislation and voluntary agreements resulted in divestitures
of generation assets in order to facilitate competition in the wholesale
power market (see Joskow, 2008, for a detailed description of both the ‘standard
liberalization model’ and a comprehensive review of the lessons learned from the
implementation of its many variants internationally).
Reform was often accompanied by the introduction of an independent
regulatory agency, with an arms’ length relationship to government departments
and with statutory duties to promote competition and to set regulated tariffs.3 This
new regulatory agency was usually a specialist in energy regulation and often
combined electricity and gas regulation, where gas was available.
To understand the role of such economic regulators it is worth examining
the mandate of the Gas and Electricity Markets Authority in the UK. This is the
governing board of Ofgem, the energy regulatory agency in Great Britain (GB)
(see Box 1).4
The legislation governing Ofgem has arisen principally from the Gas Act
1986 and the Electricity Act 1989 which privatized the state owned industries.
The duties of Ofgem were modified in the Utilities Act 2000 which introduced,
inter alia, the protection of vulnerable customers and the Energy Act 2004 which
included provisions about such things as energy security and having regard to best
regulatory practice. In addition Ofgem’s duties also arise from general competition
legislation, namely the Competition Act 1998 and the Enterprise Act 2002, as
well as arising from national implementation of European Community directives.
Reading the summary in Box 1 suggests that while Ofgem has a principal
objective – captured in its current strap-line: ‘promoting choice and value for
all gas and electricity customers’5, several other elements of economic regulation
seem largely tacked on to Ofgem’s duties. In particular climate change objectives
for the sector are things that Ofgem should have regard to rather than objectives.
There is also a loose requirement to have regard to energy security issues.
I would want to suggest, that at the very least, Ofgem’s mandate with regard to
implementing government policy towards climate change in the energy sector is
rather vague and that Ofgem’s regulatory role in the politically sensitive areas of
vulnerable customers, energy security and de-carbonization of the electricity sector
is ill-defined and reflects the incremental addition of matters to which it should
have regard to. This lack of clarity is reflected in a lack of associated powers in
these areas.
Taking Ofgem as an example of a leading independent energy regulator,
we take the traditional model of electricity and gas market regulation in the reform
period to centrally be aiming at promoting competition and effective monopoly
regulation (a perfect complement to competition in generation and retail) with
additional concerns secondary. This is not to say that many other jurisdictions,
especially in Europe and many of the states of the United States, only ever aspired
to fully implement the ‘traditional’ reform model (see Pollitt, 2008a, for more
expansion of this in a global context).
Looking to the wider context it is important to point out that few jurisdictions
have gone as far as the UK in implementing the ‘traditional reform model’.
The proposed EU Third Energy Package envisages further requirements in the
EU towards independent regulation and greater market structure reform. However
wide differences remain between EU countries, particularly with respect to the
strength and functions of energy regulatory agencies (see Green et al., 2006).
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