SECOND GENERATION ISSUES IN THE REFORM OF PUBLIC UTILITIES

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SECOND GENERATION ISSUES IN THE REFORM OF PUBLIC
UTILITIES

• RETAIL COMPETITION IN ELECTRICITY
• WASHINGTON D.C. OCTOBER 4 - 5, 1999
• Paulina Beato and Carmen Fuente
• Inter-American Development Bank

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Contents

• I. Introduction
• II. Elements of Retail Competition
• III. Evaluating Retail Competition Models

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Why Retail Competition in Electricity?

• Transforms Electricity Sector
• Transforms Consumers
• Modernizes Utilities
• Benefits the Economy

4
G
G
G
G
G
G
First Generation Reforms
G
G
Transmission network
Wholesale competition
Wholesale Market
C
C
C
D y C 2
D y C 1
Distribution monopolies remain unchanged
Market 1
Market 2
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Are First Generation Reforms satisfactory?

• Scant consumers benefits derive from reforms
• Only in a few countries prices have decreased in
  accordance with technology improvements and fuel
  prices behavior
• Electricity was highly subsidized before the
  reforms
• Consumers are not well treated by monopolies

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Retail Competition

• Main features of retail competition models
• Consumers have more than one electricity service
  supplier
• Consumers are free to buy and sell electricity in
  the market
• Distribution (wires) and electricity are two
  separate goods

7
Retail Competition Schemes Elements and
Alternatives
Industry Structure
Transmission and Distribution Access
G
Purchases Sales
T
D
C
Consumers
8

Retail Competition Schemes Elements and
Alternatives
Industry Structure

• Retail models
• Unbundling of generation, transmission and
  distribution
• Unbundling of transmission, distribution and
  retail
• Unbundling of generation and retail is not
  required

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Retail Competition Models Elements and
Alternatives

• Unbundling of distribution and retail
• Complete legal and financial unbundling of
  distribution and retail is nowhere mandatory
• Electricity industry refusal?
• Consumers reluctance?
• A few countries have implemented accounting and
  legal unbundling of distribution and retail
• Regulators promote distribution and retail
  unbundling
• Little child Report on competition in England,
  1998
• New Zealnds Minister of Energy Report, 1998

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Retail Competition Models elements and
alternatives

• Purchases and Sales
• Market Operator and Spot Market
• Market command, Spot prices setting, Payments and
  supply guarantee
• Spot Market alternatives
• Mandatory spot market use
• Limited access to consumers, England
• Limited sales rights to generators
• Market access fees, Norway and New Zealand
• Distribution companies access
• Development of other markets
• Long-term contracts
• Futures and options markets

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Retail Competition Models Elements and
Alternatives

• Transmission and Distribution Networks/1
• Consumers, retailers and generators must have the
  capacity to transport and distribute power
• Transmission and distribution networks remain as
  factual or legal monopolies
• Regulation of network access
• Determination of network use prices

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Retail Competition Models Elements and
alternatives

• Transmission and Distribution Networks/2
• Complete unbundling between regulated and
  unregulated activities facilitates regulation,
  price determination and network use
• Symmetry among competitors
• No perfect price determination system
• No efficient, decentralized scheme
• Networks increasing returns and interest of
  agents
• Trade-offs among different models

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Retail competition models elements and
alternatives

• Transmission and Distribution Networks/3
• Network use payment has two components
• Access fee
• Payment for network use losses and congestion
• Access fee
• Earnings of the firm owning the network
• Allocation of earnings among market agents
• Allocation arrangements elasticity, proportion
  of use

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Retail Competition Models Elements and
alternatives

• Transmission and Distribution networks/4
• Nodal prices as payment for network use
• Determine a price for energy at each node
• Price differences per node amount to congestion
  and losses price
• Price determination by market or optimization
  methods
• Electricity prices, losses and congestion costs
• Single energy prices determined by markets
• Estimate of losses and congestion cost

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Evaluation of Retail Competition models

• Bringing in retail competition is feasible
• Technical feasibility
• UK, Australia, California
• Reduced adoption costs
• Telemetering and telecontrol devices
• Communication systems availability
• Gradual introduction works
• Minimum transition costs

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Evaluation of Retail Competition Models

• Consumers obtain many benefits/1
• Consumers freedom to choose
• select quality-price options
• leave inefficient suppliers
• Efficient price determination
• Prices above minimum costs are banished from the
  market
• Increased range of products and services
• Instrumental to capture market shares
• Improved customer service

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Evaluation of Retail Competition models

• Consumers obtain many benefits/2
• Regulatory burden reduction
• Prices determined by markets, not by regulators
• Regulators monitor market performance
• Increased efficiency on risk assignment
• High spot prices volatility
• Consumers and generators willingness to pay a
  risk-reducing premium
• Premiums/price risks trade-offs are better
  appraised in retail competition models

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Evaluation of Retail Competition models

• Drawbacks are surmountable/1
• Network reliability and supply
• Incentives to improve maintenance
• increased number of interruptible consumers
• Uneconomic Bypass
• Sensible consumers
• Distribution firms charge excessive prices
• Improved consumer position
• Market skim-off
• Cross-subsidies are eliminated

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Evaluation of Retail Competition models

• Drawbacks are surmountable/2
• Public interest programs
• Tax electricity suppliers for network development
• Difficult transmission capacity expansion
• With bundled distribution and retail
• Attention to transmission prices
• Distribution companies have incentives to
  increase business-share

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Final Remarks

• Retail competition models implementation is
  feasible in Latin America, as has been in other
  countries.
• Consumer benefits derived from retail competition
  are far more significant than its drawbacks
• Multiple options available to implement retail
  competition
• Each country should adopt the model that better
  suits its characteristics.