Presentation Transcript

1. COMPETITION IN ELECTRICITY DISTRIBUTION By: Roxana Saplacan AmaAgyeiwaaFerkah Eco 435
2. INTRODUCTION In the electricity distribution case, monopoly and outsourcing seem to coexist and this gives an ambiguous status to the sector. We look at the traditional view of the distribution sector and the current practice of a form of competition (competition for the market) which seems to be developing in this sector. We discuss the organisational and policy implications of introducing competition for the market.
3. AUGUMENTS Whether competition for the market could improve productive efficiency of public service utilities The main argument is to understand industry practice by distinguish the provision of the infrastructure from the provision of the supplied services associated with it the distribution process.
4. THEORITICAL DEBATE It is generally assumed that competition is impossible in the electricity distribution business. This has been explained by the presence of local electricity networks, which cannot be duplicated at a reasonable cost (Newbery, 1999). Hence, these networks have natural monopoly characteristics.
5. AMBIGUOUS NATURAL MONOPOLY CHARACTERISTICS In the economic literature competition is the most appropriate ‘‘tool’’ to improve efficiency. However, competition is impossible when the reproduction of the infrastructure is uneconomic or when the cost of the good or service is the lowest when supplied by a single firm(Viscusiet al., 2000). But only a few authors have empirically explored the question as to whether the underlying cost structure of electricity distributors really indicates a natural monopoly A study of the Norwegian electricity distribution sector showed that it was characterised as a natural monopoly. Their subadditivity test shows that the mean output is more efficiently produced by a single firm than by two firms, considering all feasible share of production for both firms. In 1987 the Government of New Zealand removed the exclusive territorial franchises of electricity supply companies in order to allow them to compete with each other for retail energy services. This type of competition seems contrary to the natural monopoly hypothesis in electricity distribution
6. FRENCH CASE In France, several modifications of electricity distribution and supply have taken place starting from 2004, as a consequence of the 2003/54/EC European Directive implementation. Thus, the reorganisation of the French electricity distribution has been shaped around the possibilities of efficiency gains. Efficiency gains expected by EDF stem from a standardization of local units’ activities (harmonized practices and accounts), and from scale and scope economies. For example, some tasks like commercial services (telephone centres for example) are grouped at the regional levels, while, at the local level, electricity and gas activities are bundled.
7. UK CASE In the United Kingdom, as a consequence of the 1990 reforms, electricity distribution has been split in 14 distributors, and over 18 suppliers. Privatisation brought some major changes in the sector. One characteristic of the new organisation of distribution was the externalisationof meter reading, which was subcontracted to independent firms. Some companies have thus changed the scope of their activities by being present in some segments only. Once we recognise (a) that it is possible to operate a distribution network without owning it; and (b) that externalising part (or all) of network operation activities is not unusual, we can consider that the operation of the distribution network is a potentially competitive activity while the network (infrastructure) is and remains a natural monopoly.
8. ORGANISATIONAL AND POLICY IMPLICATIONS The new unbundling rules have, firstly, imposed separation between generation and transmission, as well as, secondly, a separation between distribution networks and supply, in order to allow non-discriminatory access of all suppliers to final customers. The Eurelectric study in 2002 as well as French and UK experience suggest that the network operation ‘‘function’’ is composed of several packages. Each package would be at its turn composed of several tasks which require different degrees of specialisationfrom their employees and have a more or less local character. The search for reduced costs can arise from the separation of network operation activities in several packages and through externalisation; but there is still no consensus on how to split distribution activities into packages and tasks.
9. CONCLUSION The traditional approach of natural monopoly is justified for the electricity distribution network infrastructure per se but it is not justified for the network operation service. The service of operating the distribution network can, both in theory and in practice, be separated into several packages and each package can be separated into several tasksbut there is the need to take a lot of precautions when implementing such a reform.