Regulation & Unbundling

Question 1

Why regulation?

Answer 1

1. protect consumers by limiting prices that monopolists could charge
2. protect investors from the government, who may be tempted to set too-low supply tariffs
   (the tariffs it pays to the utility companies)
3. higher efficiency in the energy sector

Question 2

How can regulation be done?

Answer 2

EX-ANTE
Steering agent’s behavior toward the objectives defined by the regulator

1. Direct intervention on the structure of the power sector (most powerful)
   - Restructuring: vertical unbundling (GTDR are taken over by different companies, not 1 monopoly)
   - Liberalization: horizontal separation (different competitors in each market)
2. Introduction of quality standards / operating license requirements
3. Application of different service pricing models

EX-POST
Supervision of agent’s behavior

1. monitoring the fulfillment of rules and regulations

Question 3

Regulators duties

Answer 3

1. Regulation of monopolies
2. Establishment of end-user tariffs
3. Definition of quality standards
4. Oversight of company behaviour and market operation
5. Enforcement of the law and secondary regulation
6. Drafting of reports for the government
7. Conflict settlement

Question 4

Why are transmission / distribution natural monopolies?

Answer 4

Because of economies of scale

Question 5

Can a single agent be allowed to conduct a regulated and competitive activity simultaneously?

Answer 5

No, conflict of interest, because the monopolist could distort competition in favour of its generation facilities in the wholesale market, or it associated supplier in the retail market.

Question 6

Which degrees of separation/unbundling are possible?

Answer 6

1. Accounting separation:
   liberalized and regulated activities are conducted by the same company, which is obliged to keep separate accounts for each activity (E.ON)
2. Legal separation: the regulated and competitive activities are run by legally separate entities, although both firms are allowed to belong to the same corporation
3. ownership separation

Question 7

What is unbundling?

Answer 7

A measure to regulate.

Question 8

Why unbundling?

Answer 8

1. Efficiency: the regulator believes activities can be performed more efficiently
2. Competition: the regulator believes the joint exercise of activities may result in a dominant position in the Market

Question 9

What’s the effect of unbundling?

Answer 9

Market competition