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Existing market
environment
R Existing market environment
The electricity and gas directives prescribe the
opening of the respective energy markets.
Apart from strengthening the single market, and
Europe as a business location, these measures
are aimed at permitting free movement of
goods in these sectors throughout the European Union. After providing an overview of the
sources of law underlying electricity and gas liberalisation in the European Union and Austria,
this chapter looks at the effects of the changed
legal framework on energy price formation, and
at the overall economic importance of power
and gas, and the factors that influence demand.
R Sources of liberalisation law
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Sources of electricity liberalisation law
The Austrian Energy Liberalisation Act1, amending the Electricity Industry and Organisation
Act (EIWOG), goes beyond the requirements
of the Electricity Directive (96/92/EC) in many
areas.The full liberalisation of the Austrian electricity market as of 1 October 2001 gave all
electricity consumers a free choice of suppliers.
The Acceleration Directive enacted in June
2003 obliges all other EU member states
(Figure 1) to ensure that all electricity consumers within their borders likewise have an
unrestricted choice of suppliers by 1 July 2007
at the latest.
The new directive also provides for the mandatory establishment of independent regulatory
authorities by 1 July 2004.This obligation affects
Germany, which is the only member state still
without an independent regulator. Under the
directive, regulated network access will in
future be the only permitted system, and negotiated access like that currently practised in
Germany will no longer be allowed. Other key
provisions concern legal unbundling (legal separation of electricity grids from other functions)
and public service obligations (e.g. security of
supply). Some provisions still require implementation in Austria, while in other instances (e.g.
the supplier of last resort) it is for member
1
2
3
states to decide whether or not to introduce
new arrangements. Special attention will need
to be paid to the form taken by unbundling, as
the effective implementation of the unbundling
rules is critical to creating a level playing field
and stimulating competition.
The most recent amendment to the ElWOG, in
the summer of 2002, was necessitated by the
Ökostromgesetz (Green Electricity Act)2.The
latter regulates the promotion of electricity
generated from renewable energy sources, and
at combined heat and power (CHP) plants.The
Act obliges “green” power balancing group
representatives to purchase the electricity in
question at the prices (injection tariffs) prescribed by the Minister of Economic Affairs and
Labour, which are above market levels.There is
a support tariff for electricity generated at
CHP plants.This is financed by a surcharge on
all power supplied to final customers (similarly
to the stranded costs charge).
Under the Gaswirtschaftsgesetz (Natural Gas
Act) the Elektrizitäts-Control Kommission
(Electricity Control Commission) was renamed
Energie-Control Kommission (E-Control Commission), and Elektrizitäts-Control GmbH became Energie-Control GmbH (E-Control) The
change of name was not related to any significant changes in E-Control’s existing duties in
respect of the electricity sector. However,
E-Control was given additional powers, e.g.
regarding arbitration. Market participants can
now direct complaints about service quality or
billing to the regulator.
In addition to their regulatory responsibilities
in the narrower sense, since the entry into
force of the new competition law regime3 on 1
July 2002 the sectoral regulators – and hence
E-Control – have been entitled to make applications and submissions to the Cartel Court
independently of the official parties to proceedings (the Federal Competition Authority and
the Federal Cartel Prosecutor).The amended
Federal Law Gazette I No. 121/2000
Federal Law Gazette I No. 149/2002
Federal Act amending the Federal Act on the Establishment of a Federal Competition Authority (Competition Act), the Cartel Act 1988, the criminal code and the Federal
Finance Act 2002, Federal Law Gazette I No. 62/2002.
R Electricity and gas market opening in Europe
Figure 1
■ Electricity ■ Gas
UK
100%
Spain
100%
Austria
100%
Netherlands
100%
Germany
100%
47%
Sweden
100%
35%
Denmark
100%
Portugal
0%
Finland
0%
100%
100%
72%
Luxembourg
57%
Belgium
52%
100%
Italy
45%
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82%
Ireland
Greece
59%
40%
0%
34%
20%
France
30%
0%
20%
40%
60%
80%
100%
Source: European Commission
competition legislation also provides for close
cooperation between the competition authorities and the regulator. Between July 2002 and
the end of June 2003 E-Control and the competition authorities jointly brought eight merger proceedings before the Austrian Cartel
Court. In two cases application was made for
an investigation, and preliminary investigations
were conducted on suspicion of cartel agreements in connection with increases in “green”
power prices. In addition, the Federal Competition Authority and E-Control cooperated
closely on a merger proceeding before the
European Commission.
Sources of gas liberalisation law
Directive 98/30/EC of the European Parliament
and of the Council concerning common rules
for the internal market in natural gas entered
into force on 10 August 1998.The directive
provided for national implementation by 10
4
ABl. 2003 L 176, 57
August 2000, and for progressive market opening in member states, namely:
R At least 20% of total annual gas
consumption by 10 August 2000;
R At least 28% of total annual gas
consumption by 10 August 2005;
R At least 33% of total annual gas
consumption by 10 August 2010.
This schedule has been superseded by the
Acceleration Directive4 which must be implemented by 1 July 2004.
Austria met the targets set by the original EU
directive by introducing the Natural Gas Act
2000 (GWG I). At the same time 1 October
2002 was established as the deadline for full
market opening.This was implemented by the
Natural Gas (Amendment) Act (GWG II).
The extent to which the directive has been
implemented in member states varies. Apart
from the Austrian, only the British, Dutch, German, Italian and Spanish markets have been
entirely liberalised, and the negotiated access
system remains a de facto obstacle to entry to
the German market.
The Acceleration Directive which replaces the
Gas Directive also provides for phased market
opening, but with much shorter transitional
periods (full liberalisation by 1 July 2007). In
addition, it abolishes member states’ right to
choose between negotiated and regulated network access, in favour of a uniform system
based on the latter.
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The Natural Gas (Amendment) Act and the
Energy Regulatory Authority (Amendment) Act
which entered into force at the same time
anticipated a number of provisions of the
Acceleration Directive. Central to the Austrian
legislative regime since 1 October 2002 are:
Independent regulator
E-Control and the E-Control Commission,
which were exclusively concerned with the
electricity market until the Natural Gas
(Amendment) Act came into effect, fulfil the
requirements of the directive with regard to
independence from gas industry interests.
Unbundling
Under article 7 Natural Gas (Amendment) Act
integrated gas companies are required to legally
unbundle their grid operation functions from
their other activities. An exception is made for
grid operators with less than 50,000 domestic
connections.This exemption mainly applies to
small distributors.
While the directive merely requires that network access tariffs be published, and that the
methodologies underlying their calculation be
subject to ex ante approval by the regulator,
the Natural Gas (Amendment) Act provides for
setting of the tariffs by the regulator itself (the
E-Control Commission).
As regards access to storage facilities, the
directive allows for a choice between negotiated and regulated access. Austria has opted for
negotiated access to storage capacity.
R Price formation in the electricity and
gas markets
Prior to electricity liberalisation the prices paid
by consumers to their suppliers were subject
to statutory regulation.They were partly set by
the Price Commission, under a negotiation procedure.The object of which was defined by the
Prices Act as arriving at an “economically justified price” as a maximum. In practice, this usually
meant that representatives of the federal
government, interest groups and energy
suppliers – each pursuing their various economic and distributive goals – reached agreement on prices.
The same applied to gas prices which were set
by the Prices Sub-Committee of the Parity
Commission. Here, too, only all-inclusive prices
were proposed by the gas companies and negotiated by them with the social partners. Price
transparency for consumers was limited to the
publication of final rates.The composition of
the latter (cost components such as network
and energy costs) and the process of negotiation by which they were arrived at remained a
closed book for final customers.
Market opening was followed by fundamental
changes in the price formation system. In the
deregulated areas of the market (e.g. supplies
to final customers) centralised negotiations
have given way to market mechanisms. Prices
reflect the interplay of supply and demand, and
the negotiating power of market participants. In
transmission and distribution, which continues
to be organised along monopolistic lines, the
tariffs are set by the E-Control Commission.
R Competition in network industries
R Competitive efficiencies
Figure 2
The main purpose of opening the electricity
and gas markets is to promote competition in
the interests of the economy and Austria’s
attractiveness as a business location. But what
are the economic benefits of competition?
Competition
Competition offers buyers a choice and
suppliers entrepreneurial freedom. Economists
call competition “perfect” when no supplier is
large enough to exercise a significant influence
on the “unseen hand” of the market. Due to
their large number, and their wish to maximise
their market shares, suppliers are forced to cut
their prices to the level of their marginal costs.
Suppliers are stimulated to seek process and
product innovations as these yield higher profits in the short run (temporary monopoly
prices because it takes time to imitate new
products and processes).
given volume of goods at lower cost than a
number of companies would be able to.There
may also be economies of scope, in that a company can manufacture a number of products
together at lower unit costs than would be the
case with separate production processes.
Due to certain production conditions, in some
markets a single supplier may be able to satisfy
demand at lower prices than could a number of
suppliers. Such so-called “natural monopolies”
are generally presumed to exist mainly in industries in which investments, e.g. in infrastructure,
result in high sunk costs.These industries include
electricity and gas, water, transport and
telecommunications.
The reasons for natural monopolies lie in the
subadditivity of cost functions. In other words,
unit costs fall as production rises (economies
of scale), and a single supplier can produce a
Efficiency
Entrepreneur as price taker
Good access to information
Price equal to marginal cost
This yields two conclusions:
R Under circumstances of cost subadditivity it
is economically inefficient for output to be
produced by a number of enterprises, and
this will result in wastage of resources.
R Over time subadditivity will automatically
lead to a monopoly due to participants’
dropping out of the market.
High sunk costs5 deter potential entrants (i.e.
there is no contestable market6 ). Coupled with
subadditivity, this leads to natural monopolies.
The areas in which competition is possible are
listed in Table 1. A so-called “monopolistic
bottleneck” exists when there is a natural
monopoly at a stage in the production chain,
and the plant concerned represents an “essential facility”. An “essential facility” is one that
third-party companies have to be able to use to
R Monopolistic bottlenecks
Sunk costs
Table 1
Significant sunk costs
No significant sunk costs
Natural monopoly
Monopolistic bottlenecks
Competition feasible
No natural monopoly
Competition between suppliers possible
Monopoly
Profit maximisation and
maximisation of the
consumers´surplus
Source: Knieps (2000)
5
6
Sunk costs: costs of market entry that cannot be amortised.
Contestable markets are characterised by low entry barriers. In a perfectly contestable market there are no barriers to entry, exit costs nothing, and existing competitors
cannot react immediately to new entrants.
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reach downstream markets, e.g. final customers.
In the electricity and gas sectors this is
achieved by ensuring that there is non-discriminatory network access.Where there no significant sunk costs, potential competitors can
enter and leave a market at any time, at low
financial risk.This possibility forces the monopolist to set its prices as though it were operating under competitive conditions.
Monopoly and oligopoly7
Text Box 1
Monopoly:A monopolistic market is one in which there is only one supplier, which is free to determine price
and output. Market entry is unprofitable or impossible for other firms, due to technical or legal barriers.
Monopoly is one of the classic problems of economics.Traditionally, it has been argued that, by comparison
with the optimal welfare that results from perfect competition, monopolies lead to lower output and higher
prices, and the latter cause allocative inefficiencies8 .
As an example, take a company that only operates base load power stations, and shuts down one of them
or reduces output (see Figure 3). The reduction in supply shifts the supply curve to the left, resulting in a
higher price (Pc instead of Pm) and lower output (Qc instead of Qm).
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R Effects of a reduction in output by a monopolist
Figure 3
Monopoly
equilibrium
Pm
Competitive
Supply
Price increase
Competitive
equilibrium
Pc
Demand
Output reduction
Qm
Qc
Oligopoly: In an oligopoly a small number of suppliers, each with a substantial market share, sell to a large
number of buyers.The strategic decisions of each supplier affect the others, and it must take their potential
reactions into account. The existence of a small number of dominant suppliers can also lead to collusion
(e.g. price agreements). Oligopolists tend to have an incentive to cooperate rather than to compete. The
outcome is similar to that of a monopoly, and leads to misallocation of resources and to disadvantages for
consumers.
7
8
Due to the large number of special cases of monopoly and oligopoly only a broad overview of this market forms is given here.
Allocative inefficiency occurs when scarce resources are not allocated to their optimal uses.
R Monopoly structures and potential for competition in Austria
Sector
Electricity
Gas
Production
stage
Market
structure
Generation
Oligopoyl/
competition
Transmission
Distribution
Monopoly
Monopoly
Supply
Oligopoly/
competition
Import/
trading
(Quasi)
monopoly
Transmission
Monopoly
Distribution
Monopoly
Supply
Oligopoly
Vertical
integration
Yes,
mostly
Yes, (at least
over two
production
stages
Public
ownership
Yes, but
some private
participation
Yes, but
some private
participation
Table 2
Subadditivity
Sunk
costs
Natural
monopoly
No
Medium
No
Yes
Yes
High
High
Yes
Yes
No
Low
No
No
Low/
Medium
Partly / No
Yes
High
Yes
Yes
High
Yes
No
Low
No
Sources: Kruse, J. (2001), E-Control
Table 2 shows the market structures and
potential for competition in the electricity and
gas sectors, differentiated according to production stages.A differential analysis of the potential competition at each production stage is
necessary because only some stages are resistant to monopoly.
In both the electricity and the gas sector, transmission and distribution meet the conditions
for monopolistic bottlenecks. Both have high
and mostly irreversible investment costs which
are specific to the market in question (sunk).
From an economist’s perspective, the existence
of permanent monopolies (combination of subadditivity and persistent barriers to entry) is a
sufficient argument for regulation.The potential
for discrimination against other market participants and the inefficient allocation of resources
due to the lack of competition caused by
monopolistic bottlenecks calls for state intervention. Regulation not just of access but also
of prices is necessary to ensure that there will
be competition in upstream and downstream
markets.
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By contrast, there is generally no difficulty in
ensuring that the markets for products sold via
networks are organised along competitive lines.
Differential treatment of the various production stages is the key to effective regulation,
and to the success of liberalisation. A critical
situation for deregulation is one in which network infrastructure is owned by a vertically
integrated company that also markets final
products.
R Economic importance of electricity
and gas
Power and gas are the main energy forms used
by Austrian households and businesses. In
terms of final consumption, liquid fossil fuels
(diesel, petrol, heating oil, etc.) are the most
widely used energy form, and electricity and gas
are placed second and third, respectively.
According to Statistics Austria, in 2002 electricity accounted for a good 20% of final energy
consumption, and gas for some 17%. Fossil
fuels, most of which are used for road transport, represented about 43% of the total.
Electricity and gas are both large economic
sectors. In 2001 some 59,372 GWh of electrical energy and 7,590 bn cu m of gas were supplied to final consumers. Some 25,000 people
were employed by electricity supply and 3,000
by gas supply companies.The value added of
both sectors was in excess of e 4bn, that of the
electricity sector being the larger; it contributed 3% of gross value added.
of a company’s total costs.The profit margins of
export companies can be as low as 2 – 3%, so
even relatively minor reductions in electricity
prices can result in significant improvements in
cost structures and hence in competitiveness.
Due to European integration and globalisation,
energy prices have become crucial to the competitiveness of the Austrian economy.
R Influences on electricity and gas
Not only are they large economic sectors in
their own right, but the industries operate
infrastructure which is vital to the functioning
of the entire economy. Security of electricity
and gas supply is crucial to the performance of
the economy as a whole, as they are indispensable inputs for the production and consumption
of goods and services.
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Infrastructure costs are a key factor in business
location decisions. In energy intensive industries electricity can account for as much as 20%
demand
A number of different factors are responsible
for the intra-year fluctuations in Austrian electricity and gas consumption.While gas use is
most strongly correlated with temperatures,
electricity use is considerably less prone to
seasonal shifts. As Figure 4 shows, electricity
demand rises by about one-quarter in the winter months, while gas demand peaks at almost
two-and-a-half times summer levels.
R Intra-year electricity and gas consumption in Austria
Figure 4
■ Electricity ■ Gas
14,000
in GWh
12,000
10,000
8,000
6,000
4,000
2,000
January
Source: E-Control
February
March
April
May
June
July
August
September
October
November
December
Domestic electricity consumption is also
strongly influenced by economic activity. Since
power is an important input for industrial production – especially in the paper, chemical, engineering and motor industries – its use naturally
varies with manufacturers’ order books.The
link between economic and power consumption trends is revealed in Figure 5. As climatic
conditions, or substitution effects relating to
energy shortages (e.g. oil crises) can affect electricity demand, the connection is sometimes
less pronounced.
When energy demand is viewed over a number
of decades, certain trends emerge. For instance,
the gas intensity of the economy has risen
steadily in recent decades.This is principally
due to the gas companies’ efforts to connect
dwellings to the grid, and to the substitution of
the traditional energy forms, coal and heating
oil. However, it also reflects the fact that some
20% of total gas supply now goes to electricity
generation at thermal power stations.The proportion of thermal electricity generation
accounted for by gas averaged just under 30%
in the 1960s, and had climbed to almost 50% by
the 1990s.
There are growing signs that electricity demand
is becoming decoupled from economic growth.
Energy saving appliances, new technologies and
improvements to energy-intensive production
plant have resulted in increased energy efficiency.
The structural shift towards a service economy
has also reduced the electricity intensity of the
economy.
While Austrian gross domestic product (GDP)
grew by an annual average of 2.6% from
1990–2000, electricity consumption increased
by only 2.1% per annum over the period. By
contrast, between 1975–1985 electricity con-
R Economic trends and Austrian electricity consumption
Figure 5
■ Total domestic electricity consumption excl. PS ■ GDP at market prices
in %
5.5
4.5
3.5
2.5
1.5
0.5
-0.5
-1.5
1980 1981 1982 1983 1984 1985
Sources: Statistik Austria,WIFO, E-Control
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
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sumption growth, at an annual average of 3%,
outpaced economic growth (2.2%) by a wide
margin.The watershed came at the start of the
1990s. Electricity intensity – electricity consumption per unit of GDP (e1,000) – fell by some
5% between 1990–2000, from 312 kWh to 296
kWh.
20
Despite growing awareness of the need to save
energy, and delinking of energy use from economic growth, some sectors continue to cause
increases in consumption.The spread of information and communication technology, and the
use of electricity for environmental and control
technology have added to power demand.
Meanwhile the trend towards the nuclear family
and single households has swelled the number
of electricity consumers, and modern construction methods have led to increased use of air
conditioning.