The E7 Observer - Electricity Regulation Mail - n° 05 - September 1996

Opinion: "Energy policy for the next century must be flexible"
News focus: Implement the Retail Wheeling
Economy: A need to supply a rapidly growing economy
Legislation: "A framework for competition"
Datas
Outlook: Toward a nordic liberalised electricity market

Opinion

"Energy policy for the next century must be flexible"

The British Labour Party has just returned from its Annual Conference in Blackpool. This year, we met as an Opposition. Next year with the support of the British people we hope to meet as the new Labour government of Britain.

After eighteen long years in Opposition there will be much for us to do, but our relations with Europe are at the top of the list for priority action. Successful membership of the European Union is vital importance to Britain, which is why we have spelt out that the new Labour government will reject isolationism and play a positive role in Europe.

A genuine European single market

One of our first tasks will be to assume the Presidency of the European Union in the first half of 1998. In energy policy, our aim is that by the end of the first term of a new Labour Government we will have a genuine European single market in gas and electricity.

At a European level, there has already been some progress on energy liberalisation. The recently agreed Electricity Directive is expected to be followed before too long with the much awaited Gas Directive. These Directives, whilst not everything that the UK had hoped for, offer the opportunity for competition to lower costs and increase value for consumers across the European Union, to the benefit not just of domestic households but also of businesses seeking to compete in the increasingly global market.

The UK's own domestic experience has much to offer

The UK's own domestic experience has much to offer the debate on European Energy liberalisation. Large commercial and industrial users can buy their gas and electricity from a choice of competing suppliers who have non discriminatory access to the monopoly distribution networks.

From April 1998, liberalisation is to be extended to every customer in the UK. Each domestic household will have a choice as to from they should buy their energy.

We should be in no doubt as to the difficulties: the technical complexity of the metering and billing systems is enormous, and the social and environmental implications of breaking up the old monopoly franchises are as yet unquantified.

But these difficulties should not be allowed to hold up change indeed, the Labour Party's whole philosophy is rooted in the need to accept change, and by working together to shape it positively.

Setting up an efficient regulation where necessary

A sensible energy policy for the next century must be flexible enough to pursue competition wherever possible and tough, efficient regulation where necessary. This is the framework we are establishing in the UK, and the details of extending the Single Market to gas and electricity at a European level may prove to be very different.

Very soon, though, we hope that a new Labour government will take its place around the table with our partners in Europe, negotiating positively and constructively so that before too long we see the completion of the single market in energy.

John Battle MP,
Shadow Minister for Energy and Industry,
UK Labour Party

News focus

Implement the Retail Wheeling

Don Schaefer (Republican, Colorado), President of the Energy sub committee at the House of Representatives, has introduced a bill (H.R 3790) to the Congress on the 11th of last July, concerning the restructuring of the electric industry. His bill imposes on a federal scale, the implementation of the Retail Wheeling (Third Party Network Access), for all categories of consumers at the latest on the 1 5th of December 2000.

If the States fail to implement TPNA, the Federal Energy Regulatory Commission would act to impose it. Moreover, this text does not repeat the Public Utility Holding Company Act (PUHCA) and of the Public Utility Regulatory Policy Act (PURPA) once the TPNA is implemented...

We have to remind that the PUHCA strictly regulates the activities of electricity holdings, especially in diversification field.

The PUHCA made the constitution of firms inter States difficult, and the PURPA obliges traditional electricity companies to buy the current to a new category of independent producers (qualifying facilities) using cogeneration and renewable energies.

This law promotes the use of renewable energies as a source energy according to a progressive rate that will be up to 4% by the year 2010. This project will be submitted to vote during the next Session Congress. On a State scale, the bills relative to TPNA are presently being discussed in 48 out of 50 States (8 of them are experimenting in TPNA).

The Hungarian government may postpone the second part of the privatisation of the gas group MOL. The government has just postponed to January 1997 an increase in the energy prices that was to be implemented in October. The main foreign investors (the German RWE and Bayernwerk, the French EDF and GDF and the Italian Italgas) who were expecting a return on investment of 8 % thanks to this increase showed their dissatisfaction.

The report of Mrs Eryl Mc Nally, the ESP British Deputy, has been adopted with 16 votes against 8 by the Energy Commission of the European Parliament. It recommends the adoption of a community directive relating to the introduction of rational planning techniques in the electricity and gas fields.

Professor Stephen Littlechild, the Director of OFFER (British office for electricity regulation) published a consultation paper on price restraints on the supply businesses of Public Electricity Suppliers (PESs) from 1998, when competition will be extended to all the customers in England, Scotland and Wales. Pr Stephen Littlechild affirms that an effective competition is the best protection for customers. This consultation paper also deals with which category of customers should be covered by price restraint arrangements, and with how long the price restraint arrangements should last.

Economy

Turkish energy policy: a need to supply a rapidly growing

With the least developed energy economy and an electricity sale 20 times higher than its purchase, Turkey seems to be entering 1997 without energy.

Since 1983 GDP has been growing annually by more than 5,5%. A large increase in gas consumption and imports is particularly expected.

The Former Motherland Party member of Parliament, Erdal Batmaz warned in a research document, the "Energy Production Consumption Observation in Turkey" zelco,e dqtqco,pzelco,e dqtqco,pthat urgent solutions to the energy crisis were needed three or four years ago, and stressed that Turkey's energy stock (31% in 1993) is expected to decrease to 8% in 1996 and to 4% in 1997.

The reasons for the crisis

The lack of policies and investments seems to be the major reason for the crisis. A $5 Billion of energy investment is needed every year but only $1.2 Billion have been invested during the last few years. To attract foreign capital and to increase generation capacity, the Turkish government initiated the build operate transfer (B.O.T.) programme in 1985 under which projects are financed by local and foreign enterprises before ownership is transferred to the State (normally after 15 years). But due to administrative delays and court ruling, only 34 MW of capacity have been commissioned so far.

The Turkish energy sector

The Turkish energy sector is mainly state owned with State economic companies (SEEs). The government has privatised the electricity production and distribution system but has kept the transmission system under public control. In 1993 the electricity company TEK was divided into the Turkish Electricity Generation and Transmission Corporation (TEAS) and the Turkish Electricity Distribution Corporation (TEDAS) with 7 regional based distribution industries. About 10% of the electricity is generated by independent companies, 3% by private sector electricity companies and 6% by autoproducers. Independent companies sell energy to TEAS through special bilateral agreements.

The privatisation programme

As set out in the five year plan (1995 2û00) Turkey energy policy aim is to ensure sufficient, reliable and economic energy supplies to support economic and social development.

By a new legislation implemented in June 1996 the government has initiated the Build Operate Own (B.O.O.) programme to accelerate the privatisation programme.

Although the government is undertaking measures to privatise most of the energy sector trough an ambitious programme to modernise the energy industries and to build the infrastructure needed, it seems that the implementation is still not efficient.

"Energy crisis in Turkey represents a very dark shadow"

"Energy crisis in Turkey represents a very dark shadow", Industry and Natural Resources Minister Recai Kutan said. The Minister emphasises that natural gas power stations must be constructed urgently otherwise Turkey will have to import 3 or 4 Billion Kwh of electricity per year. This question deserves to be raised during the Second Annual Conference on privatisation and restructuring of electricity that will take place in Istanbul (Turkey) the next 24 and the 25 of October (1)

(1) Conference information: KPMG England, +44 171 637 4383

B. O. O Legal framework in Turkey

B.O.O decree n° 96,8269 of the 8 June 1996:

allows local and foreign companies to build and to operate electricity generation putting in;
allows generators to sell electricity to TEAS (1) TEDAS and others companies: transmission companies, supply electricity companies, and industrial companies which use more than 4000 TWh;
applies oneself to private projects and concerns thermal power stations' founding and running only. (does not concern the hydro geothermal and nuclear energy)

(1) this transaction is guaranteed by the Treasury Department

ENDESA, the Spanish electricity company will invest 112,5 milliards of pesetas in Chili to acquire 25,27% of the capital of the Chilean electricity company Empresa nacional de electricidad.

According to Enrico Testa -the President of ENEL. the Italian electricity company- the privatisation of its company could start next year.

"The ENEL privatisation should allow to create a real competition and to open the market to numerous investors", Enrico Testa said.

To this subject, a Commission has been set up by the Italy's Ministry of Industry to make recommendations on how to promote liberalisation and competition in the Italian electricity sector according to the proposed European Union Directive on the Internal Electricity

The Japanese electricity companies federation stated that compared to august 1995 the electricity production of the nine main Japanese electricity companies has decreased by 5,6% (down to 78 432 Gigawatts per hour) in august 1996. At the same time, whereas the production of thermal power stations has decreased by 12,5%, the production of hydropower and of nuclear power has increased. The nuclear power stations' production now represent more than 33% of the energy produced by the companies.

An independent Experts Commission was set up by the EBRD (European Bank for Development) and the European Commission in order to evaluate the necessity of finish the building of the two reactors in Ukrania.

This report should be submitted to the Commission and to the EBRD before the 29th of November l996.

The EBRD may decide to grant some financing to those projects.

Datas

Renewable energies in OECD, 1994

Legislation

"A Framework for Competition"

In November of 1995, the Ontario Government established the Advisory Committee on Competition in Ontario's Electricity System (the Macdonald Committee) to examine the economic, technological and public policy trends facing Ontario Hydro and the provincial electricity system and to make recommendations on the structural, legislative, regulatory and potentially, ownership reforms required to ensure both are poised to meet the competitive challenges of the 21st century.

The report of the Advisory Committee, entitled "A framework for Competition", was publicly released on 7 June, 1996. Overall, its recommendations reflect proposals and plans underway in other juridictions : most significantly, an ultimate end-state of customer choice and retail access for all, following a period of wholesale access.

To dispatch electricity, oversee the delivery and coordination of electricity supplies and ensure security of supply, the committee recommends the establishment of a non-profit Independent System Operator. A separate, non-profit Electricity Exchange, whose membership would comprise all marketplace participants, would run the bidding and Settlements processes and the futures market for electricity.

The introduction of full competition is perceived as requiring the breakup of Ontario Hydro. Access to the transmission System would be open and non-discriminatory, with Ontario Hydro's transmission assets set up as a separate grid company. Ontario Hydro's current generation assets would be separated and established as distinct, Competing entities. Private equity would be introduced into ownership of the fossil and hydroelectric assets (except the Niagara Falls facilities), but the nuclear group would remain publicly owned. Also needed is a complementary rationalisation of the provincial electricity distribution business: from over 300 municipal electric distribution utilities to many fewer, organised around county or regional boundaries (requiring the absorption of Ontario Hydro's retail system into those of the municipal utilities). The monopolistic wires business would be separated from the competitive electricity sales and services activities. Finally. the committee recommends the sale of Ontario Hydro International (mandated to sell its products and services internationally) and the introduction of private equity into the ownership of Ontario Hydro Technologies the company's research and development facilities.

Comprehensive legislative and regulatory change would accompany these changes: the current Power Corporation Act would be replaced with new legislation of a policy nature. The Ontario Energy Board, which currently regulates the natural gas companies in the Province and advises the Ministry of Environment and Energy on Ontario Hydro's rates, is recommended as the future regulatory authority.

The Macdonald Committee offered no timeline but stated the need to introduce retail access as soon is reasonably possible. These recommendations now rest with the Ministry, which, after hearing public responses to this report, will develop its industry proposals for Cabinet approval in the fall of this year.

Rod Taylor
Vice-President,Corporate Strategies
& Sustainable Development
Ontario Hydro

"What Future for Industrial liberalisation in Europe". This is the topic of the next conference organised by The European Voice, in Brussels, the 7th of November. Contact: London +44(0) 171 453 2700.

The Paneuropean Energy Chart's office in Brussels announced that the Chart was submitted to the ratification of the Russian Parliament. Consultations will be conducted from December 1996 by a specialised Commission. To be enforced, the Chart must be ratified by at least 30 countries.

CHUBU, one of the nine main Japanese electricity companies, has started administrative procedures to implement a construction program of thermal power stations Three power stations are to be built : two coal powers stations in Hekinan, and one with fuel in Taketoyo. The works should start in 1997. By July 2003, the three thermal power stations should be working

The IFC (International Finance Corporation)'s Clean Energy Fund should be operational by the end of 1996. Its aim is to help finance and package emerging market renewable energy and energy efficiency projects that are too small for normal investment operations. This Fund could range from $100 200 million. it lends to private businesses.

As far as the impact of increased gas supplies on the electricity industry is concerned, B.C. Nebergall, Enron Europe Vice President said that the "Gas fired Combined Gas Turbine (GCGT) technology is generally the most economic solution and enjoys many additional benefits over other fuels", during The European Power Forum organised by AIC Conferences in London last September.

Outlook

Towards a nordic liberalised electricity market

If the deregulation of the electricity market is traditionally linked to the privatisation of its industry, it is different in Norway where the main part of the industry remains under State control in the new competition framework. However, even without using privatisation, the 1991 Energy Act enabled the implementation of what is probably the most deregulated electricity market.

The legal basis of the change

The new Norwegian Electricity Act that was adopted in 1990 and implemented on the first of January 1991, lays down the legal bases of changes that tend to reinforce the flexibility and the efficiency the electricity industry. Moreover, it stipulates that the competition reinforcement is the mean that has to be set up in order to increase the efficiency of the electricity industry.

Third Party Network Access (TPNA)

The 1991 Act thus opens access to all the networks to all producers and consumers, and it enables consumers to choose freely their electricity supplier as well as their distributor, independently from their feeding society. It imposes open network access accordingly with some principles: the owner of the network must assess, when required, the available capacity for a desired transport, the discrimination between customers and group of customers is prohibited, the owner of the network must inform the customers of the costs and of the expected transport tariffs as well as the basis on which they are assessed. It imposes to networks' operators the obligation to connect any user but it eliminates the supplying obligation for distributors. It requires the separation of accounting between production, transport and distribution.

The licence: a regulation tool

The 1991 Act introduces a new framework of regulation that gives to NEV (1), jointly with the Direction of competition, the power to regulate the industry. The State thus keeps its supervising and regulating over industry responsibilities. The most important regulation tool is the licence, imperative for distributors, as well as for the participants to electricity markets.

The deregulation effects

Norway has a lot of natural resources, and is the first producer of hydropower in Western Europe. This has enabled Norway to produce 99 6% of its electricity in 1994. By the year 2000, local officials agree to say that Norway should become a net electricity importer owing the electricity production over capacity. However, pluviometric hazards, on a spot market, have consequences on production and generate important prices fluctuations. In the new competition framework, prices dropped for some customers. The competition and the overcapacity situation led producers, whose hydroelectric installations have been depreciated, to adjust their prices on marginal production costs which are structurally low. Most of supplying contracts have been renegotiated because of the new Act. The prices's drop mainly beneficiated to very big industrial customers (up to 30 and 40 %). It is apparently different for other customers, because of high transaction and distribution costs. A limitation on exports and imports implicitly exists because of the low market prices. As a consequence of deregulation, traders and brokers appeared on the Norwegian electricity market, and there was a development of new flexible contracts.

Norway is reinforcing its links with the Continent

At the end of 1995, the Norwegian government has approved three agreements for electricity exchange between Norway and continental Europe. In December 1995, the Norwegian Parliament approved the White Paper on agreements with Sweden. From the first January 1996, an integrated electricity market including the two countries in a energy exchange area called "The Power Exchange Area" was set up. The quantitative restrictions on electricity trade and duty on cross border trade were eliminated and a harmonised assess methods (3) now replaces the special tariff that was in force at that time. At term, liberalisation of electricity markets in Norway, Sweden, Denmark and Finland could go toward a single electricity market in Northern countries. This market could be the mean for those countries to find back the advantages of the cooperation that existed within NORDEL (4) and that became old fashioned in the new liberalisation framework on a European scale. A nordic market will moreover have positive consequences on national domestic market. They will have to start by spot trade on daily or weekly contracts, and will have to tend towards forward trade. On a longer term, the market will probably extend itself to other countries, to start by Germany and Russia. Norway is a country which has refused to enter the European Union, but which is reinforcing its electric links with the Continent.

P.C. and V.S.

(1) Norges Vassdrag Og Energiverk, norwegian admnistration for water and energy, under the Industry and EnergyMinistery
(2) Production can range from 86 to 148 TWh between dry and humid year for an average production of 110 TWh.
(3) Node based tariff
(4) Electric cooperation Northern organization between Sweden, Denmark, Finland, Island and Norway.

The E7 Observer