2009 IEW Conference - Venice Transmission Network Unbundling and Grid Investments: Evidence from the UCTE Countries Paolo Nardi CERTeT – Università Bocconi

2 Policy Review: an outline Sector Inquiry (January 2007) Third Energy Package (September 2007) –Transmission Network Ownership Unbundling EP’s second reading (April 2009) –ISO –OU –EEU

3 Policy Review (2): the debate Commissioner Kroes –«There is evidence that investments are based on what is good for the integrated company, rather than on efficiency gains for the network company. We need to ensure a structural unbundling that removes the opportunities for discriminating against competing suppliers, and which provides the proper incentives to invest in the network» (speech 06/17) Mrs Angela Merkel –«Unbundling is a different issue. We have many traditions in Europe. Fourteen member states already have unbundling, others like Germany have a different tradition. I do not think the issue of competition can be reduced to the unbundling question» (Financial Times, March 6th 2007)

4 Literature Review Benefits of Unbundling (Léautier, 2001): –Pro-competitive effect of grid investments –Conflict of interest for vertically integrated incumbent –Unbundling is the structural solution Costs (Kaserman and Mayo, 1991; Kwoka, 2002 and 2008): –Diseconomies of scale –Diseconomies of coordination Net impact? Ambiguous (Brunekreeft, 2008; Pollitt, 2008) –Lack of definitive econometric evidence on reform effects –Studies on wholesale and retail markets, not on transmission network

5 Methodology (1) Research questions: Is there any evidence of a positive relationship between unbundling and grid investments? Does the concentration in the wholesale market matter with this evidence? Sample: 14 TX networks of UCTE countries ( ) 28 major interconnections ( ) Indicators: annual growth rates of capacity indicators quality indicators to evaluate side effects

6 Methodology (2) Non-parametric tests on medians between: TX-dataset: Unbundled vs. not unbundled country-year Ownership unbundled vs. not ownership unbundled country-year ICX-dataset: ICX-year between both unbundled countries vs. not both unbundled countries ICX-year between both ownership unbundled countries vs. not both ownership unbundled countries

7 Grid length of the network

8 Conventional thermal capacity of ICX networks

9 Empirical findings (1): capacity Some capacity indicators are likely to increase after ownership unbundling –In TX networks, measured as annual growth rate of grid length (significance= 0.03**) –In ICX networks, measured as annual growth rate of thermal capacity (significance=0.09*) More mixed evidence when legal and functional unbundling have been also considered

10 Empirical findings (2): quality Any unintended costs of Ownership Unbundling? –Concerns expressed by policymakers and scholars on unintended costs of ownership unbundling should not be overcome Quality indicators show twisted results: –Significance is not always good –Even if unbundling per se is associated to an apparent enhancement of quality indicators, the same indicators systematically worsen if the analysis focuses upon ownership unbundling

11 Comments: A scattered evidence of increased grid capacity after ownership unbundling –there could be a problem of short-run effect; Yet a degradation of quality indicators cannot be excluded –A less reliable and low-quality TX and ICX service could represent a side effect of difficult coordination and/or mismanagement of the maintenance activities

12 Conclusions Ownership Unbundling does not take off –Relevance of political issues A phenomenon of capture by ‘hybridized’ utilities Doubts on the economic rationale behind the EC’s proposal –Benchmark Competition Regional Approaches by ERGEG (ACER) Pentalateral Group and market-led initiatives

13 Thank you for your attention ‘We must now return energy to centre stage’ (Commission President Barroso, January 2007)

14 Essential References Brunekreeft, Gert (2008) Ownership Unbundling in Electricity Markets. A Social Cost Benefit Analysis of the German TSO’s. EPRG Discussion Paper 08-15, University of Cambridge Kaserman, David and Mayo, John (1991) The Measurement of Vertical Economies and the Efficient Structure of the Electric Utility Industry. The Journal of Industrial Economics 39 (5) Kwoka, John (2002) Vertical economies in electric power: evidence on integration and its alternatives. International Journal of Industrial Organization 20 (5) Kwoka, John (2008) Restructuring the U.S. Electric Power Sector: A Review of Recent Studies. Review of Industrial Organization 32 (3) Léautier, Thomas-Olivier (2001) Transmission Constraints and Imperfect Markets for Power. Journal of Regulatory Economics 19 (1) Pollitt, Michael G. (2008) The arguments for and against ownership unbundling of energy transmission networks. Energy Policy 36 (2)