Economic Regulation in Energy Economic Regulation in Energy K Peter - - PDF document

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Economic Regulation in Energy Economic Regulation in Energy K Peter - - PDF document

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Economic Regulation in Energy Economic Regulation in Energy K Peter Kolf General Manager Economic Regulation Authority 28 March 2007 Science & Engineering Murdoch University Overview The Economic Regulation Authority Economic

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Economic Regulation in Energy

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K Peter Kolf General Manager Economic Regulation Authority

28 March 2007 Science & Engineering Murdoch University

Economic Regulation in Energy

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Overview

  • The Economic Regulation Authority
  • Economic Regulation
  • Issues
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The Economic Regulation Authority

Functions

  • Administers Access to Infrastructure
  • Licenses Service Providers
  • Monitors & Regulates Markets
  • Inquiries (Referred by Government)

Features

  • Independent of Government, Industry & Consumer

Groups

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Economic Regulation Authority

Governing Body

General Manager Corporate Director References and Research Executive Director Licensing, Monitoring & Customer Protection Director Gas and Rail Access Manager Finance & Administration Executive Director Competition Markets & Electricity

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Gas Pipeline Infrastructure

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Electricity Infrastructure

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Rail Infrastructure

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Water Services

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Matters to which the Authority must have regard

  • Promote the public interest
  • Consider the long-term interests of consumers
  • Encourage investment
  • Consider the interests of investors & service providers
  • Promote competition & fair market conduct
  • Prevent abuse of monopoly power
  • Practice transparent decision making

Section 26 Economic Regulation Authority Act 2003

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Objective Function

Maximise:

  • Long term interests of consumers

Subject to:

  • Interests of investors & service providers
  • Encourage investment
  • Environmental protection
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Investment Environment

Max W Optimum

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Economic Efficiency

Singularity

  • Technical efficiency
  • Allocative efficiency
  • Dynamic efficiency
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Objective Function

Maximise:

  • Long term interests of consumers

Subject to:

  • Interests of investors & service providers
  • Encourage investment
  • Environmental protection
  • Re-elect Minister
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Objective Function

Maximise:

  • Re-elect Minister

Subject to:

  • Interests of investors & service providers
  • Encourage investment
  • Environmental protection
  • Long term interests of consumers
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Investment Environment

Election of Minister Long Term Interests

  • f Consumers

Interests of Investors

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Max π Max W

Energy Transmitted TJ/d Energy Consumed TJ

Excess π = 0 Optimum

Energy Transmission Company

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1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 S1 S6 S11 S16 S21 S26 S31

  • 800
  • 700
  • 600
  • 500
  • 400
  • 300
  • 200
  • 100

100 200 100-200 0-100

  • 100-0
  • 200--100
  • 300--200
  • 400--300
  • 500--400
  • 600--500
  • 700--600
  • 800--700

Profit

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1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 1 6 11 16 21 26 31

  • 200
  • 150
  • 100
  • 50

50 100 150 200 150-200 100-150 50-100 0-50

  • 50-0
  • 100--50
  • 150--100
  • 200--150

Consumer Surplus

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No Proof of Hypothesis

“The great difficulty in the social sciences (if we may presume to call them so) of applying scientific method, is that we have not yet established an agreed standard for the disproof of an hypothesis. Without the possibility of controlled experiment, we have to rely on the interpretation of evidence, and interpretation involves judgement; we can never get a knock-down answer. But because the subject is necessarily soaked in moral feelings, judgement is coloured by prejudice.”

(Joan Robinson, Economic Philosophy, 1962, p26)

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Prejudice

“Anyone who says to you: ‘Believe me, I have no prejudices,’ is either succeeding in deceiving himself or trying to deceive you.”

(Joan Robinson, Economic Philosophy, 1962, p26)

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First Principles of Regulation

  • There is a demonstrated need for regulation
  • It actually works
  • It’s least restrictive on consumer sovereignty
  • It’s benefits outweigh the costs
  • It’s user friendly
  • It’s consistent with the nature of things
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Types of Regulation

  • Public sector ownership & control
  • Price control of private sector
  • Market based regulation

– Open access – Structural separation – Markets in contestable elements – Price or revenue cap for monopoly elements

  • Monitoring / transparency
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Supply of Goods & Services

Private Goods Bread, Butter etc Mixed Goods Pipelines, Wires etc Public Goods Free to air, Defence etc Common Property Fisheries, Water resources etc

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Monopoly

Factors:

  • Economies of scale
  • Economies of scope
  • Other barriers to entry – new infrastructure
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Externalities

  • Environmental
  • Social
  • Other
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Economic Regulation

Inflexible Prescription Legislated Mayhem (Legal utopia) Dictated Mayhem Flexible Regulation

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Economic Regulation

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Conclusions

  • Economic regulation continues to be contentious, but settling
  • Regulation is second-best, but in some circumstances

necessary

  • Benefits of economic regulation not always obvious
  • Issues complex, counter intuitive and easily misunderstood
  • Litigation costly and time consuming
  • One regulatory model does not fit all circumstances
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Economic Regulation in Energy