The end of the twentieth century was accompanied by a concerted worldwide push towards competitive reform of the electricity supply industry (ESI). Until that stage, few countries would have questioned the economic efficiency of publicly owned vertically integrated utilities and their role as monopoly service providers in the ESI (the main exceptions being the privately owned vertically integrated utilities of the US and Japan). Although vertical monopolies may remain the most efficient structure for isolated power systems, the forces of competition are in the twenty-first century being harnessed by most countries as the drivers to greater economic efficiency of their electricity sectors.
Apart from an early attempt in Chile in 1983, the most notable example of unbundling and dismantling of the vertically integrated utility came in 1990 from England and Wales, where the industry had traditionally been owned by the state. The UK then opted to move to a new industry structure involving full competition in generation and retail supply. This was achieved by the fundamental expedient of requiring the transmission and distribution networks to become common carriers. This enabled each of the functions of generation and retail supply to become "unbundled" from the network function.
To create a competitive electricity market, where none existed before, requires a country to implement a wide range of structural and regulatory reforms. If a country also wishes to embark upon privatisation of its electricity utilities these reforms are inescapable (unless the government is willing to substitute privately-owned monopolies for public ones).
Because political, economic and industry conditions vary markedly between countries, any country should be cautious in adopting another country's precedents. This applies especially between developed and developing countries. Nonetheless, although there will never be any universally applicable rules, we have identified eight principles which we believe may be helpful as a guide in implementation of an ESI reform process in many countries.
(i) Unbundle the vertical monopolies — large power systems, which are operated by vertically integrated utilities, must be dismantled or "unbundled" into generation, transmission and distribution/retail utilities, which must then be run along commercial lines.
(ii) Create a wholesale electricity market — a wholesale electricity market cannot evolve by itself; it must be created by restructuring the generation function — by splitting up ownership of the power stations, appointing an independent system operator and introducing rules to regulate competitive trading.
(iii) Guarantee access to the transmission grid —a non-discriminatory, open access regime must be established for the transmission grid in order to guarantee all aspiring generators and retailers the right to participate in the market.
(iv) Establish an independent regulator —governments must cease to intervene in regulatory matters and must hand over regulatory responsibility to an independent regulatory agency, operating in a professional manner and utilising transparent procedures.
(v) Entrench the reforms in the legal system — in order to provide security and stability for investors, all reforms should be firmly entrenched in law.
(vi) Be careful with IPPs — IPPs should not be introduced in such a way as to constrain the freedom of action of governments in pursuing wider industry reforms.
(vii) Consider private sector participation, corporatisation and privatisation — utilities which remain state-owned in a competitive market may be at a competitive disadvantage against more adaptable private sector competitors, although this can be offset by any tendency for governments to favour their own entities. There should be a level playing field for all competitors and privatisation is conducive to this.
(viii)Finally, gain public support — public support for all reforms enhances the prospects of success. When privatisation is proposed, unequivocal political authority is a prerequisite.
Above anything else, ESI reforms in any country, regardless of its stage of economic development, must be designed to serve the country's particular needs and circumstances. This depends not just on the size and characteristics of its power systems but also on economic and political factors. It has a crucial bearing on the reform agenda if a country's electricity industry is in a healthy economic condition prior to undertaking the reform process. Equally important is the requirement to appreciate the economic and political situation in the country as a whole. Effective reform of the ESI requires that market reforms have already been started in other sectors, that the national economy has some effective market mechanisms, that financial institutions are at least moderately sound, that creditworthy customers exist and that contractual obligations are readily enforceable. Politics plays a crucial role: the nature and speed of ESI reform cannot move ahead of the evolution of the political structures and attitudes in the country concerned.
Although the reform experience of a particular country, however successful, may have no valid application in another, models of reform which have been tested and applied in other countries are likely to carry far less risk than theoretical models. Countries embarking on reform can certainly benefit by looking at the models which have been applied and the mistakes which have been made elsewhere. Nonetheless, they should not blithely copy what may have been done by the United Kingdom, Australia or other industrialised countries which had mature and sophisticated industry structures to begin with. In any case, countries such as the United Kingdom and Australia are really not far out of the experimental stage and we suspect they still have much to learn (a new trading system is to be implemented in the United Kingdom in the second half of 2000).
by Robert Pritchard and Philip Andrews Speed