THE STATE OF DEREGULATION OF THE ELECTRICITY INDUSTRY
PRESS RELEASE
The Competition Authority
The Electricity and Gas Regulatory Authority
JOINT PRESS RELEASE
The investigation conducted jointly by the Electricity and Gas Regulatory Authority and the Competition Authority into the state of deregulation of the electricity industry has been completed
At their meeting on 9 February 2005, the Competition Authority and the Electricity and Gas Regulatory Authority resolved to close their joint fact-finding investigation of the state of deregulation of the electricity industry, more than five years following the entry into force of legislative decree 79/99, and following the commissioning of the electricity exchange.
The investigation had provided in an updated picture of the national electric power supply. Enel is the main nationwide power supplier in terms of its net operational efficient power stock, with a market share in excess of 55%. Its facilities are also structured with a bias towards the particular type (the so-called mid-merit and peaker generating plants) that give it a substantial competitive edge when setting prices, particularly for peak demand. Enel, moreover, is the only operator to have generating plants all over the country, while the other companies are more locally concentrated, mainly in northern Italy. This supply structure, in terms of its geographic breakdown and type of generating facilities, shows that process of disposing of the production companies (Genco) set in motion by the Deregulation Decree, has not been insufficient to create any real competition against Enel.
The Italian wholesale electricity market can be divided into four macrozones: North, South (the Centre and the South), Sicily (Sicily plus Calabria), and Sardinia. All of them are insufficiently competitive, with Enel as the dominant operator on the wholesale markets in the North, South and Sicily macrozones, with a duopoly in Sardinia comprising Enel and Endesa.
Figures for April-September 2004 show that Enel is indispensable to meet the local demand, and is therefore able to set the wholesale price for 100% of the hours and the South macrozone, 44% of the hours in the North macrozone, 29% of the hours in the Sardinia macrozone, and 24% of the hours in the Sicily macrozone. Endesa is absolutely essential to meet its local demand, and is therefore in a position to set the wholesale price for 67% of the hours in Sardinia.
Enel is also the only operator that is able to make strategic use of its market strength between different macrozones. Enel has the capacity to set prices simultaneously in several macrozones; for 95% of the hours in the North and South macrozones taken together, 91% of the hours taking the South and Sicily macrozones together, and 63% of the South and Sardinia macrozones taken together.
The survey also revealed serious constraints on the development of competition on the dispatching services market, which is even more concentrated than the wholesale market, and where once again Enel's role is clearly confirmed as the dominant supplier.
Despite all these critical features, the introduction of such market mechanisms as the electricity exchange has not only been an irreversible decision, but is certainly able to foster, in the medium term, a real competitive structure and a reduction in wholesale electricity prices below the current levels, provided that the market can develop towards adopting a structure that is less prone to conditioning by the former monopoly holder, Enel. Both authorities have therefore suggested that a number of measures be adopted regarding the structure of the electric power offering. And in particular, they consider the following to be appropriate:
a) priority should be given to measures on the national transmission grid, in order to reduce the risks of inter-zonal congestion to the minimum, and to ensure that the new generation capacity to be installed in the coming years - mainly located in the north, which is an area that already exports power to the rest of the country - will provide a real opportunity to compete with supplies from the dominant operator;
b) connections with countries abroad should be increased, consistently with the development of the national transmission network;
c) other companies should be encouraged to set up new production poles in market zones where the demand is not being fully met today;
d) measures should be adopted which, in the period leading up to the establishment of a competitive supply structure, are able to remove or minimise situations in which market strength can potentially be exercised;
e) production capacity should not be removed from the market. In a medium-term perspective, in which Enel's unilateral dominance might be weakened, it is essential to ensure that the full production capacity is offered, in order to prevent a strategicshortage of supply between producers purely for speculative purposes.
The following incentives for the competitive development of the electric power market would be appropriate:
a) measures should be strengthened to guarantee the development of a stable market, with companies operating also under medium/long-term contracts;
b) the market should be organised on a "zonal" basis, at least until an adequate level of competition has developed in all the zones of the national territory, to send out price signals that will reveal critical points in the system;
c) solutions should be pursued to ensure that Italy's dominant corporation is not able to unfairly benefit from implementing "linked" strategies in different zones of the country;
d) action should be taken to prevent the introduction of a distorted market mechanism when setting prices and quantities as a result of the abuse of market strength, so that Enel's present and future competitors have reliable market benchmarks to use when investmenting in power generation.
As for the measures to encourage a competitive electricity demand, whereas in the initial period (2004) electricity demandwas expressed in aggregate form by the independent system operator, the operational adjustments made at the beginning of this year on the electricity exchange seem to be moving in the right direction. Adequate instruments should also be developed to cover the price risks (standardised differential contracts, negotiated by products, also on specific organised markets, etc) to facilitate the active and informed participation of the demand and encourage electric power acquisition strategies that are more responsive to price variations (evidencing possible elasticities). A major contribution can be made to this by both hastening the process of installing and managing hourly metering devices at all the end-users' voltage levels, and encouraging initiatives to ensure rational energy use.
Rome, 10 February 2005