Universal service obligations (USOs) (2)

1
Universal service obligations (USOs) (2)

• The interaction between universal service
  regulation and competition in these market
  segments is direct and very strong
• USOs may determine the nature of competition that
  can be sustained in the market.
• Great attention must therefore be given to the
  definition of USOs and to their implementation
• ERGEG (European regulators group for electricity
  and gas), position paper on End Users Price
  Regulation
• End-user price regulation is one factor which
  prevents equal access of suppliers to all
  customers. This has a negative effect on the
  functioning of the competitive retail markets

2
Universal service obligations (USOs) (3)

• ERGEG, last June has published a Review on
  end-user price regulation in European Countries
• According to this review in the electricity
  sector in 2006, 17 out of 28 countries surveyed
  had some form of retail price regulation for
  eligible customers (not households)
• Moreover when regulated tariffs were available
  only a very small percentage of customers had
  switched to the competitive market in most
  market segments more than 80 remained at
  regulated tariffs and in many segments this
  percentage was close to 100.
• Finally, only in one country (Hungary) suppliers
  offering regulated tariffs were chosen on the
  base of an open tender.

3
What can retail competition do? (1)

• First we have to define a benchmark
• DSOs supply final customers
• Local monopoly
• Need for price and quality regulation
• Possible regulation basic electricity service
  plus premium if added values are demanded (eg.
  price hedging)
• Regulator knows all kind of model
• Auction to choose the retail supplier
• Competition for the market
• Price and quality determined by the auction

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What can retail competition do? (2)

• EXPECTED BENEFITS - COMPETITION CAN
• 1. Increase productive efficiency of retailing
• by developing innovative retailing technologies
  that reduce commercial costs
• by reducing the costs related to risk hedging
• Increase competition in the wholesale market eg
  by easing entry into the market
• Increase allocative efficiency
• By transferring all costs savings along to
  consumers

5
What can retail competition do? (3)

• EXPECTED COSTS - COMPETITION CAN
• 1. Increase total costs
• By loosing economies of scope between
  distribution and supply
• By increasing advertising and promotion costs
• By increasing retailers profits
• 2. Decrease allocative efficiency
• Switching costs may give rise to market power
• While new entrants can have an advantage in
  competing for new customers it is very hard for
  them to compete for old customers who are already
  attached to an incumbent
• and any consumers who switch are likely to be
  less loyal, hence less valuable, ones

6
What can retail competition do? (4)

• Common barriers to effective competition
• institutional barriers involving metering and
  data aggregation
• limited unbundling of distribution and supply
• limited access to reliable information on
  contracts and prices.

7
What can retail competition do? (5)
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Contacts

• Clara Poletti
• Director
• IEFE - Bocconi University
• www.iefe.unibocconi.it
• Viale Filippetti 9
• 0122 Milano Milan (Italy)
• 39 02 58363820
• e.mail clara.poletti_at_unibocconi.it