Comparing electricity transmission arrangements
In September 2007, the EU Commission published a proposal for the 3rd legislative energy market package (EC 2007b). This proposal was formulated in order to remedy, among other things, two important problems identified by the EU Commission in the electricity sector: the lack of independence of the transmission organizations and the non-compliance with the non-discriminatory access rule (EC 2007d). The EU Commission had noticed that the fact that transmission organizations were not completely unbundled from generation or retailing (e.g. legal or functional unbundling) was one of the main factors explaining the lack of development of competition. Indeed some transmission companies in Europe are still integrated with generation and retailing activities (e.g. Austria, France, Germany, etc.).
Among the possible solutions identified in the proposal to settle this problem, the EU Commission considered ownership unbundling between transmission system activities and generation activities to be the first best solution. The Commission also considered that a possible second-best solution would be the setting up of an independent business in charge of operating the transmission system, while the network ownership remained in the hands of the generator via a legally separate affiliate . It deemed these two options to be preferable to a legally unbundled transmission system operator (hereafter, LTSO) where transmission ownership is not entirely separate from generation or from system operation. The Commission's point of view relied on a set of arguments based on theoretical and empirical studies which claimed that legal unbundling was not enough to solve problems of discriminatory access (EC 2007c).
The Commission's proposal triggered various reactions from interested parties. A coalition of countries (France, Germany, etc.) presented a counterproposal (known as the "third way", EEUTSO 2008). This coalition was opposed to ownership unbundling and supported an alternative LTSO with more control as well as additional measures to ensure better coordination with neighboring transmission organizations.
The EU Commission “answered” this counterproposal in February 2008 with a first “non paper” (EC 2008a). It reasserted its preference for ownership unbundling and a Transmission System Operator (hereafter, TSO) but also considered alternative solutions. In fact the Commission was willing to agree to incomplete ownership unbundling provided that transmission companies engaged in strong regional cooperation and met other necessary prerequisites to ensure non-discriminatory access. In a draft proposal (EC 2008b), it extended the regional cooperation approach to all the operators, not only those opting for the third way.
On June 6, 2008, Member States reached a compromise based on the so-called "third way" proposal, in which they endorsed two alternatives to ownership unbundling: the "independent system operator" (ISO/LTO) and "legally unbundled transmission system operator" (LTSO) models. Both of these would have allowed European electricity companies to retain their network assets, provided they met strict conditions to ensure separation between supply and transmission. On June 19, 2008, the European Parliament rejected both proposals, backing full ownership unbundling as the only option for electricity companies. As the Council’s position is different from that of Parliament, a second reading will take place.
The purpose of our study is twofold. First, we aim to shed light on this debate by re-examining theoretical arguments from the economic literature on transmission arrangements. In order to do so, we build a consistent comparison framework and rank ideal transmission arrangements according to the relative weight of identified criteria. This ranking is useful as it provides theoretical guidelines. However, we have to bear in mind that the implementation of transmission arrangements can substantially deviate from theoretical models. As the saying goes, the evil is in the detail. This calls for caution when interpreting our ranking. In the second part of our analysis we highlight significant discrepancies between observed implementations of different types of transmission arrangements and well-designed theoretical arrangements.
Our report is organized as follows: we start by identifying five main criteria enabling us to compare different institutional arrangements for electricity transmission. These criteria and the comparison framework are presented in Section II. The rest of the report is organized in two parts. In Section III, well-designed institutional arrangements for transmission are compared according to the five criteria. Section III.1 ranks four institutional arrangements in a national isolated power system perspective. In Section III.2, we take into account the regional perspective and the interconnection of different systems to show that the ranking can be modified substantially. In Section IV we analyze how current implementations of different arrangements may modify our findings based on well-designed institutional arrangements. Section V concludes the report.
