2. http://www.eurelectric.org
Boulevard de l’impératrice, 66 bte2 - B – 1000 Brussels
Tel. : + 32 2 515 10 00 - Fax. : + 32 2 515 10 10
Email : cbusard@eurelectric.org
The Union of the Electricity Industry–EURELECTRIC is the sector association
representing the common interests of the electricity industry at pan-European level, plus
its affiliates and associates on several other continents.
In line with its mission, EURELECTRIC seeks to contribute to the competitiveness of the
electricity industry, to provide effective representation for the industry in public affairs,
and to promote the role of electricity both in the advancement of society and in helping
provide solutions to the challenges of sustainable development.
EURELECTRIC’s formal opinions, policy positions and reports are formulated in
Working Groups, composed of experts from the electricity industry, supervised by five
Committees. This “structure of expertise” ensures that EURELECTRIC’s published
documents are based on high-quality input with up-to-date input information.
For further information on EURELECTRIC activities, visit our website, which provides
general information on the association and on policy issues relevant to the electricity
industry; latest news of our activities; EURELECTRIC positions and statements; a
publications catalogue listing EURELECTRIC reports; and information on our events and
conferences.
4. Table of Contents
1. BACKGROUND AND INTRODUCTION 1
2. KEY PROVISIONS IN THE DIRECTIVE 2003/54/EC 4
3. GENERAL REGULATORY FRAMEWORKS AND PRINCIPLES 8
3.1. General framework 8
3.2. Explanation of competencies 8
3.3. Principles of good regulation 9
4. EURELECTRIC SURVEY ON REGULATORY MODELS – MAIN FINDINGS 14
4.1. Regulatory Authorities involved 14
4.2. Independence of the regulators 16
4.3. Resources of the regulators 17
4.4. Competencies of the regulators 19
4.5. Regulatory models and formulae in use 23
4.6. Consultation between regulators and industry 25
4.7. Resources devoted to regulatory work by the industry 25
4.8. International aspects: co-operation between European regulators 25
5. ASSESSMENT OF REGULATORY MODELS BY INDUSTRY 28
5.1. Negative Characteristics observed 28
5.2. Positive points 32
5.3. Cross-border impact of regulatory decisions 32
6. CONCLUSIONS AND RECOMMENDATIONS 34
ANNEX 1. RELEVANT PARTS OF THE FINAL TEXT OF THE NEW ELECTRICITY
DIRECTIVE 2003/54/EC 37
ANNEX 2. ENERGY REGULATORY AUTHORITIES 39
5. ANNEX 3. TABLES BASED ON FINDINGS OF EURELECTRIC SURVEY 40
ANNEX 4. DECISION TO SET UP THE EUROPEAN REGULATORS' GROUP 43
ANNEX 5. EURELECTRIC QUESTIONNAIRE ON REGULATORY MODELS. 46
6. Executive summary
The European Union is accelerating the process of liberalising the electricity and gas markets
by having adopted new Electricity (2003/54/EC) and Gas Directives (2003/55/EC). Among its
qualitative aspects, this "liberalisation package" outlines the minimum functions and
competencies of the regulatory authorities. The regulators have an important role in ensuring
the operation of an internal market in electricity, and the resulting regulatory models will play
a key role in the good functioning of the internal electricity market in the soon-to-be-enlarged
EU.
The purpose of this report is to take a closer look into the existing regulatory models in
Europe, to see what the main differences and converging points are, and to identify good
practices. It is intended that the report will serve as an initial step in preparing for greater
input from the electricity industry to the debate on how regulatory models should evolve in a
European electricity market, post-liberalisation.
Good regulation has a number of characteristics that can be generally accepted. These include
clarity, proportionality, consistency, transparency, independence, accountability, effectiveness
and flexibility. A best practice regulatory framework is seen to exist where the above
characteristics emerge for the benefit of all stakeholders and are embedded within regulatory
processes and procedures with equal emphasis. The characteristics should be pursued
regardless of the regulatory model that is adopted.
It is also a generally accepted principle that the regulators should enjoy appropriate
independence in their day-to-day work from regional or national government. This is to
guarantee regulatory stability and to avoid situations in which the decisions of the regulator
are constantly modified.
At present the regulatory frameworks and the competencies of the various authorities in the
field are very different from country to country. In general the economics, energy or industry
ministries still occupy a central role in energy policy, but the sector-specific regulatory
authorities have become central actors throughout Europe in ensuring network access and
approving network tariffs. Their competencies vary significantly, as do their resources and
regulatory practices. A new facet in the activities of the regulators is their increased European
cooperation.
In a survey conducted in EURELECTRIC, members were asked to comment on both positive
and negative aspects of their experience with regulation. As different countries are at different
stages of liberalisation and have different regulatory structures and objectives, it is difficult to
make direct comparisons between regulatory practices. However, there were a number of
common themes apparent from the comments received.
A common observation from the comments received is that there is a perceived failure to
balance the interests of electricity industry stakeholders in the emphasis placed on conflicting
or competing regulatory objectives. The electricity industry thus encourages regulators and
governments to design the regulatory framework with a balanced set of regulatory objectives
and competencies that will guarantee the appropriate consideration of all relevant objectives.
7. Another field that evoked many comments is the question of allowed returns. Many of the
concerns identified in the survey are country-specific and relate to the manner in which price
control methodologies are applied in practice. There is a general concern that regulated tariffs
do not always fully reflect the costs nor provide incentives for further investments.
Despite criticism towards the activities of the regulators, the industry has identified a number
of issues where the efforts by the regulators are seen to be very positive. In many cases they
are making positive and effective contribution to the promotion of transparency and non-
discrimination in the markets. In general the regulators have shown a good record of
independence and a relatively fast reaction to the changing environment, including in
countries where liberalisation has commenced in recent years. Efforts to ensure good
consultation procedures and stakeholder involvement were also seen as positive in many
cases, even if most respondents called for industry’s opinions to be taken into account more
seriously.
Regulatory stability is key to ensuring a well-functioning competition and reliable supply of
electricity in liberalised markets. This is especially important in the area of investments in
both generation capacity and networks, in order to guarantee that there is sufficient installed
equipment available to meet demand under various circumstances, i.e. security of supply.
8. Ref.: 2004-030-0052 January 20041
1. Background and introduction
The European Union is accelerating the process of liberalising the electricity and gas markets
by adopting new electricity and gas directives (new numbers 2003/54/EC and 2003/55/EC
respectively), which replace the existing ones and push the market liberalisation further. All
non-household customers will be able to freely choose their electricity and gas supplier by 1
July 2004. This possibility is extended to all customers no later than 1 July 2007. In reality
however, full liberalisation is occurring at a faster pace, with markets already fully open to all
customer categories in several EU Member States.
In addition to speeding up the market opening, or the so-called quantitative measures, the
newly adopted revision of the Electricity Market Directive also establishes qualitative
measures to ensure full liberalisation such as legal unbundling of network businesses,
regulated third-party access, sector-specific regulatory functions and reinforced public service
obligations, including provisions on fuel mix disclosure by the supplier to its customers.
Regulatory models in use in the soon-to-be-enlarged EU are of paramount importance for a
functioning internal market. The new directive harmonises some of the general issues in the
regulatory framework in the EU:
1. The obligation to set up a regulator: this was already the case in most of the EU and
Acceding Countries, with the most prominent exception being Germany. With the new
directive, it is obligatory to charge one or more competent bodies with the responsibility
for carrying out the required regulatory functions.
2. A minimum set of common competencies: the regulators will have the competence to
approve tariffs or at least the methodologies to calculate tariffs prior to their entry into
force.
Even if the new directive brings a certain level of harmonisation to the regulatory functions in
the EU Member States, a lot of scope for variation still remains. The final outcome can, and
will, still be a patchwork of diverging regulatory models.
The EURELECTRIC Board of Directors tasked the Markets Committee to look into the
situation of regulatory models in Europe. This work has been undertaken during 2003 as part
of the "post-liberalisation" agenda, which aims to identify those issues that are of particular
relevance during and especially after the process of implementing the new electricity
directive.
The work done by the "Regulatory Models" subgroup has been to identify the consistency and
potential obstacles for the Internal Electricity Market of the different regulatory models and to
see if best practice models emerge. The task of the group has also been to promote awareness
within EURELECTRIC of regulatory models and the associated key policy issues, for
example the appropriate level of coordination among European regulators.
The existing electricity directive provided very little common ground for the regulatory
practices. The regulatory authorities and functions which exist today have resulted from
national specific circumstances, the directive merely stating that EU Member States must
have in place a dispute settlement authority and that appropriate mechanisms for regulation
and control and transparency must be in place to avoid abuses of dominant position.
9. Ref.: 2004-030-0052 January 20042
In general the competencies of the present regulatory authorities go far beyond the
requirements of the first directive.
The scope of this regulatory function is more detailed in the new directive. Under the new
provisions, regulators will have a number of explicit tasks; new elements are also added,
emphasising the role of the regulator to ensure a competitive market. A detailed account of
the requirements of the new directive is given in section 2 of this report.
To reflect the scope of regulation in the new directive and to define the scope of the group's
work, it must be stated that 'regulation' or 'regulatory models' are used in this text mainly to
refer to the economic regulation of natural monopolies, ie. network operators. We will look
into regulation from the perspective of the new Directive. When necessary, our work takes a
larger viewpoint encompassing those areas in market regulation that have direct impact to the
functioning of companies in the markets.
Purpose of the report
The purpose of this report is to take a closer look into the existing regulatory models in
Europe, to see what the main differences and converging points are and to identify good
practices and set common goals for the near future. The report also aims to provide an
overview of the different regulatory models that exist at present in each of the Member States.
An important aspect of this is to describe the experience of the evolving regulatory regimes
from the perspective of industry participants that are subject to such regulation. It is intended
that the report will serve as an initial step in preparing for greater input from the electricity
industry to the debate on how regulatory models should evolve in a post liberalisation
European electricity market.
The development of regulatory models in different Member States to date has evolved largely
at a national level. However it is evident from the Directives and activities of CEER that
there will be increased pressure to harmonise and strengthen the role of regulatory authorities
in the electricity industry across Europe. Regulation is the single most important factor facing
electricity utilities in the foreseeable future. The action and decisions of these sector specific
regulatory authorities affects core company revenue, business processes, customer service,
company structure and the nature of competition for most utilities.
It is apparent that regulatory authorities and the European Commission will be well placed to
state their case for increasing levels of regulation across Europe. It is essential that the
electricity industry is equally well positioned to participate in the debate and argue their case
for appropriate and proportional regulation. It is in the industries interest that the regulatory
framework is effective and efficient so that it can provide certainty and a suitable environment
both for fair competition and long term investment and development.
Survey among the electricity industry
In order to find out about the different existing regulatory frameworks, the "Regulatory
Models" subgroup conducted a survey among EURELECTRIC members. A questionnaire
(see Annex 5) was sent out and replies were received from the industry in 20 European
countries. The questionnaire included questions on the regulatory framework in general, main
actors, competencies of the various authorities and assessment of the functioning of the
regulatory systems by the industry. This report is largely based on the findings of this survey.
10. Ref.: 2004-030-0052 January 20043
It must be noted here that the study looks at the main elements in regulation, but the details
are different in all countries. This also means that respondents to the questionnaire may well
have understood the questions in various different ways. Therefore the answers are not
necessarily comparable; however the process was adequate to provide an approximation or
representation of predominant features for the purpose of obtaining an overview of potential
variations in regulatory models.
11. Ref.: 2004-030-0052 January 20044
2. Key provisions in the Directive 2003/54/EC
The New Electricity Directive establishes common rules for the generation, transmission,
distribution and supply of electricity. Furthermore, it also establishes a number of common
minimum criteria for the regulatory functions necessary to police the functioning of the
markets.
The Liberalisation package is particularly important to the consideration of regulatory models
as it places a mandatory requirement on Member States to appoint regulatory authorities for
the electricity and gas sectors. While regulatory authorities are the norm in most Member
States, the mandatory requirement introduced in the Electricity and Gas Directives
(2003/54/EC and 2003/55/EC respectively) is fundamental to harmonising the regulatory
models in all member countries. The liberalisation package formally recognises the role of
regulatory authorities, and outlines minimum regulatory functions and competencies of
national regulatory authorities. In particular the EU Electricity and Gas Directives
acknowledge that regulatory authorities have an important role in ensuring the operation of an
internal market in electricity. The Directives specifically summarise their regulatory functions
in general terms as:
• Ensuring non-discriminatory access to Networks
• Ensuring effective competition and the efficient functioning of the market
For the purpose of comparing regulatory models in different EURELECTRIC member
countries it is useful to consider the various aspects of the Directives that relate to the
regulatory authorities or overall regulatory framework and review the implications for the
various aspects of regulatory models. These are discussed under the heading below.
Regulatory Authorities Scope and Structure
Both the Electricity and Natural Gas Directives state that there may be one or more regulatory
authorities. This is significant to the potential scope of the individual regulatory authorities’
functions. On one hand it allows a single regulatory authority for both the electricity and
natural gas sectors. It also allows flexibility if required to divide the functions between a
number of regulatory authorities. For example a Member State may wish to designate the
energy regulator or the financial regulator to regulate the activities of a liquid balancing
market, or a competition authority to monitor competition and report on market dominance
and anti-competitive behaviour.
As a fundamental governance issue, the Directive specifies that the regulatory authorities
must be wholly independent from the interests of the electricity sector. This is of significance
to Member States with state owned utilities as it may require the separation of the regulatory
authority from the ministry which has the responsibility for the ownership of the utility.
The Directives also provide a basis for an appeals process. They provides for appeals to be
taken
• To the Regulatory Authority against the Network operator for certain disputes over
connection and access to the national network
• Against certain decisions by a Regulatory Authority
• Against a decision to refuse to grant an authorisation.
12. Ref.: 2004-030-0052 January 20045
The electricity Directive primarily describes the scope of the regulatory authorities’ functions
in terms of the activities of Network undertakings and the operation of a competitive
balancing market for electricity.
However it also describes Member States' responsibilities for certain functions which would
also form part of the overall regulatory framework. More notably these include requirements
on the Member State
• To ensure the possibility of tendering procedure to provide additional capacity in the
interest of security of supply
• To establish authorisation procedures for construction of generation capacity and
direct lines
• To establish mechanisms for regulation, control and transparency to avoid anti-
competitive behaviour
• To ensure that reliable information is provided to customers about the energy sources
for the electricity supplied.
Although the Directive does not require that the above functions are carried out by a
regulatory authority, Member States may choose to allocate these responsibilities to the
regulator.
Overall Functions
The Electricity Directive sets out the general functions of the regulatory authorities and
describes these in broad terms as ensuring non-discrimination, effective competition and the
efficient functioning of the market. For the purpose of harmonising the regulatory framework
across Europe, the Directive furthermore sets out indicative responsibilities and minimum
competencies of regulatory authorities to perform this function. It also indicates that there are
certain functions which a member state may wish to delegate to the regulatory authorities and
identifies other areas as highlighted earlier which form part of the overall regulatory
framework.
General Responsibilities
The Directive sets out the particular activities which regulatory authorities shall monitor in
performing their overall function. These include
• Rules on management and allocation of interconnector capacity
• Mechanisms to deal with congestion on national network
• Time taken by Network operators to carry out connections and repairs
• Publication of Network information
• Effective unbundling of accounts to ensure there is no cross subsidisation
• Terms and conditions for connecting generators with regard to the cost benefit of
renewable, distributed and CHP generation
• The performance by Network operators of their functions
• Level of transparency and competition.
13. Ref.: 2004-030-0052 January 20046
The Directive specifies that the regulatory authorities shall monitor and report on these
activities. It also provides that the regulatory authority may require the TSO or DSO to
modify arrangements in proportion to the extent that such arrangements are seen to be
inconsistent with the regulatory principles of ensuring non-discrimination, effective
competition and the efficient operation of the electricity market.
Furthermore, under the Regulation 1228/2003 on cross border electricity exchanges, the
regulatory authorities must:
• approve operational and planning standards including schemes for the calculation of
the total transfer capacity;
• decide on exemptions to normal access rules for new investments;
• ensure compliance with all guidelines adopted under the Regulation
Minimum Competencies
The overall functions of the regulatory authorities are very general and may be open to
significant interpretation on the degree to which each member state might choose to
implement them. However, the Directive is quite specific on the regulation of two aspects of
the electricity market:
• Terms and conditions for connection and access to the national network
• Terms and conditions for the provision of balancing services
The Directive sets out fundamental competencies for the regulatory authorities in relation to
the above and provides that the regulatory authorities in each member state shall as a
minimum
• Approve or fix at least the methodologies used to calculate or establish the terms and
conditions for connection and access to national networks
• Approve or fix the methodologies used to calculate or establish the terms and
conditions for the provision of balancing services
• Have the authority to require the TSO or DSO to modify the terms and conditions,
tariffs, rules, mechanisms and methodologies for connection and access to the national
network or for balancing services or any of the activities that are monitored by the
regulatory authority under the Directive to ensure that they are proportionate and
applied in an non-discriminatory manner.
• Arbitrate, with binding effect, on complaints against the TSO or DSO in relation to the
above, unless and until such decisions are overturned on appeal.
14. Ref.: 2004-030-0052 January 20047
Although the directive provides for a minimum of ex-ante regulation of mechanisms for
setting network tariffs in practice it implies that the regulatory authority will require
complementary competencies to review financial and business projections for the network
activities. It also implies that the regulatory authorities may have access to sufficient
information, to review tariff mechanisms during revenue setting and review processes. It
implies that regulatory authorities must have sufficient resources and financial and technical
expertise to consider and ensure appropriate investment and performance by network
operators.
Optional Functions and Competencies
In addition to the general regulatory functions specified in Article 23 of the Directive, the
Directive also refers to certain functions which Member States may wish to delegate to
regulatory authorities. These include two specific functions in relation to security of supply.
The first is the regulator's role in monitoring and reporting on security of supply issues, and
the second is the specific responsibility to organise, control and monitor the tendering
procedures for new capacity.
The Directive indirectly identifies further functions which might be considered as forming
part of the regulatory framework and may in certain Member States form part of the functions
of national regulatory authorities. These include
• Administering authorisation procedures for the construction of new generating plant
and direct lines.
• Administering Licensing arrangements for market participants as a means of ensuring
compliance with regulatory controls and performance requirements.
• Reporting on market dominance, predatory and anticompetitive behaviour, showing
change in ownership patterns and measures taken to ensure a sufficient variety of
market actors or measures taken to enhance competition and interconnection.
• Initiating appropriate measures where confidentiality rules are not respected.
• Ensuring that information provided by suppliers to their customers on the energy
source of electricity supplied is reliable.
Significance to the review of regulatory models
The Directives seek to harmonise the functions and competencies of regulatory authorities
across Europe. It is clear that the European Commission wishes to ensure greater cooperation
between national regulators, with a view to facilitating a European internal market in
electricity. Whereas the Directive sets out a template to ensure that there is consistency on a
fundamental regulatory framework relating to network access, it is clear that there is
significant scope for differing interpretations between different Member States. It may be
anticipated that the Directive will act as a catalyst in the ongoing evolution of regulatory
authorities in the electricity and gas sectors.
It is therefore essential that the electricity industry reviews the effect of various regulatory
models, and is proactive in engaging in dialogue with the European Commission and national
regulatory authorities on the types of regulation appropriate to the electricity industry.
15. Ref.: 2004-030-0052 January 20048
3. General regulatory frameworks and principles
3.1. General framework
This report is primarily concerned with sector-specific regulation of the electricity industry.
To that extent it focuses on the roles and responsibilities of energy regulators and the relevant
ministries with responsibility for energy policy. It must however be noted that the electricity
industry regulatory framework sits within a broader and more general regulatory framework
and will be influenced to varying degrees by the political, legislative and regulatory structures
that exist in different member countries. The complex interplay between the relative roles,
authorities and degrees of influence between various bodies in the more general regulatory
environment can also affect the overall characteristic of the sector specific energy regulatory
regime. Examples of the type of elements that go into the build-up of a regulatory framework
are included in the list below.
• The legal status of the regulatory authority and how its role and functions are defined
in national legislation
• How the roles and responsibilities for electricity and energy matters are divided
between the sector specific regulatory authority and the government ministry(s) with
responsibilities for the sector.
• The overall governance arrangements for the regulatory authority and the degree of
separation and independence of the regulatory authority from political or
governmental organisations as well as the interests of electricity companies.
• The extent to which existing national legislation may influence regulatory
requirements and the extent to which certain matters may be reserved to the courts for
judgement or the imposition of sanctions.
• The existence of mechanism for appeal of regulatory decisions.
• The nature of the powers of the regulatory authority and the extent to which it
competencies for each of the functions which it carries out vary along a spectrum from
a minimum duty to monitor to the ultimate authority to make binding decisions,
enforce compliance with its directions, and impose sanctions.
• The extent to which there may be other regulatory authorities or government
ministries with roles and responsibilities which are either specific to certain aspects of
the electricity industry or which cover activities which are significant to the electricity
industry. As discussed later this could include the regulation of consumer rights,
environmental matters, planning, procurement, financial markets, labour laws and
safety.
3.2. Explanation of competencies
For the purpose of this report competencies are considered to represent the functions and
responsibilities of the regulatory authorities and the extent of statutory powers that the
regulatory authority may have in relation to discharging these functions. When comparing the
competencies of different regulatory authorities it is useful to consider these competencies on
a number of levels as set out below.
16. Ref.: 2004-030-0052 January 20049
• Sector responsibility. This considers whether the regulatory authority is responsible
for the electricity sector only or whether it includes a number of energy sectors or a
number of other monopoly utility activities. It is noted in this report that the majority
of regulatory authorities with sector specific responsibility for electricity markets also
have similar responsibilities for natural gas markets.
• Range of functions. This considers the range of activities within the electricity
industry for which the regulatory authority has a defined role, duty or powers. The
range of functions may differ at a national level due to the extent that certain functions
may, on the one hand, be reserved to a Government ministry or the judicial system, or
on the other hand may fall under the exclusive or shared responsibility of another
regulatory authority.
• Extent of regulatory powers. This considers the nature of the statutory powers that a
regulatory authority may have in relation to the functions it discharges. This may
range across a broad spectrum as set out in the list below for illustrative purposes:
o Monitor
o Advise / Recommend
o Agree
o Approve
o Set / Issue Directions
o Enforce Compliance
o Impose Sanctions
These regulatory powers should be consistent with the functions assigned to the
regulatory authorities, and enable them to discharge their responsibilities and meet the
long term regulatory objectives.
3.3. Principles of good regulation
This report does not intend to recommend best practice model for regulation of the electricity
industry in Europe. However it is useful to consider good practice features observed in
general regulatory frameworks as a reference for reviewing the experience with existing
electricity sector regulatory frameworks in Europe.
A regulatory framework is normally depicted as a mechanism of balancing the interests of
different stakeholders that ensures their respective rights and obligations are satisfied (see
diagram below). Typically the main stakeholders are government as legislator and policy
maker, consumers or the public at large and the regulated activity or industry. In reality the
stakeholder groups are much more complex and contain many different categories or groups
with different and sometimes conflicting or competing interests.
17. Ref.: 2004-030-0052 January 200410
Regulatory
framework
Governments:
EU and
National
Regulated
industry
Consumers
And
Public Interest
Picture 1. Different interests in the regulatory framework.
Good regulation is seen to exist where policy objectives set by government are being
achieved, the overall performance of the regulated industry is sustainable, efficient and
responsive, and where there is a correct balance maintained between the interests of
consumers and the interests of participants and investors in the regulated activity. Where
regulation is established the objectives must be clearly defined and set with reference to the
long-term policy and the objectives themselves are seen as enduring and sustainable.
It must also be recognised that regulatory frameworks introduce cost to industry, and may in
their own right impede innovation and introduce barriers to market entry. Therefore
regulation should only be introduced where there is a clear cost benefit, and when all
alternatives to regulation that can achieve the policy objectives have also been fully evaluated.
3.3.1 Alternatives to regulation
A critical consideration in the design of a regulatory framework is determining the level and
nature of regulation that is appropriate to a particular industry. In many cases this also
requires the consideration that alternatives to regulation may better serve to meet and balance
the differing requirements of various stakeholder groups in an effective and efficient manner.
While recognising that regulatory authorities have an important part to play in the overall
regulatory framework for the electricity industry, it may equally be recognised that there are
alternatives to regulatory authorities which exist in other general regulatory frameworks.
These have proven to be effective and can vary depending on whether it is considered that a
light handed rather than intrusive regulation is more appropriate. Examples of the types of
alternative include:
• Fiscal Incentives
• Market design and level of competition
• Prescriptive enforceable legislation
18. Ref.: 2004-030-0052 January 200411
• Consumer education
• Ombudsman or industry watchdog
• Self regulation
• No regulation
Even where a regulatory framework is appropriate for a particular industry overall, the
competencies of a regulatory authority may be limited, recognising that alternatives to
regulation may be more appropriate for certain activities in the industry. The appropriate mix
of regulation and its alternatives will also vary with the country's institutional arrangements or
industry status, such as for example the number of market participants and level of
competition. The alternatives provide a basis for regulatory authorities to concentrate
resources on activities where there are the greatest benefits that can be achieved from
regulation.
3.3.2 Characteristics of Good Regulation
It has been reported by a number of task forces established to review best practice regulation
that there are characteristic features observed from regulatory frameworks which are seen to
be operating well1 2 3
. Whereas the description of these characteristics varies there are a
number of characteristics that are generally accepted and supported by EURELECTRIC.
These include:
Clarity: A fundamental prerequisite to good regulation is that regulatory objectives,
roles and requirements should be clear and understandable. Good practice regulation
requires:
• That there are clearly defined regulatory objectives set on a long-term basis by
government.
• That the roles and responsibilities (competencies) of regulatory authorities should
be clearly set out in legislation.
• that regulations and regulatory requirements should be understandable and there
should be clarity regarding stakeholders’ rights and obligations and the
consequences if these are not satisfied.
Proportionality: This is where actions or decisions taken by regulatory authorities are
seen to be considered and measured to address specific regulatory objectives or risks
in a balanced manner without imposing unnecessary costs or excessive restrictions.
This is a characteristic where regulatory intervention or sanctions are perceived to be
taken, where necessary, in an open and transparent way, and only to the extent
required to address a particular issue.
1
Best Practice Utility Regulation, Utility Regulators Forum discussion paper, The Office of Water Regulation,
Western Australia, July 1999.
2
Principles of Good Regulation, Better Regulation Task Force, London, 2003
3
Developments in Best-Practice Regulation: Principles, Processes, and Performance, Sanford Berg, Public
Utility Research Centre, Florida, 1999
19. Ref.: 2004-030-0052 January 200412
Consistency: This is where regulatory actions and decisions are seen to be
predictable, uniform and rational and provide stability and certainty to stakeholders. In
addition decisions are seen to be non-discriminatory and apply equally to all similar
categories of stakeholder. The principle of consistency also implies that there is
consistency between different regulatory authorities and between similar regulatory
authorities in other jurisdictions.
Transparency: This describes how the regulations are clear and understandable and
the regulatory process is seen to be open and accessible. Good communication, open
consultation and access to relevant documents and information are key features of a
transparent regulatory process where stakeholders are informed of regulatory
proposals, invited to make submissions, and where such submissions together with the
final decision and justification are communicated to affected stakeholders. Another
aspect of transparent regulation is that the legal obligations and rights of both the
regulatory authority and stakeholders are clearly communicated and the consequences
of non-compliance are well defined.
Independence: As a regulatory framework must provide a balance between the
differing interest of consumer and industry stakeholders it is considered good practice
the regulatory authorities should be independent of the interests of each of the
stakeholder to the extent necessary to ensure that regulatory decisions or actions are
not unduly influenced in favour of any particular stakeholder. Also whereas regulatory
authorities are often seen as agents of government and state governance institutions,
good practice also recognises that while regulation may be subject to government
review, regulatory authorities must be seen to operate within their framework of
competencies and objectives independently of government, free from day-to-day
political interference.
Accountability: Without prejudice to the requirement for independence, it is also
recognised that within a good regulatory framework, the regulatory authorities are
recognised as being accountable for their actions or performance. This may be
observed in different forms including for example:
• Requirements to provide open and clear rational or justification to stakeholders for
decisions or actions taken;
• A requirement to report on the performance against defined regulatory objectives;
• The existence of an independent appeals process that may review the decisions by
a regulatory authority.
Effectiveness and efficiency: Good practice in regulation includes ongoing
assessment of the cost effectiveness of proposed regulations or regulatory decisions
and a comparison against alternative arrangements. It considers the costs to both the
stakeholders and the regulatory authority in ensuring compliance. It also requires that
regulatory processes are efficient and timely. The effectiveness is enhanced where the
regulatory authority has access both to all relevant information and to appropriate
expertise to ensure that regulatory decisions are appropriate, relevant and correctly
targeted.
20. Ref.: 2004-030-0052 January 200413
Flexibility: Although a regulatory framework must provide consistence and stability it
must equally be recognised that the regulatory approach must be adapted to prevailing
conditions of a particular market or the condition of existing infrastructure. It must
also be able to evolve with changes in the external environment and be open to using
alternative regulatory incentives to achieve the overall objectives.
A best practice regulatory framework is seen to exist where the above characteristics are
embedded with equal emphasis within the regulatory structures and the processes and in the
day to day practice and behaviour of regulatory authorities.
21. Ref.: 2004-030-0052 January 200414
4. EURELECTRIC survey on regulatory models – main findings
Now that the text of the new electricity directive has been adopted, it is important to consider
the various options for implementation of the provisions. The directive provides a minimum
set of competencies that must be undertaken by regulatory authorities. However it still leaves
significant discretion to Member State regarding the overall regulatory framework. The
EURELECTRIC survey conducted in 2003 gives some insights into how regulatory
authorities for the electricity sector have been organised throughout Europe. The survey
looked into some of the competencies of the authorities, their resources and the policies.
It was evident in conducting the survey that many of the differences between regulatory
frameworks in different Member States are only truly apparent at a detailed level. The survey
however was primarily concerned with obtaining an overview of the regulatory framework in
each country, and therefore the survey sought to categorise the regulatory frameworks in each
country in terms of the predominating features. The findings of the survey are contained in a
number of tables in this chapter.
4.1. Regulatory Authorities involved
The survey confirmed that there are now sector specific regulatory authorities in all EU
Member States, EEA Countries and Candidate Countries with the exception of Germany and
Switzerland. Following from the new Electricity Directive, the process of setting up a
regulator in Germany is underway and the possibility that the remit of the telecommunications
regulator will be expanded to cover electricity and gas is being explored. In Switzerland, the
liberalisation laws have not been passed so far, and there is no regulator in place. According
to a draft legislative bill, a special commission would be set up to regulate the electricity
market. There is no knowledge of the foreseen timetable yet.
The map on following page illustrates the situation as of summer 2003 and the regulatory
authority in each member state.
It was also apparent from the survey and the experience of members of the working group that
there are a number of relevant regulatory authorities and organisations which have a
significant influence on the operation of the electricity industry, either directly or indirectly.
In most countries the regulatory framework involves the relevant ministries, the energy
regulators, competition authorities, environmental and planning authorities. The survey has
shown that the regulatory frameworks differ in the nature and extent to which various
regulatory competencies are allocated or reserved to these authorities or organisations. In
countries with a federal structure, these authorities can in addition be found on both regional
and federal level.
22. Ref.: 2004-030-0052 January 200415
Picture 2. Regulatory authorities in Europe.
Ministries have their main role in policy making and in proposing legislation and in many
cases also through the state ownership of large energy companies. In the past, ministries with
responsibility for energy, industry or economics, performed many of the electricity industry
regulatory functions, prior to the establishment of sector specific regulators. In many cases
such ministries have retained a number of regulatory competencies. Very often they are also
in charge of approving the construction of generating plant and networks. In addition, in a
number of cases the ministries have a role in approving the network tariffs proposed by the
regulators. The same is true in some cases for the tariffs for captive customers. Questions of
licensing and the country's needs to export or import energy have also been tackled by the
ministries.
More recently, environment ministries and/or environmental agencies have increased their
influence over the energy sector on both strategic and operational level. On local level,
operational issues regarding the construction of power plants, substations and power lines are
in many cases regulated by local authorities (for example planning, construction and land use
permits and agreements). In some countries the environment ministry is in charge of
coordinating the local authorities in the preparation of environmental impact assessment
reports.
The most important role in the operative regulation of the energy sector has shifted to sector-
specific regulators. These are sometimes specific regulatory office just for electricity, but
more frequently either joint electricity and gas regulators, or sometimes authorities regulating
three or even more utility sectors. Energy regulators are responsible for the day-to-day
regulation of the electricity sector. The core of the regulators' competence is the regulation of
network access and tariffs.
ERSE
STEM
CRE
OFGEM
DTe
ECG/K
EMRA
URE
MEH
CER
RAE
EMV
ERU
ANRE
DKER
URSO
ETI
SPRK
NCPE
DERA
AEEG
CNE
NVE
CREG
OFREG
23. Ref.: 2004-030-0052 January 200416
The regulators are in most cases also responsible for supervising the unbundling of
companies' accounts and the issues of supply quality. Regulation of the balancing market falls
also in most cases within the competence of the regulator.
Competition authorities also play an increasing role in cases of cartels or abuse of dominant
position, or dispute settlement. A range of other instances can also be relevant. For example
work safety authorities regulate operational practices of electricity companies, and in some
countries the powerful consumer associations can be involved in determining how commodity
or service suppliers are practically regulated in the area of customer service standards (invoice
items, fault rectification, complaints, etc).
4.2. Independence of the regulators
It is a generally accepted principle that the regulatory authorities should enjoy appropriate
independence from the politically appointed governments in their day-to-day work. This is to
guarantee regulatory stability, and to avoid situations in which the decisions of the regulator
are subject to undue influence regarding local or short term political objectives. Some form of
governance framework is however appropriate, given the extensive competencies of a
regulatory authority, and will undoubtedly be required by governments to ensure
accountability. Ultimately government must ensure that the long-term strategies and
objectives of the regulatory authority are being achieved, and that regulatory requirements are
consistent with the energy policy. However such safeguards can be built into the regulatory
structure at a high level without undermining the independence of the regulatory authority. It
is important to ensure that the correct balance is maintained between independence and
accountability.
While it is important to ensure that the regulatory structure provides for the regulator's
independence, it is equally important that the regulatory authority can effectively operate
independently in practice. This is largely influenced by the regulator's own organisation and
the use of the resources in terms of budget and professional know-how that the authority has
at its disposal.
The question of operational and managerial independence is a key issue for regulators: in
order to well regulate the sector, they must be independent from interests in the sector. Since
the electricity industry has traditionally had an important share of public/state ownership, it is
important that the regulators are independent from the politically controlled energy ministries,
and in many cases the state's role as the owner of large companies in the sector.
The survey found that 14 out of 15 EU Member States have established regulatory authorities,
and that these regulators were considered to be independent entities within the administrative
structure of the state. In only four cases they were considered to be part, or under direct
control, of their respective energy or economics ministries.
It can be said that in the EU countries, the regulators in general have an adequate
degree of organisational and financial independence.
24. Ref.: 2004-030-0052 January 200417
4.3. Resources of the regulators
The survey found that the sector-specific regulatory authorities in Europe were funded
through either one or a combination of a number of the following arrangements. As regards
the financial independence, the funding of the regulators is in general arranged trough four
basic sources:
1. Levy or percentage (surcharge) incorporated in the regulated tariffs
2. Licensing fees or other payments made directly to the regulator from the
electricity industry
3. Direct funding of the regulatory authority from the ministry or through state
budget
4. Percentage of administrative fines.
Licensing fees are the most common methodology used for funding the costs of energy
regulation. Licensing fees are used in 11 countries, however in the case of 6 Member States
these are paid to the state or relevant ministry, who subsequently provides funding to the
regulatory authority. A surcharge on tariffs is levied in five countries to finance the activities
of the regulator. In only two countries were regulatory authorities considered to be funded
solely from the budget of the ministry or state. One country also uses revenues from fines to
supplement the funding of the regulator. In most cases the total funding of a regulator is a
combination of two or more of the above sources, the most common combination being state
budget along with licensing fees.
There is significant variation in the budget for regulatory authorities across Europe . The
budgets range from €1.5 million (Finland) to €54 million in the UK. In terms of the number
of staff employed, there are also significant differences between the authorities. The smallest
European regulator organisation is in Finland and employs 15 staff whereas the largest
regulatory organisation is Ofgem in the UK which has approximately 320 staff.
The regulators also differ greatly in terms of their total budget in relation to their staff
resources. On average, their budget per person employed is roughly €100 000. This figure
ranges from €50 000 up to €280 000.
The survey did not concentrate in detail on the level of funding or staffing of regulatory
authorities and therefore it is not possible to draw any conclusions regarding the reason for
the significant variation in the resources available to the different regulators. In any case these
variations may reflect:
• Different regulatory philosophies (light / heavy handed, proactive / reactive etc);
• Different scope and range of competencies;
• Existence of alternatives to regulation;
• Overall size of the electricity and gas market (GWh or number of customers);
• Use of external consultants and existence of one-off projects;
• Local factors such as the cost of living and salary rates;
• How salaries of regulatory staff compare with those of industry participants.
As full market opening is established and the regulatory environment across Europe matures,
there may be a greater concern to ensure the cost effectiveness of regulation. In that context it
may be interesting to explore the underlying reasons for such variation in cost, as a means of
establishing a more comprehensive understanding of how the regulatory models differ in
practice.
25. Ref.: 2004-030-0052 January 200418
Table 1. Regulators' resources.
Country Regulator Status Elec /
gas
Staff Budget Funding
Austria E-Control
GmbH;
E-Control
Kommission
IA E, G 61 8 M € Tariffs
Belgium
(federal)
CREG IA E, G 35 10 M € Tariffs
Czech
Republic
ERÚ IA E, G,
other
90 4 M € State budget
Denmark Danish Energy
Authority;
Energy
Supervisory
Board
IA E, G 30 n.a. Licensing
fees
Finland Energy Market
Authority
IA E, G 15 1,5 M € State budget;
licensing
fees
France CRE IA E, G 80 9 M € State budget
Germany No regulator
Greece RAE IA E, G 50 n.a. Licensing
fees
Hungary HEO IA,
supervised
by gov.
E, G 90 6 M € State budget;
licensing
fees
Ireland CER IA E, G 39 8 M € Licensing
fees
Italy AEEG IA E, G 86 18 M € State budget;
licensing
fees
The
Netherlands
DTE Department
of ministry
E, G 55 9 M € Ministry;
licensing
fees
Poland URE IA E, G 284 15 M € State budget;
licensing
fees
Portugal ERSE IA E, G 50 4M € Tariffs
Romania ANRE Department
of ministry
E n.a. n.a. Licensing
fees; other
Spain CNE IA,
attached to
ministry
E, G 153 12,5 M € Tariffs
Sweden STEM IA E, G 34 2,5 M € Ministry
Switzerland No regulator
Turkey EMRA IA E, G 290 25 M € Licensing
fees;
surcharge on
tariffs; fines
UK
(England,
Wales,
Scotland)
Ofgem IA E, G 320 54 M € Licensing
fees
UK
(Northern
Ireland)
Ofreg IA E, G 23 3 M € Licensing
fees
IA = Independent Authority
26. Ref.: 2004-030-0052 January 200419
4.4. Competencies of the regulators
4.4.1. Area of competence
Overall, the survey has shown that in all cases where an independent regulatory authority has
been established, it has been assigned responsibility for both the electricity and natural gas
sectors. This is seen as an efficient combination both because of the similarities between
electricity and gas networks from a regulatory perspective given that they both represent
natural monopolies, and because of the interaction between electricity and natural gas
markets.
In carrying out the survey, it was noted that responsibilities for different aspects of various
regulatory requirements may in fact be spread or shared over a number of different authorities
or organisations. In reality, a more detailed survey would be required in order to establish the
exact details of how such competencies were defined and allocated in each Member State.
However, for the purpose of this report, the survey merely sought to establish where the
predominant influence on certain activities lay, as a means obtaining a high level comparison
on the regulatory models.
In terms of the regulation of natural monopolies, such as transmission and distribution
networks, the survey highlighted two key findings:
• In the majority of cases the responsibility for regulation of network codes, access
arrangements and unbundling of accounts is assigned to an independent regulatory
authority. In many European countries the regulators either directly set the network tariffs,
or approve them after proposals by the companies. In a limited number of cases the
approval of such arrangements are reserved to the relevant ministry. In a number of
countries, the proposals of the regulators are submitted to the energy or economics
ministry for final approval.
• In the majority of Member States responsibility for issuing planning approvals, or
authorisations (licences) to construct or operate network equipment, is reserved to the
relevant ministry or other statutory authority. However, it is apparent from the survey that
energy regulatory authorities in many countries have responsibility for licensing network
operators.
In the case of competitive activities the survey provided the following key findings:
• In the majority of countries, the responsibility for planning approval or construction
authorisation is either reserved to the relevant ministry, or is assigned to another statutory
authority other than the energy regulator. However, the licensing of generation operations
appears to be most often within the remit of the regulator's activities;
• In majority of countries (specifically those with less than 100% market opening), the
responsibility for setting and approving end user tariffs for captive customers is assigned
to the energy regulator;
• In the majority of countries, the energy regulator has responsibility for the regulation of
the balancing market;
• In many cases the activities of trading and marketing are not perceived to be subject to
specific regulation.
27. Ref.: 2004-030-0052 January 200420
Even if the development in the energy markets has been towards competition and "de-
regulation", it is apparent from the survey that regulators still have considerable responsibility
for regulating the competitive activities in the sector, i.e. generation, supply and wholesale
trading. In many countries for example, as some parts of the markets are not yet fully
competitive, the regulators have the power to regulate supply prices to captive customers. One
could predict that the scope of these powers are likely to change after July 2007 when all
European electricity and gas customers are free to choose their supplier. However, it might be
anticipated that some aspects of regulation could be retained in respect of the role of supplier
of last resort and of the provision of a universal service.
The survey also found that the energy regulators have competence in regulating the balancing
market in the majority of Member States. However, the nature and definition of a balancing
market varies between Member States, as do the exact competencies that a regulatory
authority has with respect to regulation of this market. In some cases the energy regulator
may have authority to regulate balancing prices, whereas in other countries the regulator may
only be concerned with approving the overall arrangements for the balancing market. It is not
possible to draw direct conclusions from this high level finding of the current survey.
However, given the EU Commission's strategy for integration of electricity markets, it may be
useful to carry out a more detailed survey on the nature of balancing markets and their
regulation.
Equally, the survey did not seek to establish the identity and competencies of other regulatory
authorities that have a significant influence on the electricity industry. However it is apparent
from the findings that environmental and planning authorities play a significant role in the
overall regulatory framework. It would be useful to undertake further work in this regard, to
obtain a more comprehensive picture of how the competencies of such authorities
complement or overlap with the competencies of energy regulators.
For a summary of the division of competences in European countries, please see Table 2 on
page 23.
28. Ref.: 2004-030-0052 January 200421
Table 2. Competencies of the different authorities (numbers of countries replied).
Activities Ministry Energy
Regulator
Competition
authority
Other
authority
Not
regulated
NATURAL MONOPOLY ACTIVITIES
Transmission Networks
Planning approval 10 7 5 2
Authorisation for construction 11 4 8 1
Authorisation for operation 9 8 2 2
Grid code 4 12 1 4
Access to networks 2 15 2
Setting of transmission tariffs 3 13 1 3
Approving transmission tariffs
(after proposal by transmission company)
3 12 2
Unbundling of accounts 1 14 3
_______________________________
Distribution Networks
Planning approval 8 5 5 3
Authorisation for construction 8 3 8 4
Authorisation for operation 8 8 4 2
Distribution code 3 12 1 4
Access to networks 2 15 2
Setting of distribution tariffs 3 13 1 3
Approving distribution tariffs
(after proposal by distribution company)
4 12 1 1
Unbundling of accounts 1 15 3
Quality of supply 3 14 1 2
_______________________________
COMPETITIVE ACTIVITIES
Generation
Planning approval 8 3 6 4
Authorisation for construction 9 5 8 1
Authorisation for operation 7 8 4 3
_______________________________
Supply
Setting prices for captive customers 4 9 1 5
Approving prices for captive cust. 4 8 1 3
Market share / competition issues 4 8 10 2 1
Trading 4 4 5 3 7
Marketing & selling 1 5 3 4 7
Billing & collection 2 7 2 3 7
_______________________________
Balancing market 2 11 2 2 2
29. Ref.: 2004-030-0052 January 200422
4.4.2. Decisions
The survey also sought to establish the extent to which regulators have the power to enforce
their decisions. The survey found that the decisions by the regulators have binding effect in all
cases: they do not only "suggest" decisions, but actually are able to issue decisions which will
have to be fulfilled by market participants.
In 12 countries it was reported that regulators have the right to impose fines on companies
that do not comply with their decisions. In some countries the regulator may not have
authority to impose fines, but may initiate proceeding for failure to comply with regulatory
requirements, and seek to impose fines or other penalties through the courts.
Other sanctions are in use in many countries. For example, in some cases the regulators have
the right to invoke the company's license.
Table 3. Competencies of regulators
Country Regulator Binding
effect
Fines Other
sanctions
Retroactive
decisions
Austria E-Control-GmbH;
E-Control –
Kommission
yes no n.a. no
Belgium
(federal)
CREG yes yes yes yes
Czech
Republic
ERÚ yes no (but can
propose
fines)
yes no
Denmark Danish Energy
Authority; Energy
Supervisory Board
yes yes no yes
Finland Energy Market
Authority
yes yes no no (court case
pending)
France CRE yes yes yes no
Germany Cartel Authorities yes yes yes yes
Greece RAE yes yes yes no
Hungary HEO yes yes yes no
Ireland CER yes no, only
courts can
yes no
Italy AEEG yes yes yes yes
The
Netherlands
DTE yes no yes yes
Poland URE yes yes no, but
competition
authority can
no
Portugal ERSE yes yes yes yes
Romania ANRE n.a. yes yes no
Spain CNE yes no no, but
initiates
sanction
process
no
Sweden STEM yes yes yes yes
Switzerland No regulator n.a. n.a. n.a. n.a.
Turkey EMRA yes yes yes no
UK
(England,
Wales,
Scotland)
Ofgem yes yes yes yes
30. Ref.: 2004-030-0052 January 200423
4.4.3. Recourse to courts and other bodies
An important facet of the regulatory process is the number of bodies and phases involved in
reaching the final outcome. A key factor in this is whether there is recourse from the
regulators' decisions to other bodies or courts of law, and the probability of successfully
pursuing an appeal to such a body and overturning a regulatory decision. In nearly all
countries there is recourse at least to courts after a decision is made by the regulator. In seven
countries there is recourse to an appeals body first (a dual recourse). Only in two countries
there is no recourse or no defined procedure to appeal after the decision by the regulator.
Table 4. Recourse to courts and other bodies.
Country Recourse to
courts
Recourse to
other bodies
Austria Different courts Energie-Control-
Kommission
Belgium
(federal)
No specific
procedures
n.a.
Czech
Republic
Brno
Administrative
Court
Appeals Commission
of ERÚ (not a third
party)
Denmark Yes, after
"Energy Board
of Appeal
Energy Board of
Appeal
Finland Supreme
Administrative
Court
no
France Cour d'Appel de
Paris or Conseil
d'Etat
Cour de Cassation
Germany Civil courts no
Greece No Athens
Administrative Court
of Appeals
Hungary County courts no
Ireland High Court Appeals Panel
Italy Administrative
courts
no
The
Netherlands
No Trade and Industry
Appeals Tribunal
Poland Competition
and Customer
Protection Court
yes (based on
administration code)
Portugal Yes yes
Romania No n.a.
Spain yes, after appeal
to ministry
Minister of Economy
Sweden Administrative
courts
Government
Switzerland n.a. n.a.
Turkey Council of State no
The UK
(Ofgem)
Judicial review Competition
Commission or
Competition Appeal
Tribunal
4.5. Regulatory models and formulae in use
Regulators have powers to regulate either ex-ante or ex-post. In ex-ante regulation the
regulator approves the applied tariffs prior to their entry into force. Companies suggest or
submit their network tariffs, and in some cases also supply prices for captive customers, to the
regulator which approves or modifies them; all this before the actual application of the tariffs.
31. Ref.: 2004-030-0052 January 200424
Also an ex-post system of regulation can be used. In these systems, regulators react to
complaints and investigate tariffs when they are already in use, usually on a case-by-case
basis. Both systems can work, taking into account the different characteristics of European
markets. Please see Table x for country-specific details.
Regulators in the vast majority of countries in Europe have powers to regulate ex-ante. In a
minority of cases, ex-post regulation has been in use. One must note at this point that the new
Electricity Directive (2003/54/EC) mandates ex-ante regulation which will become the norm
in the EU. As a result, Finland, Sweden, Greece and Germany will thus have to adopt ex-ante
based systems.
Table 5. Ex-Ante or Ex-Post decisions.
Ex-Ante Portugal, Spain, Turkey, the UK, the Netherlands, Italy
Belgium, Denmark, Romania, Ireland, Austria, France,
Czech Republic, Hungary, Poland
Ex-Post Finland, Sweden, Greece, Germany
Regulators use different formulae to regulate network tariffs. Regulatory economics knows
many variations to what are essentially a limited number of generic approaches: price cap
regulation, rate of return regulation and the use of yardstick competition models or
benchmarks. In Europe, price cap regulation is in use in six countries, and rate of return in 8
countries. Three countries in this survey employ a model that combines the above two
methods. In addition, regulators in a number of countries employ benchmarking as a means to
compare the performance of companies.
Table 6. Regulatory formulae.
Price cap
Portugal (distribution), Spain, Turkey, the UK, the
Netherlands, Italy
Rate of return Belgium, Denmark, Finland, Sweden, Greece, Ireland,
Portugal (captive supply), Germany, Romania
Combination of above
models
France, Hungary, Poland, Czech Republic
Benchmarking Denmark, Finland, Sweden, Ireland, Poland, the
Netherlands
Other / not decided Austria,
Another important issue is whether the decisions can have retroactive effect, i.e. if the
regulator can for example force network companies to pay back money to network users. Here
the picture is somewhat more divided: in a majority of countries retroactive decisions do not
exist, but in a significant minority they do.
Table 7. Retroactive decisions.
Retroactive
decisions
Portugal, the Netherlands, Italy, Belgium, Denmark, ,
Germany, the UK
No retroactive
decisions
Finland, Sweden, Greece, Spain, Turkey, Romania, Ireland,
Austria, France, Czech Republic, Hungary, Poland
32. Ref.: 2004-030-0052 January 200425
4.6. Consultation between regulators and industry
In order to ensure transparency of the regulatory decisions, it is of paramount importance that
there is a form of consultation with main stakeholders during the process. According to the
industry survey, consultation between regulators and the industry exists in nearly all
countries, but in very different forms. These procedures can be either based on laws
("obligation to consult") or on established practices. In a few cases the companies felt that
there is little or no consultation. Table 8 below summarises the existing procedures.
Table 8. Consultation procedures.
Formal procedures exists by law /
decrees
Belgium, Greece, Ireland, Poland,
Portugal, Spain, the UK, the
Netherlands, Italy, Germany
Semi-formal / ad-hoc procedures Austria, Denmark, Hungary,
Switzerland, Romania, Czech
Republic, France
No / little consultation Finland (companies heard case-by-
case), Turkey
4.7. Resources devoted to regulatory work by the industry
Companies differ a lot in how much resources they devote to regulatory work. The total of
human resources devoted to regulatory work in companies is hard to specify precisely;
companies usually estimate so-called full-time equivalents (FTEs). Companies typically
employ a regulatory affairs manager and possible a support team. Frequently other managers
are also involved in regulatory issues. These are typically accountants, lawyers and all top
managers, whose work regularly includes negotiating with the regulatory bodies.
In reality the total volume of human resources devoted to regulatory work can be slightly
higher than stated. In our survey FTEs dealing with regulatory issues vary from 2 to 30, which
means that in total tens of people deal with regulatory issues in electricity companies
(generation, transmission and distribution) in individual countries. Regulatory affairs do
induce significant costs to the sector.
4.8. International aspects: co-operation between European regulators
The energy regulators in Europe have established channels of cooperation within two
organisations. The Council of European Energy Regulators, CEER, brings together the EU
Member State regulators and the Energy Regulators' Regional Association, ERRA,
membership covers the EU Candidate Countries along with other East European regulators.
Originally set up by a Memorandum of Understanding in March 2000, the CEER was
established to respond to the needs of the European Electricity Regulatory Forum. In June
2003 the members of CEER signed the new statutes establishing CEER as a not-for-profit
association. The statutes were published in the annex of the Belgian State Gazette in October
2003. The CEER brings together energy regulators from 14 EU and European Economic Area
Member States: Austria, Belgium, Denmark, Finland, France, Greece, Ireland, Italy, The
Netherlands, Norway, Portugal, Spain, Sweden and the United Kingdom of Great Britain and
Northern Ireland. The regulators of Luxemburg and Northern Ireland are not yet members,
but invited to participate in all WG and TF meetings.
33. Ref.: 2004-030-0052 January 200426
The CEER acts as a central point for contacts between regulators and the European
Commission's DG TREN and participates actively in the Florence Regulatory Process and the
Madrid Regulatory Process. It maintains close working relations with regulatory authorities in
North America and the new Member States that will join the EU in spring 2004.
CEER increased its activities during 2003 especially due to the amendment of the Directives
96/92/EC and 98/30/EC, concerning common rules for the internal market in electricity and
natural gas, and the elaboration of the regulation on conditions for access to the network for
cross-border exchanges in electricity (Regulation (EC) 1228/2003). Following the
Commission decision from November 2003, establishing the European Regulators Group for
Electricity and Gas, CEER will have even more responsibilities in the future.
In order to fulfil all its activities CEER is internally organised in 8 WGs in accordance with
the following subjects: Electricity, Gas, Quality of Supply, International Energy Price
Comparisons, Taxation and the Environment, South East Europe Electricity Regulation, New
Member States and Security of Supply.
ERRA is a voluntary organization of independent energy regulatory bodies of the
Central/Eastern European and Newly Independent States region. Its main objective is to
increase exchange of information and experience among its members and to expand access to
energy regulatory experience around the world. ERRA has working relationships with energy
regulators in EU and US. Its members meet regularly to develop technical papers on tariffs,
licensing, competition, trade and other energy issues. Its foundation (in December 2000, 15
founding members) was stimulated mainly by US National Association of Regulatory Utility
Commissioners.
The purpose of ERRA is to improve national energy regulation in member countries, to foster
development of stable energy regulators with autonomy and authority and to improve
cooperation among energy regulators. In addition, the association strives to increase
communication and the exchange of information, research and experience among members
and increase access to energy regulatory information and experience around the world and
promote opportunities for training. ERRA has 2 standing committees – Tariff/Pricing and
Licencing/Competition, as well as the Benchmarking WG and EU Accession WG – and
distinguishes 4 different member categories: full, associate, honorary and founding Members.
Full members are energy regulators with primary responsibility for electricity regulation.
Regulatory authorities of Albania, Armenia, Bulgaria, Croatia, Czech Republic, Estonia,
Georgia, Hungary, Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, Moldova, Poland,
Romania, Russian Federation, Slovakia, Turkey and Ukraine are full members of ERRA.
The European Commission announced on 11 November 2003 the creation of a “European
Regulators Group for Electricity and Gas”, aimed at assisting it in further developing the
Internal Energy Market. This advisory group of national regulatory authorities should play a
crucial role in assisting the Commission in further developing the EU internal energy market.
The group should in particular help ensure a consistent application of the new Electricity and
Gas Directives as well as the new Regulation on cross-border exchanges of electricity. All
market participants, consumers and end users should be allowed provide input to its activities.
The creation of the group was strongly advocated by the European Parliament. The intention
for the group is to get important contribution from the Florence and Madrid Forums and to
represent a formal structure for regulatory co-operation and co-ordination. The EU Energy
Commissioner Loyola de Palacio commented on its foundation by saying that “the group will
contribute to effective market opening in practice by promoting consistent approaches to
market regulation throughout the Union”.
34. Ref.: 2004-030-0052 January 200427
During the negotiations of the liberalisation package adopted in June 2003, the European
Parliament strongly advocated the setting up of this group of regulators, similar to those
already existing in the financial services and telecommunications sectors, which would
monitor the application of the package. This resulted in the adoption of a recital (nr. 16) in the
Electricity Directive that announced the creation of a regulators group as a “suitable advisory
mechanism for encouraging cooperation and coordination of national regulatory authorities”,
in order to promote the development of the internal market for electricity and gas, and to
contribute to the consistent application in the whole of the EU of each of the three texts in the
package.
The European Regulators Group will be composed of the Heads of all EU national regulatory
authorities, responsible for overseeing the day-to-day interpretation and application of the two
Directives and of the Regulation. The group will invite the European Economic Area (EEA)
and the EU Acceding Countries to participate as observers.
35. Ref.: 2004-030-0052 January 200428
5. Assessment of regulatory models by industry
As part of the survey and the follow-up work by the working group, members were asked to
comment on both the positive and negative aspects of their experience with regulation of the
electricity industry to date. The aim of this was to obtain a qualitative view of regulation from
the perspective of industry participants, and assess how good and bad characteristics were
observed in practice. As different countries are at different stages of liberalisation and have
different industry and regulatory structures and objectives, it is difficult to make direct
comparisons between regulatory practices. However, there were a number of common themes
apparent from the comments received.
5.1. Negative Characteristics observed
5.1.1 Lack of appropriate balance in emphasis on all Regulatory Objectives
A common negative perception observed from comments received is that there is a perceived
failure to balance the interests of different electricity industry stakeholders in the situations of
conflicting or competing regulatory objectives. The examples of how this was seen in practice
varied from country to country. In some cases even where the overall regulatory framework
was similar, the practice and experience was seen to be different, due to increased emphasis
being placed in practice on certain objectives over others. Some of the relevant examples
include:
• Placing an over-emphasis on protecting the interests of domestic customers at the
expense of promoting competition in some jurisdictions. Alternatively, in other
countries placing undue emphasis on the promotion of competition without sufficient
regard to ensure that customer interests are protected and to ensure that there is not
undue discrimination against the incumbent;
• Lack of a comprehensive long-term vision to ensure that short-term issues or special
pleading do not take precedence over long term objectives for sustainable
performance of the electricity industry;
• Increased regulatory risk, due to a failure to balance the need for regulatory discretion
and flexibility against the need for long term regulatory certainty required for
investment in a capital-intensive industry;
• Inconsistency with other regulatory or government policies and lack of co-ordination
among regulatory authorities;
• The absence of a formal comprehensive regulatory impact assessment of the
regulatory proposals on industry in relation to the actual benefits to consumer, due
either to inadequate consultation or a lack of appropriate industry expertise within the
regulatory authority;
• Over-emphasis on the need to provide economic signals or cost-reflective tariffs,
without adequate consideration of social aspects such as the need to maintain
infrastructure in areas in need of regional aid;
• Excessive regulation in certain areas where alternatives, such as competition, could
achieve regulatory or government objectives.
36. Ref.: 2004-030-0052 January 200429
Some of the examples above also indicate areas where the regulatory objectives
fundamentally differ from those that may be appropriate to provide correct requirements and
performance incentives to the electricity industry. Regulators are perceived to be too much
oriented on lowering prices, in contrast to ensuring security of supply and sustainability.
The underlying reason for this is a set of objectives pursued by many regulators, that puts
special emphasis on meeting short term targets, or reflect the performance of the regulatory
authority, rather than the industry and consumers overall. Under this restricted set of
objectives, issues concerning security of supply take a lower priority, although their
incorporation is required by the Directives.
The electricity industry thus encourages regulators and governments to design the regulatory
frameworks with a balanced set of regulatory objectives, and competencies that will guarantee
the appropriate consideration of all relevant objectives. It is also important that an overall
regulatory framework ensures regulatory accountability for a balanced achievement of
objectives.
5.1.2 Inadequate Transparency and Consultation
The experience of different members with transparency and consultation of regulatory
processes and practice was quite different. In countries with poor arrangements for
consultation and transparency, this was recognised as a significant issue of poor regulatory
practice and a contributor to ineffective or inefficient regulation. In countries raising this
issue the examples include:
• Inadequate separation between the respective roles of government, regulatory authority
and appeals forum to ensure transparency in the decision making process;
• In some cases the regulatory decisions were presented without adequate explanation or
justification explaining the rational for a particular decision;
• Lack of open consultation procedures that would allow adequate time for the industry to
assess the implications of regulatory proposals, and to make submissions;
• An increased requirement to take recourse to the courts, due to the absence of adequate
opportunity to explore mutually acceptable regulatory agreements. This has the added
disadvantage of prolonging the process of implementing regulatory decisions, and
increasing the level of regulatory uncertainty overall.
Overall it was seen that the lack of proper transparency and consultation with industry as the
single most common procedural issue that reflected bad regulatory practice.
5.1.3 Insufficient Regulatory Accountability
In most countries, it was recognised that regulators should operate with a high degree of
independence. However, it is also recognised that regulatory authorities are being given
increasing powers and significant discretion on their use, and there is a high degree of
concentration of power to a small number of people. In some cases the regulator is in a
position to introduce legal requirements without being accountable to the democratic process.
Therefore there is a concern, notwithstanding the need for independence, that regulatory
authorities should ultimately be accountable for achieving regulatory objectives and adhering
to good regulatory practice.
37. Ref.: 2004-030-0052 January 200430
Accountability is seen to exist at least under the following conditions:
• where the regulator is required to report on its annual performance and on its
contribution to the overall performance of the electricity industry and on aspects of
protecting the interests of customers;
• where it is required to provide stakeholders with justification for decisions taken;
• where there are independent appeals processes on critical regulatory decisions.
5.1.4 Lack of clear responsibility for Security of Supply
In most countries prior to liberalisation, the responsibility for security of supply was clearly
recognised as resting with the national or local integrated utility. With liberalisation, it is not
necessarily assigned to any single market participant. As this is a critical issue for the
electricity industry overall, it is recognised that it must form part of the overall regulatory
objectives and be reflected to some extent in general terms, within the broad competencies of
the regulatory authority.
5.1.5 Inadequate competent resources
A general view supported by the members indicated that regulatory authorities did not have
access to personnel with sufficient industry experience and expertise, to properly appraise the
impact of regulatory decisions. In cases where regulatory authorities were seen to have such
expertise, it was recognised that the quality of regulatory decisions was improved and was
ultimately to the benefit of the industry overall.
In general, the members support the position that adequate resources should be made
available to regulatory authorities, to ensure that they can attract high-calibre experts and
experienced staff.
5.1.6 Lack of co-ordination between regulatory authorities
A common view expressed is that there are often conflicting and competing regulatory
requirements being placed on electricity companies. Where this is seen to be uncoordinated, it
may have negative impact to increased regulatory uncertainty and regulatory burden, in trying
to respond separately to the requirements by different regulatory authorities.
Equally however, it was also recognised that in some cases the overlapping competencies of
different regulatory authorities in a country helps to promote greater transparency. This can in
its own light help to ensure that regulatory authorities are required to achieve a balance in
respect of conflicting regulatory objectives.
A good example of this is for example an overlap between energy regulatory and
environmental agencies. In this case, the overlap may result in a balanced consideration of
general environmental concerns on emissions against the sector-specific need for security of
supply and fuel diversity.
Another example is countries that have both national and regional authorities which place
different regulatory requirements on the industry.
38. Ref.: 2004-030-0052 January 200431
5.1.7 Inappropriate Price Controls or inadequate returns
Many of the concerns identified in the survey are country-specific and relate to the manner in
which price control methodologies are applied in practice. Where network operators are
subjected to a rate-of-return regulation, almost all elements of the system are criticised by the
industry. This extends to both to the capital base and the rate of return. In the context of
regulatory models that rely more heavily on benchmarking elements, these are regarded
sceptically by the industry as well. These concerns are also shared by supply and generation
businesses that are subject to price regulation. Some of the common concerns expressed
include:
• There is often a lack of transparency or certainty that the methodology is being applied
consistently and without consideration of a target end-user price;
• Where price caps are applied, it may be done without allowing for adequate variations
in uncontrollable external market driven costs;
• There is an insufficient incentive in the rate of return to promote new investment;
• Quality of supply is not adequately incentivised, where price caps are imposed;
• Where adequate allowed cost of capital is applied, other approaches are used to cut
overall revenue, such as reducing the allowed regulatory asset base or cutting the
allowed operating expenditure;
• Yearly price adjustments for variations are not being applied or continuously deferred;
• Permitted rate return does not take full account of the regulatory risks or increased
exposure to other uncontrollable costs and risks, in the light of market liberalisation
and separation of businesses;
• Price control periods are too short to provide incentives to electricity companies to
improve efficiency and exceed regulatory targets;
• Benchmarking techniques are applied without sufficient understanding of differences
which will impact on underlying costs.
5.1.8. Problems related to detailed issues
A number of countries have stated certain detailed issues that have caused problems for the
regulatory framework. These include for example:
o Stranded costs
o Problem of transits
o Problems relating to balancing market
o RES and CHP related problems
o Impact of price caps on quality of supply
o Secondary legislation & licenses
39. Ref.: 2004-030-0052 January 200432
5.2. Positive points
Despite criticism towards the activities of the regulators, the industry has identified a number
of issues where the efforts by the regulators are seen to be very positive. The below examples
are country-specific and therefore do not necessarily apply in all countries, but they can be
given as examples of good practice:
• In many cases regulators are making good efforts to promote transparency and non-
discrimination in the markets;
• In general the regulators have shown a good record of independence; this is especially
the case of countries with longer traditions of liberalisation;
• Many regulators have also shown a relatively fast reaction to the changing
environment, also in countries where liberalisation is recent;
• Consultation procedures and stakeholders’ involvement were seen positive in many
cases, even if most respondents call for industry’s opinions to be taken into account
more seriously.
This of course constitutes the other side of the procedural problems cited above. Regulating
authorities are seen to promote non-discrimination and transparency in an efficient manner.
In general both the criticism and the positive points put forward by the industry are wide-
spread. As they come both from the regulated companies and from their customers and
competitors, a clear overall direction of the remarks is difficult to establish.
One conclusion however can be drawn. The large majority of criticism seems to indicate that
the regulating authorities should strive to explain their decisions and the underlying reasons
better.
5.3. Cross-border impact of regulatory decisions
Even if this report is not meant as a regulatory impact analysis, some attention was devoted to
impact of regulation, especially bearing in mind that in this work the regulatory models are
also considered from a cross-border perspective. Therefore it is useful to try to identify some
aspects of regulatory decisions and their impact on investments and business across borders.
Most respondents to our questionnaire do not necessarily recognise any particular link
between the decision of foreign regulatory authorities and their own domestic business. An
important exception to this constitutes the reference to congestion management which directly
influences the situation in the domestic market. As most congested interconnectors are located
on borders between Member States however, this is not foreign regulatory influence in the
narrower sense.
A different and very interesting point brought forward concerns the effects of foreign
regulatory decisions, for example if international benchmarking is used to determine national
tariffs. The obvious effect is that at least in the medium term stricter regulatory control abroad
results in stricter conditions at home as well and vice versa. The effect is not necessarily
dependent on an explicit obligation to benchmark internationally, as it is difficult to imagine a
regulatory regime that completely ignores the regulatory practice and results in other
countries.
40. Ref.: 2004-030-0052 January 200433
Another concern cited multiple times deals with reciprocity. Too much differing regulatory
regimes are perceived as ultimately leading to market distortions within the EU internal
electricity market. One issue referred to in this context are the varying rules for unbundling.
The overall impression of these concerns is that the cross-border impact of regulatory
decisions is at the moment limited to specific cases and so far has not been a wide-spread
general problem. The electricity industry is aware that closer integration of regulatory
procedures within the internal market might alleviate some of the specific concerns cited
above. Yet there is a danger where additional detailed harmonisation might also result in
additional problems and distort decisions. One example are attempts to perform international
benchmarking which usually experience difficulties in adjusting or taking all relevant
parameters into account.
For these reasons, the harmonisation of regulatory procedures should be approached carefully
and only if there is a specific problem limited in scope to address. From the perspective of the
electricity industry – both grid operators and grid users – little is to be achieved by
harmonisation of regulatory procedures solely for the sake of harmonisation.
It is possible for markets to operate without harmonised regulatory models. However, certain
consistency in regulatory requirements and procedures is needed, in order to allow efficient
cross-border trade and investment in and between the different national markets in an
integrated area. This is notably the case for certain issues such as promotion of renewables
and CHP, security of supply, harmonisation of G charges (G=0), congestion management
methods and access to gas transmission networks.
Regulatory models in use have implications of different kind and magnitude to European
utilities. So far, companies have encountered problems of different kind in their dealings with
the regulators. In the concluding chapter, a number of recommendations are made by the
industry.
41. Ref.: 2004-030-0052 January 200434
6. Conclusions and recommendations
Liberalisation of the electricity industry and the separation of business activities has increased
the level of complexity within the electricity sector. Now more than ever, regulatory stability
is critical in ensuring well-functioning competition and reliable supply of electricity in
liberalised markets. This is especially important in the area of investments in both generation
capacity and networks, in order to guarantee that the demand by consumers for electricity is
met at all times, i.e. security of supply.
In order to contribute to the debate about regulatory models, EURELECTRIC points out in
the following a number of issues to be considered in setting up and developing regulatory
models.
Procedures and good practices:
1. Consultation and transparency
Even if transparency is a stated goal of nearly all regulators and efforts are made to ensure
consultation and involvement of stakeholders into the regulatory processes, there is still
considerable scope for improvement in this respect. The regulatory process and procedures
should:
Clearly communicate regulatory proposals in a timely manner;
Permit adequate time for interested parties to make submissions on proposals;
Provide multilateral fora for open discussion where circumstances require;
Ensure that industry submissions are given due consideration;
Allow access to relevant documents and information;
Clearly communicate the final proposals and justifications for decisions taken;
Provide for regulatory impact assessment and appropriate controls to ensure that all
actions taken are proportional;
Permit appeal of regulatory decisions under defined circumstances.
As the new Electricity Cross-Border Regulation (1228/2003) sets out the general rules for the
comitology procedures, and as the regulators have established a group of European
Regulators, it is also important to extend the notion of consultation and transparency to
European level. The industry wishes to be an active partner and to have an institutionalised
role in the regulatory processes on European level. Clarity and transparency must be ensured
in these processes.
2. Adequate resources and expertise must be ensured for the regulators
The electricity sector is much more complex now than what it used to be during the monopoly
era. The unbundling of generation, transmission, distribution and supply implies that their
regulation must be organised adequately, to ensure the viability of each activity. In addition to
the traditional electricity sector activities, a number of totally new activities have emerged,
such as trading and risk management.
The regulator must have the capacity to keep pace with market innovation. This necessitates a
high level of technical expertise and know-how, as well as sufficient financial resources to be
assigned to the regulator.
42. Ref.: 2004-030-0052 January 200435
EURELECTRIC recognises that the quality and effectiveness of regulatory decisions is
significantly improved where regulatory authorities have the appropriate business experience
and technical expertise.
It is also recognised that this needs to be balanced against the need to ensure value for money
in relation to regulatory costs. It is therefore desirable that the regulator supports alternatives
to regulation, and allocates its resources to those activities and issues where the costs of
regulation can achieve most benefits.
3. Overlap with other authorities
The fact that different authorities are in some cases responsible for the same regulatory
domain has a potential for creating conflicting regulatory requirements. This may also result
in unnecessary uncertainty and cost. It may complicate the regulatory decision-making from
the perspective of all stakeholders. It also makes conflicting decisions possible.
It is important that the respective roles of all relevant authorities are clearly defined in the
broader regulatory framework to establish which regulatory requirements take precedence
where conflicting requirements arise.
4. Balance of objectives
In general regulators have multiple objectives or functions to pursue. In many cases this leads
to conflicting or competing demands on the regulatory process. For example regulatory
authorities in the energy sector are often required to:
• Maintain low tariffs while at the same time allow adequate returns to ensure
investment and long term security of supply;
• Promote competition while also being required not to discriminate and to act in the
interest of customers;
• Ensure universal service while also required to promote cost effectiveness and provide
correct economic locational signals;
• Promote renewable forms of energy while at the same time trying to avoid market
distortions.
This presents a significant challenge to regulatory authorities and underlines the need to
ensure that regulatory authorities have the appropriate competencies and resources. In order to
ensure a sustainable and efficient industry, it is necessary that the regulatory framework
ensures that regulatory authorities obtain a balance in meeting the overall regulatory
objectives, and that single issues are not pursued at the expense of other.
Long term objectives
5. Investments, tariffs and rates of return
Security of supply and sustainable investment are critical challenges facing the electricity
industry overall in the post-liberalisation era. It is critical that the regulatory framework
promotes an environment which supports sustainable investment. A regulatory framework
may achieve this by:
• Setting clear and enduring regulatory objectives which provide certainty over the long
term strategy for the electricity market;
