Who is responsible for an energy policy?
There are a number of reasons why the responsibility for (of) an energy policy is fundamentally that of the government. In historical terms, most electricity and gas supply industries (as opposed to production systems) were formerly under the complete ownership and control of governments. In countries like the United States and Germany where the facilities were typically privately owned, they were still operated in accordance with directions given by the government regulator. There is little or no difference between the operation of a state monopoly and the operation of a private sector monopoly under direct governmental regulation.
Given that state control is usually the starting point, it follows that structural problems associated with transforming monopoly markets into liberalized, competitive markets can only be dealt with by the government. The government has to carry out the enabling act (usually legislation) in order to transform the existing structure into whatever structure is demanded by the policy of liberalization and/or privatization. The relationships of the newly created players must also be addressed by government in order to set out the ground rules of the new market. The government creates the policy which in turn is implemented to establish the new market structure, and addresses any structural problems associated with the introduction of competition and new participants.
Structural problems that necessitate the government taking responsibility for energy policies
These structural problems may include the issue of tariff/pricing, barriers to entry (access to networks) owing to the natural monopoly element in the downstream sector, availability of supply, etc. Moreover infrastructures for the industry require medium and long term coordination and guidelines for all players. Centralized policies and guidelines reduce uncertainty while government policies will make up for market deficiencies. Governments have a proper role in setting national energy policy objectives but these should be kept to a minimum and applied in a fair and easy to understand way.
Governments in adopting energy policies have embraced different forms of privatization and liberalization for overhauling the electricity industries. The starting point for privatization and liberalization in most of these countries is quite similar. Important issues to note in this respect include the following: Electricity industry has undergone some form of privatization in many countries. Private sector participation in electricity (outside those countries with regulated privately-owned systems) generally began in the 1980s, leading to the introduction of a degree of competition in the downstream energy industries.
Private sector participation also saw the beginning of a move by government to allow others to participate in the making of energy policy. This has however proved controversial and has led to an intense debate in the United States, particularly in the light of the failure of Enron (at the time of its collapse it was the world’s largest privately owned electricity company) and the involvement of Enron executives in the workings of the Department of Energy and the Vice President’s Task Force on Energy.
One of the reasons for supporting others in participation and in the making of energy policy is that the government, especially in developing countries, needs private sector experience to make energy policies effective and efficient. One of the reasons for opposing the idea of others participating in the making of energy policies is that it may be difficult to get an impartial energy policy maker outside government. This makes it difficult to achieve a level playing field which is necessary for the introduction of competition in the energy sector.
Privatization and liberalization
Privatization and liberalization are key government policies for regulating the energy industries. As a starting point it is important to understand what privatization is all about before discussing the issue of liberalization.
What is privatization?
It is the act of selling existing state assets – no more and no less. It is to be noted however that there is conceptually no need to break up the state company, or to create competition, or to adjust the regulatory structure significantly. All that is needed for privatization is a decision (and then follow up action) to sell the state assets to a third party. Privatization does not require liberalization, although in practice most governments would incorporate an element of liberalization within a privatization policy. Moving a company from the state sector to the private sector, even with regulation, tends to create problems in making future adjustments to the sector.
Privatization without competition implies that there is replacement of the state monopoly with a private monopoly. Privatization alone does not change the natural monopoly element in the downstream energy sector. By itself, privatization does not introduce competition. By itself, privatization does not change the pricing structure of the industry. Private sector monopolies are profit oriented rather than service oriented.
Any efficiency gains are incentivized by regulation, not by markets. Once the decision to privatize has been taken, the state is removed from the direct provision of energy. The sale means that someone else (a new participant) will be providing energy and the role of the state changes from service provider to creator of the enabling legal environment to permit others to provide that service. The function of government changes with privatization.
Privatization will require new laws, if only to change a monopoly status of the incumbent. Typically the incumbent is a state company in which case the law will give the government permission to sell, and probably also to restructure. Restructuring a state company (but leaving its ownership within the state) to meet the future challenges of liberalization is called corporatization, and is a process which attracts great debate. The debate is essentially about the nature of equal (or non-equal) competition between state companies and private companies. The idea of corporatization is unimpeachable, that the state company will be prepared for possible future privatization by being run on the same basis as a private company. But given that state companies and private companies have different objectives, it can be difficult to equate the two.
The objectives of a state energy company may include the following: Availability and accessibility of supply (state companies tend to aim for redundant or excess capacity to ensure provision of service), Creation of employment, Energy supply at reduced/controlled price (the government may subsidize the full cost of energy supplied), Focus on customer service as opposed to profitability, Protection of national interest- the energy industry is usually a key industry in the national economy and the state energy industry is frequently used as an instrument of general economic policy.
While the objective of a private energy company may include the following: Availability and efficiency of supply (extreme care needs to be taken in relation to the incentive to hold redundant or excess capacity), Maximization of shareholder value and profit (adequate return on investment). The business is focused on profitability not just prices and Market leadership.
Having said that, there are examples of companies which are owned by governments but which do not exist simply to reflect the national interest. For example BP was formerly British Petroleum, a company owned by the British government since the purchase of the shares of the Anglo Persian Oil Company by the Minister before World War I. The company does not appear to have ever acted as a state company indeed during the Rhodesian oil embargo declared by the British Government; the company appears to have continued to trade with Rhodesia. The company does not appear to have regarded itself as required to act in the public interest, and accordingly did not have the same need for a corporatization process before its privatization in the 1980s. Similarly, it is difficult to see why state companies which invest abroad are acting in the public interest of their own country; for example Electricite de France (now partly privatized) bought assets in several countries.
Corporatization may not need new laws, but removal of monopoly usually does. Similarly, if the state company is to be broken up legislative permission is usually required. If regulatory changes are to be made (and such changes are inevitable at privatization or liberalization) then it is to be expected that the legislation will also provide for such changes. Normally the regulatory changes are made by secondary legislation, in terms of a consent granted in the primary law.
Conceptual problems with privatization
The primary question is whether or not privatization should take place. This is a policy as well as a political question to be addressed by any individual government considering adjustment of the downstream energy industries. The political aspect of this question can be seen from the tones of the debate that precede every privatization policy of the government. The United Kingdom gas privatization debate in the House of Commons; parliamentary debate over the Gas Bill 1986 in Hansard emphasizes this aspect of the privatization issue.
The other problems of privatization will naturally arise after a decision to privatize has been made by the government, and would include the following: the form of the privatization (i.e. what is created through the sale of the state company) ensuring that government sells state assets for proper value and the new role of government as the creator of a suitable legal environment for business difficulty in sustaining the traditional gains of monopoly provisions especially those in the nature of Public Service Obligations (eg obligation to supply; connection rights; uniform price for similar categories of consumer etc.).
Problem that may arise from the obligation to supply consumers at Uniform Price
The problem is that a private energy company may not agree to supply different consumers at uniform price without government’s subsidy especially as transport costs increase with distance. Supply at uniform price may create losses for the company particularly where the losses cannot be mitigated by increased supply to surplus consumers. This will affect government’s policy of having cheap and affordable energy supplied to consumers which will encourage industrial growth. It is one of the arguments against privatization particularly for a developing country.
The political aspect of the privatization process will require a political decision on the part of the government. An integration of the political and economic aspect of the decision will tend to create a proper balance in theory, for the reform of the downstream energy sector. This balance between political and economic need may however be difficult to achieve in practice. The question of what should be done is therefore difficult to answer as it requires a careful look at each country. The primary function of this paper is to set out the options. Determining which option is “best” for a country is a matter of economic
The electricity world can be regarded as divided into two separate categories. There are those countries which have sufficient capacity (the simple test being that the lights are on); and there are countries which are in short capacity. These two requirements present completely different challenges for liberalization and privatization. Liberalization in category one countries (those with sufficient capacity) is predominantly designed around the concept of delivering the service at lower price. Liberalization and competition are designed to improve efficiency. Privatization is designed to change management and bring in profit incentives to improve efficiency. From a regulatory viewpoint, the key is that the incentive for state monopolies is based on command and control, whereas the incentive for private monopolies can be more subtly directed towards revenues.
The privatization debate – should governments allow privatization at all? Is largely in the past, particularly in those (first category) countries looking at liberalization. The debate is less over whether privatization should take place and more with respect to the form of the privatization and how to ensure that the government sells state assets for proper value. The lack of recent debate may however simply reflect the fact that a majority of countries with sufficient capacity have already embraced some degree of Privatization.
In category two countries, the argument is slightly different. Category two countries (those with insufficient capacity) tend to create policies designed to increase capacity. Liberalization does this by allowing new participants into the generation sector, and privatization achieves this goal by allowing the new entity access to new funding sources. In such countries, there is less emphasis on competition at the beginning of the process and indeed recognizing that competition may create undesirable results including price rises. The result is that category two country liberalization and privatization schemes tend to be complex and couched in regulatory restrictions to prevent abuses as the market gradually takes off.
Monopoly, privatization and security of supply
Monopoly systems tend to reduce the complexity surrounding concepts such as security of supply. Security of supply is an extremely simple concept in general terms, it is the risk that the system will be subject to interruption owing to lack of fuel (or lack of the correct fuel), or a lack of capacity. In more detailed terms, Security of supply means different things to different entities depending on the perspective one looks at it from. See below for a sample of the meaning of security of supply.