Data Gathering and Costing Rate Design
2.7. The Introduction of Competition in the Production of Electricity
Until recent developments in the US and UK have led to increased private sector participation or the potential thereof, competition has been limited worldwide in the electricity sector (Cordukes, 1990). Previously, governments had the outlook where they electricity supply was considered a public concern and tariffs as being tools for meeting their social obligations. Thus price increases have been highly sensitive politically because Governments perceived that they contribute to inflation and impact adversely on their electoral status (Cordukes, 1990).
In the past, competition was not favoured; however, consolidation and price fixing followed franchise proliferation. In the early 1900s, reliance on market competition was abandoned in favour for regulated monopolies. The outlook was "Public utilities are best conducted under a system of legalized and regulated monopoly". States had
such opinions and thus regulation received more support than public ownership and thus policies against market competition were established7.
Zardkoohi (1995) raised a major policy concern in terms of whether restructuring of the electricity industry could enhance competition and consequently improve economic efficiency. He also mentioned that pooling can be the response to the above concern. Pooling is generally defined as the common facility planning, construction and use by several independent companies. Two major benefits are: pools substantially improve reliability at considerably reduced costs; and pooling can result in substantial cost savings in power generating and transmitting . However, pooling arrangements yield many benefits. It can facilitate investment coordination and construction of large generating units and transmission lines, leading to economies of scale in the latter groups.
The industry paper consolidated by Cordukes (1990) appeared to be confident that the latter perspectives (on competition) will cease to exist in the near future...
To elaborate on that point, Cordukes (1990) has evidence of developing countries that have already embarked on introducing competition; a brief look at these examples might lead one to a more positive outlook on the subject;
In Chile, realistic pricing policies have been adopted where the government regulates prices for distribution companies, through this, a climate for promotion of cogeneration and private sector development has been established. Similarly in Pakistan, the regulatory environment was transformed through the Bank's assistance to encourage competition and provide sector financing for generation projects.
From a study of complete restructuring by Berlin et al, the following were founded;
"it is particularly important that inter-utility competition for customer loads be promoted. The desire to achieve efficient allocation of resources and to stimulate
7 Primeaux, W. J. Jr "Competition between Electric Utilities" in Moorhouse & Demsetz, ed., Electric Power: Deregulation and Public Interest. 1995. pp 395-400.
8 Zardkoohi, A. "Competition in the Production of Electricity" in Moorhouse & Demsetz, ed., Electric Power: Deregulation and Public Interest. 1995. pp 63-68.
technological innovation demands no less." Berlin et al thus proposed ending vertical integration by separating generation and transmission from distribution.
Weiss (1995), Cohen (2002) also embarked on similar studies and projected the following conclusions; vertical integration and combination utilities are two major barriers to competition in the electricity industry. He suggested two alternative classes of modifications. The first one being to induce "maximum competition," this alternative would require a complete restructuring of the industry as follows:
• The separation of generation-transmission companies from distribution
• The disbanding of combination utilities
• The elimination of public and private territorial restrictions on sales to distributors or large industrial customers
• A general requirement of interconnection and wheeling at reasonable charges
• The elimination of preferential access to federal power and preferential tax and capital-coat treatment for municipals and cooperatives
• The elimination of legal restrictions on entry into bulk power; and
• The limitation of horizontal mergers among generation-transmission companies to cases where the partners are too small to negotiate effectively with other bulk-power products of a region.
However, Weiss (1975) contradicted himself by stating that such a thorough restructuring process is probably neither practical nor politically feasible in the foreseeable future. He thus offers a more reserved set of modifications, which may be easier to attain to induce modified competition.
• The elimination of private and public territorial restrictions on sales for resale and possibly private restrictions on sales to large industrial customers
• A general requirement of interconnection and wheeling;
• Control of horizontal and vertical mergers;
According to Moorhouse & Demsetz (1986), a derivative of such great efforts would be "a further reduction in vertical integration because of the increased access of municipals and cooperatives to power at competitive prices and the increased
competitive pressure on small utilities that are presently integrated." This view point was recently supported by Cohen (2002).
Other specialists, Joskow and Schmalensee (1983) evaluated the cost effectiveness of several scenarios in a vertically integrated utility. One scenario however stood out where one has the South African electricity market in mind. This scenario calls for complete vertical non-integration of the utilities and proposes deregulation of wholesale power transactions. Each sector would be owned and operated by different entities. The ownership and operation of all transmission capacity would be transferred to "a regional power pooling and transmission corporation". Transactions between independent distribution companies and independent generating entities would be free of regulation. Transactions between distribution companies and transmission-pooling entities, however, would be governed by regulation. Gordon (1986) reiterates that retail services would be provided by franchised monopolies, and the retail rates would be subject to state regulation. Coupled to that, a market structure is also being suggested where over time; a multi-market model electricity market framework will ensure that transactions between electricity generators, traders and power purchasers may take place on a variety of platforms, including bilateral deals, power exchange and a balancing market. This is what the South African market will be striving for in the near future...