Privatization and Liberalization of the Downstream Electricity Market
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 private policy xsignals 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.