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See version in english Regulation of the Power Sector, Ignacio J. PÉREZ-ARRIAGA (dir.)

BIBLIOGRAPHIE : PÉREZ-ARRIAGA Ignacio J. (dir.), Springer, 2013, 728 p.

Regulation of the Power Sector, Ignacio J. PÉREZ-ARRIAGA (dir.)

Ignacio J. Pérez-Arriaga

This comprehensive book on the regulation of the power sector, edited by Professor Ignacio Pérez-Arriaga, is presented as a collective work of researchers at the Institute for Research in Technology at Comillas Pontifical University of Madrid, Spain. They are a group of experts in engineering, economics and regulation of the electric power sector with extensive experience on teaching, researching and consulting across the world. The book contents have been tested during the past years throughout the annual training course of the Florence School of Regulation, which was started in 2002 at the request of the Council of European Energy Regulators. Precisely, the book adopts the point of view of the regulator, whose goal is to promote the public interest. The same contents have been tested at the Massachusetts Institute of Technology as well as in other courses and places. The authors dedicated the book to their students, who have been exposed to limited teaching material. However, the book is not an introductory text since it goes further into the complexities of power regulation. The book is geographically imbalanced in the sense that case studies often refer to Spain, Latin America, the European Union and North America, but much less to other regulatory experiences from Africa, Asia and Oceania. This drawback is explicitly recognized by the authors, who commit to correct it in possible future editions.

The technical and economic analysis reflects the research interests and specialization of the authors. The book is directed to regulators, policy decision makers, business managers and researchers. But energy market regulation is also very important for lawyers, as it is competition law. In fact, regulation aims to supplement the insufficiency and limitations of competition. As expressed eloquently by A.E. Kahn in the last chapter : “All competition is imperfect ; the preferred remedy is to try to diminish the imperfection. Even when highly imperfect, it can often be a valuable supplement to regulation. But to the extent that it is intolerably imperfect, the only acceptable alternative is regulation. And for the inescapable imperfections of regulation, the only available remedy is to try to make it work better.” Consequently, regulation and competition are complementary in pursuing the functioning of efficient power markets. The book covers both traditional and liberalized regulatory frameworks. It gives a broad characterization of the power sector and presents the economic fundamentals of regulation. It also looks in detail at the regulation of particular components of the power sector and at advanced and transversal topics. It is obvious that most of the issues addressed in this book are of high interest to lawyers.

Chapters 1 to 3 provide an introduction to the power sector from an engineering, economic and regulatory perspective. As an introduction to the entire book, the components of a power system are described : generation, transmission and distribution. The technological characteristics of the power system influence the way the system is managed in terms of investments and system operation. The two major regulatory approaches to organize the power system are traditional versus liberalized regulation. While the traditional centrally planned system is based on the regulation of a vertically integrated monopoly, the liberalization and restructuring of the power sector introduce a new decision-making process that is free-market oriented. The reasons why the various activities of the power industry are structured as competitive markets or monopolies are explained using economic fundamentals, including consumer and supply behavior. The liberalized power systems are subject to a very detailed and complex regulation. The implementation of the act restructuring the sector is entrusted to new independent regulatory authorities.

Chapter 4 tackles the fundamentals and principles of monopoly regulation. Building and maintenance of network infrastructures operate as natural monopolies. The variables that can be regulated are company revenues, quality of service standards, investments and the conditions to be met by the exclusive licensee. As an alternative to the traditional cost-of-service (or rate-or-return) regulation, the unbundling of the electricity sector justifies the implementation of incentive-based regulation to enhance market efficiency, using either price or revenue caps.

Chapters 5 and 6 address distribution and transmission regulation. Those activities are treated as regulated monopolies as it makes no economic sense to develop parallel networks to provide electricity supply. Distribution and transmission companies enjoy enormous market power, since they are indispensable for the supply of electricity. In a competitive framework, network companies are obliged to provide open and non-discriminatory access. To avoid conflicts of interest, unbundling and independence between network and competitive activities are necessary. However, despite the physical similarities and common treatment of transmission and distribution as regulated monopolies, a differentiated approach is justified.

While regulators can examine individually the small number of significant new assets per year, this is not possible with the huge volume of components in the distribution grid. Transmission grid regulation primary concern is to enable wholesale market competition. It focuses on investments (planning, business models and siting), allocation of costs (incurred in building, maintaining and operating the grid) and fair and non-discriminatory network access. Regulators often opt for simple transmission tariffs in a way that the network costs are socialized. Yet, energy prices in power systems vary in space and time. The book authors elaborate extensively on the concept of nodal or location pricing and how it affects investments, access and cost allocation. On the other hand, in electricity distribution, where the majority of end consumers are connected, service quality (continuity of supply and product quality) is an issue of high importance and it is closely related to investment and maintenance costs. Distribution infrastructure growth is evaluated as a whole and linked to the growth in demand and reliability requirements.

Electricity wholesale market, as explained in Chapter 7, is composed of all the commercial transactions of buying and selling electricity and other ancillary services concerning the aspects of security and quality. The transactions are organized around a sequence of successive markets : long-term markets (physical and financial), day-ahead markets, and intraday plus balancing markets. The core activity of the wholesale electricity market is the day-ahead or spot market, where organized auctions and bilateral contracts take place the day before the delivery of electricity. In a competitive context, market monitoring is critical. Arguably, market power depends on the structure of the market rather than the rules. Several regulatory measures for mitigation of market power may apply in the short-term, such as price and bid caps, and in the long-term, such as divestment of assets and energy release or virtual power plants auctions.

Chapters 8 and 9 deal with electricity tariffs and retailing (also known as supply and commercialization) and assess how final consumers may benefit from a competitive environment. The regulatory authority determines the costs of the regulated activities (e.g. networks, research, renewables, efficiency, domestic sources) and also how these costs are charged with a regulated tariff or “access tariff” to final consumers. Under traditional regulation, also the costs of electricity production and supply are regulated, which are determined by the regulatory authority and included in an “integral tariff.” Under a competitive regulatory framework, consumers are free to choose a supplier and pay the agreed price for the energy and the commercialization service. But consumers may also be allowed to opt for a regulated integral tariff called the “default tariff.” Finally, a “last resort tariff” must apply when a consumer is left without a supplier in emergency situations. Key issues in regulation of retail markets are how to deal with vulnerable customers and energy poverty and, on the other hand, ensure that the default tariff is not a superfluous and unnecessary barrier to retail market development.

Chapters 10 to 14 address some horizontal and advanced topics on electricity regulation. First, the creation of regional electricity markets has evolved from enhancing reliability to the increase of competition and security of supply. By way of illustration, the features of the internal electricity market in the European Union are presented. Second, regulation focuses on the measures that can be adopted to mitigate the environmental impact of electricity supply and consumption, especially with regard to the expected role of renewable sources in the future energy mix. Third, in restructured electricity markets, the intervention of the regulator amounts to an additional set of rules in order to ensure security of supply in electricity generation, particularly concerning firmness (the ability of installed facilities to meet demand in the short- to mid-term) and adequacy (the existence of available capacity in the long-term). Forth, regulation of electricity and natural gas converge in the areas of downstream business, security of supply and market power.

Finally, the last chapter presents the challenges in power sector regulation. In the midst of restructuring and liberalization of electricity markets, a new revolution erupted from different angles. The transition to a sustainable energy model, the decarbonization of the power systems, the integration or coordination of neighboring markets, the deployment of large amounts of intermittent renewable generation, demand response facilitated by information and communication technologies, new business models and universal access to electricity supply are all at the top of the agenda.

In conclusion, this book makes a substantial contribution to the design of loud, long and legal regulation of the power sector. It aims to bring the reader to the current frontier of knowledge. As professor Pérez-Arriaga acknowledges, that frontier changes quickly and therefore he puts forward the need to frequently update the book if well accepted. This is most welcome !

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  • European University Institute (Florence)


Ernesto Bonafé, Regulation of the Power Sector, Ignacio J. PÉREZ-ARRIAGA (dir.), February 2014, Concurrences Review N° 1-2014, Art. N° 62412, pp. 262-263

Editor Springer

Date 26 February 2014

Number of pages 735

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