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C. The Importance of the Proper Power Sector Framework |
1. Market Restructuring
The adoption of a sound energy law that defines the electricity market (e.g., open access) and the regulatory arrangement (e.g., a separate regulatory body) increases the likelihood of success. For example, in Hungary, the government attempted to privatize electricity assets before taking these steps, and failed. It then enacted an Electricity Law and created a regulator, tried again, and achieved very successful privatization of all its distribution and much of its generation assets. The Law, however, did not anticipate the possible need for competition in the future structure of its electricity market. Consequently, introducing competition, necessary for accession to the European Union, is proving difficult and creating uncertainty for investors.
This legal privatization preparation involves legalizing private ownership, spelling out how the privatization will proceed, and setting forth the post-privatization ground rules. Included in this last category should be laws describing the structure of the privatizing country's energy market, e.g., treating issues such competition and open access to the transmission system (third party access).
To privatize, the assets being sold should be packaged into appropriate components. Typically, preceding the privatization process one public, vertically integrated utility is unbundled. The assets are divided and packaged into logical, saleable units (with the assistance of advisors). Knowing in advance the structure of the energy market that is envisioned assists the government in packaging these assets for sale, and provides the investor with a clear understanding of the characteristics of the new energy market in the post-privatization environment.
Additionally experience teaches that some specific organizational issues should be dealt with prior to privatization to avoid problems later. For example, certain baseline structural requirements exist for participation in the EU energy market. If a government makes long-term purchase or tariff commitments to investors, difficulties could arise if compliance with the EU's directive on liberalization of the electricity market will conflict with such commitments. This issue is known as the "stranded cost" problem - investments that become "stranded" due to additional structural changes in the sector after privatization, such as the introduction of competition. If a government commits to a long-term power purchase agreement with the acquirer of generating assets, problems can arise if subsequent changes in the market reduce or eliminate the ability to transfer the cost of that agreement to a captive customer base.
Hence, at least the general understanding of the ultimate market structure should be reflected and accounted for in the legal and regulatory framework before privatization starts. If the ultimate goal is to eliminate captive customer bases, then the laws and regulations should be designed with that goal in mind, with a transitional roadmap leading up to that final situation. The process and packaging of the privatization of energy assets should then respond to that market structure.
In determining what market structure to adopt, as a general rule, the trend now is toward a bilateral market allowing for direct competitive contracts between distribution and generation companies, supplemented by a balancing pool to provide incremental quantities and ancillary services. The legal and regulatory framework should allow for the existence of bilateral contracts between consumers and suppliers, complemented by a pool to deal with spot market needs.
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Table
of contents |
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I. Power Sector Privatization |
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II. Privatization Process |
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Conclusion |
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