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Energy in a Competitive Market

Essays in Honour of Colin Robinson

Edited by Lester C. Hunt

This fine collection of original essays is in recognition of Colin Robinson, who has been at the forefront of thinking in energy economics for over 30 years. Energy in a Competitive Market brings together both prominent academics and practitioners to honour his outstanding and unique contribution. The authors cover a wide and fascinating selection of topics incorporating the whole spectrum of energy economics. In doing so, they examine the belief that markets are the key to the effective allocation of resources, a notion which arguably applies as much to energy as it does to any other commodity.
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Chapter 4: The Swiss electricity industry and the regulation of distribution prices

Massimo Filippini and Jörg Wild


Massimo Filippini and Jörg Wild INTRODUCTION The deregulation of the electric power sector was introduced in England and Wales in 1990. Switzerland is probably going to take a similar step in the next few years with the introduction of a new Swiss electricity market law.1 As in other countries, the reform of the Swiss electricity market is certainly not a removal of all regulatory interference with the electric utility. The new market law will introduce market competition in two activities of the electricity supply business (generation and sales), but the transmission and distribution activities, which remain natural monopoly activities, will still need regulation. For the transmission and distribution activities, economic theory requires the regulation of network access prices. In fact, most countries – with Germany as a prominent exception – implemented access price regulation as part of the deregulation process. Access price regulation is a difficult task. On the one hand, prices should be set in a way that enables network operators to cover their costs and gives sufficient incentives for investment. On the other hand, price regulation should give incentives for the efficient operation of the networks. Unfortunately, in reality there exists a fundamental conflict between these two regulatory goals: a guaranteed recovery of all costs tends to destroy efficiency incentives, because network operators are able to pass on all their costs to final consumers. Whereas incentive-orientated regulation mechanisms – for example, price-cap regulation – emit strong incentives for cost reductions and efficiency improvements, they do...

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