Essays in Honour of Colin Robinson
Edited by Lester C. Hunt
Chapter 4: The Swiss electricity industry and the regulation of distribution prices
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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