Guidelines on Tariff Setting

Among the different components of the electricity industry, the transmission networks remain natural monopolies. This implies that their services are not subject to competition and hence that their price must remain regulated. In other words, they must satisfy certain regulatory criteria. Chapter 1 introduced the relevant criteria that emerge from current and foreseen legislation and discussed their economic properties. Nondiscrimination and transparency dominate in European law. Cost recovery is not imposed by EU legislation but is explicitly required by some member states’ legislation (e.g., France). Economic efficiency is never mentioned in this legislation even though one would consider as obvious that one also tries to avoid economic inefficiencies. The notion of cost reflectiveness, even though not an explicitly required objective, pervades EU texts on transmission. Chapter 1 argues that cost causality may be a more adequate term for cost reflectiveness: one should charge customers the cost that they cause. This chapter is about the search for cost causality in the design of tariffs of transmission and distribution.