Transport Pricing of Electricity Networks

The setting of tariffs for the use of electricity networks is associated with the liberalisation process of the energy sector. As infrastructures which are too costly to duplicate, transportation networks are natural monopolies. To do their business, producers, traders and industrial consumers have to use the same networks. The conditions for their access, especially the setting and publication of charges, are therefore a crucial factor for a successful opening up of the electricity sector to competition. Let us imagine, for instance, the anti-competitive effects raised by a vertically integrated incumbent who could deny access to its network to new entrants in setting a dissuasive price of transmission or in arguing false technical problems. The obligations and conditions for access to the network are set by statutes, refined by soft law, developed by jurisprudence and enforced by public authorities. In other words, the legal framework provides guidance to the setting of access charges. It prescribes general principles operators have to follow, categories of costs they have to include, methodology of calculation, etc. As a result, the tariff for the use of electricity networks is not only an economic topic; it is a matter of law and economics. This is why the first chapter of this book deals with both the legal aspects and the economic principles related to access charges. It is divided into two parts.

This chapter deals with the key issue of cost allocation, namely: how to allocate costs across services or market segments within a given industry, in order to set prices exhibiting desirable properties?

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.