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''Who and why needs competition in the Polish power sector''

Leszek Juchniewicz, PhD
The President of the Energy Regulatory Office

The time for changes in the power sector has finally come. According to the decisions of the European Commission and European Council, contained in the directives on the Internal Energy Market, all member countries are obliged to provide all customers with a right to choose, since July 1st, 2007, a supplier of gas and electricity. According to this right, the market mechanisms, like in the other sectors of the economy, will play more and more important role, and competition between different suppliers of electricity and gas will lead to market prices and quality which would be acceptable to all of us.
The electric power and gas subsectors are one of the last relics of natural monopoly. Their presence in our economy is not a Polish phenomenon, because the power sector has developed this way all over the world. A commonly used expression – “natural monopoly” supports this idea. For many decades, for many generations, it seemed obvious that , according to “ natural order”, there was only one vertically integrated power company, owing generating assets producing electricity, transmitted by grids belonging to this enterprise, and selling a stream of invisible electrons to all those customers who were not only lucky enough to live in an area covered by this grid but also lucky enough to be connected. (because, speaking openly, there was no alternative). The level of internal integration of such a company was so high that nobody tried to introduce legal or economic unbundling, and the final conclusion was that the power sector was identified with the infrastructure of the economy. And I mean every economy – British, Italian, French or Polish, to mention just a few. The word “infrastructure” means “foundations”, something what is necessary for any complex system or organism to function. Encyclopaedic definition of infrastructure defines it as basic institutional service tools necessary for a given economy to operate. Energy services are included in the term “economic infrastructure”.
Well, this definition does not come from an old edition of encyclopaedia. It can be found in “The New Universal Encyclopaedia” of the Polish Scientific Publishing House (Polskie Wydawnictwo Naukowe) published in 1996.
Honestly speaking, according to actual knowledge, only this part of the power sector which is connected with transmission and distribution should be a part of infrastructure. The rest, subject to competition, should not.
The development of the gas subsector was very similar. Municipal gas generators producing gas in the process of coal gasification were distributing and selling it to final customers. Gas generators, being a part of infrastructure, possessed monopoly for generation, transmission and sales of gas.
A stimulus was needed for the change of approach towards the power sector. This stimulus, a very strong one, were events which followed the so called “great oil shock of 1973”. This crisis, has made people (or at least its significant part living in market economies) realise that natural monopolies constitute significant barriers in the development of the economies, but also the consequences of excluding important economy branches from market rules. When the reason was found it was not difficult to prescribe a remedy. To avoid such crisis situation in the future it was necessary to introduce market relations into the power sector. That means to subject the subsectors dealing with generation and transmission to competition and legally oblige them to give access to transmission and distribution of gas and electricity grids (enjoying de facto natural monopoly positions) to customers (or suppliers), giving them in this way the right to buy energy according to their own personal choices.
Another important question is not why, but how to motivate consumers of energy and gas to change a hundred – year old habits and experiences, and recognise chances brought by gas and electricity market reforms. Orthodox market economists could protest that it is not necessary to underline the advantages of market solutions over other forms of economic regulation because they seem to be obvious. This is only part of the truth. Let's just remind the beginnings of the Polish transformation, full of reluctance to everything that was new - painful events connected with the fall of entire sectors of the economy and particular enterprises, lost savings in bankrupting banks, dramatic returns from holidays bought out in dishonest travel agencies. In other words – an average citizen is usually afraid of everything connected with the market – and he/she seeks for state help – from its organs, institutions and people performing public functions. It is obvious that the society should receive such help. The problem has also been recognised by the European Parliament and the European Council, which offer recommendations to strongly protect the rights of consumers on the electricity and gas markets in the already mentioned energy directives.
It is possible to point out two basic duties of the state connected with the introduction of market mechanisms into widely understood energy sector. Firstly, the state should equip customers with the knowledge about the essence of competition in this sector, about the functioning of competition and the profits which could be brought by it. Secondly, the state should, in maximal possible range, ensure the feeling of security related to the ongoing reforms. It means that the state must elaborate and implement, clear and understandable for everybody, principles and ways of operating of all participants of the energy and gas markets. For the time being, there are no such rules of legal character and national standards. This situation is a serious restraint for the state to fulfil its educational obligations. There is not much to be handed over to customers in order to increase their understanding of the essence of things.
There is no doubt that this mission is not only necessary, it is just indispensable.
Lets look around, talk to neighbours, co-workers, and even famous economy experts. How many of them really know what is the idea of free choice of electricity and gas supplier and who can make profits on it? I can assure you – not many. Have you noticed that when we talk about our troubles, either connected with the breaks of supplies or connections to grids, we say loudly –“ the power station has cut electricity” or “they don’t want to come to my place and install a connection” and so on. This opinions however should not be addressed to power stations. It reminds me of a proverb from my school years from “Przekrój” weekly magazine.” Only people who live near a power station have fresh electricity everyday”. How many of us think this way? What conclusion can be drawn of the absolute truth that nobody can recognise where the electricity (which we receive in our socket) comes from. The lack of proper knowledge, long-time habits, fear of facing new challenges, appear to be significant barriers against progress and development.
Do we still want to remain passive customers dependent on power sector manipulations or would we like to use new opportunities?
Have you noticed recent advertisements published in the press by energy moguls operating on our market? One of them is trying, in a simple way, to engrave in our memory a piece of information saying that it is selling the cheapest energy in Poland. While the other one gives us a wider message:“In the year 2007 all Customers in Poland will have the right to decide about the supplier of electricity. What will it change? Lights will be on as they are today, the same with a refrigerator, a television set or a washing machine. However the possibility of choice will make the suppliers take into consideration your requirements and induce to meet them. Competition will force the power companies to show reliability, to satisfy your feeling of comfort and to take care of the environment around you.”
This kind of advertisement proves one thing – the power sector has started the battle for customers. Even not for today’s clients but for those who could be overtaken in the near future.
But what about us, customers? Are we prepared, and if yes, how? It is impossible to deny that not too well. So, it’s the high time to start these preparations.
At the beginning, general knowledge about profits resulting from competition will be useful. With the passing of time, when offers could be compared, evaluated and chosen (sometimes with a help of so called “experts”), this knowledge will become more detailed.
For the time being we should became familiar with, at least general, rules of changing a supplier of energy in other EU countries and advantages brought by competition to customers. If we take into account basic criteria for changing a supplier, i.e. obtaining lower price, research works conducted in the years 1999 – 2003 in old member countries have shown that most significant discounts, about 20%, were offered to small entrepreneurs, but individual household customers paid to new suppliers 9,5% less then to old ones, and finally, big industrial customers decreased their energy expenditures by 6,5%. It is worth noticing that during the above mentioned period of switching suppliers significant changes in prices of gas and oil, basic carriers of primary energy in many European power stations, were observed. This process decreased profits offered by competition.
Do we have a chance to enjoy similar, or maybe even bigger gains? Of course. In Poland we generate electricity in many different sources with different generation costs, and generation capacity is much bigger than the real demand. The are enough (about 300) companies dealing with trade (besides other kinds of energy activities) which could sell energy to us, instead of present suppliers – distribution companies owing grids to which we are connected. There are many companies – classic intermediaries specialising in trade. The situation, at least formally, is similar to the one in Great Britain, where dozens of energy suppliers, independent from distribution companies, operate on the market, and 13 mln (a number equal to Poland) out of 26 million customers have changed a supplier over the last few years enjoying different significant benefits, mainly financial. The situation in the gas subsector in Poland is worse than in the electricity, because it is far more difficult to find new, cheaper suppliers, and the sources of supplies are less diversified. This is not only our problem, similar troubles are experienced by other EU member countries. It means that the development of the gas market will be our common concern, and diversification of gas supplies differentiating the supply side, will depend significantly on the transborder interconnections. Although, we will have the right to change our present gas supplier from July 1, 2007 it would be better to wait with such a decision until the gas market is fully fledged and gives a real choice.
I would like to assure you that there are many question marks, doubts, and, first of all, problems to solve. It is impossible to refer to all of them in one, or even several articles like this one. This problem requires much more time and attention.
Now is the time for conclusions in this short invitation for discussion. If you, dear reader, are tired with arguments and are not able to answer the question asked at the beginning of this article – who and why needs competition in the power sector – I am ready to repeat that again. Competition is necessary for customers, because it will let them buy energy or gas at the market price and of required quality. Competition is also needed for energy enterprises. It will give them a chance to make necessary restructurisation and rationalisation, improving the quality of servicing. Competition in the power sector is needed for the whole national economy, because it will improve not only efficiency of generators and suppliers of electricity and gas but also of all customers. The power sector will not be perceived as a barrier for development but will become a solid foundation of economic growth and, thus – our welfare.
29.05.2007

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