The role of systems operators in network industries A CERRE study Jon Stern (Centre for Competition and Regulatory Policy (CCRP), City University, London) Martin Cave (CERRE & Imperial College) Guido Cervigni (IEFE-Bocconi) 10 July 2012 Centre on Regulation in Europe (CERRE) asbl rue de l’Industrie, 42 (box 16) – B-1040 Brussels ph :+32 (0)2 230 83 60 – fax : +32 (0)2 230 83 60 VAT BE 0824 446 055 RPM – [email protected] – www.cerre.eu Table of contents About CERRE .......................................................................................................................... 3 About the authors .................................................................................................................. 5 Executive summary and key conclusions ................................................................................. 7 1. Introduction and scope of the report ............................................................................. 19 2. What do systems operators do, and why? ..................................................................... 23 2. 1. What are systems operators? ................................................................................... 23 2. 2. What do systems operators do? ............................................................................... 23 2. 3. A competition policy perspective .............................................................................. 32 3. SOs in energy - the single area case with one infrastructure owner ................................ 39 3. 1. The Origins and Development of Electricity System Operators ................................ 39 3. 2. Single Area Electricity SOs in the EU .......................................................................... 45 3. 3. System Operator Functions in Electricity .................................................................. 45 3. 4. Effectiveness of ISOs Relative to ITSOs in a Single Area ............................................ 49 3. 5. Current and Ongoing EU Single Area Issues .............................................................. 51 3. 6. Gas system operators: introduction .......................................................................... 54 3. 7. Single area gas systems operator functions .............................................................. 56 3. 8. The ISO/ITSO discussion in the gas industry .............................................................. 61 4. SOs in energy - the multi-area case with several infrastructure owners .......................... 71 4. 1. Electricity: US Multi-Area ISOs .................................................................................. 71 4. 2. Multi-area SOs in the EU ........................................................................................... 76 4. 3. The EU Target Electricity Model: Regional Virtual SOs ............................................. 77 4. 4. Uncertainties and Outstanding SO-related Issues with the Project Target Multi-Area Electricity Model .................................................................................................................... 80 4. 5. Multi-area gas SOs ..................................................................................................... 86 4. 6. Concluding remarks on gas SOs ................................................................................. 95 5. Extensions to the rail and water sectors ...................................................................... 109 5. 1. Railway SOs .............................................................................................................. 109 5. 2. Separation in railways ............................................................................................. 109 5. 3. SO functions in a single area rail context. ............................................................... 111 5. 4. Multi-area SOs in rail ............................................................................................... 117 5. 5. Railways SOs – summary and unresolved issues ..................................................... 121 5. 6. System Operators in Water ..................................................................................... 122 5. 7. Water SOs in a Single Area ...................................................................................... 123 5. 8. Water SOs in a Multi-Area Context ......................................................................... 126 5. 9. Concluding Comments on Water SOs ..................................................................... 135 120710_CERRE_SO_FinalReport 2 About CERRE Providing top quality studies, training and dissemination activities, the Centre on Regulation in Europe (CERRE) promotes robust and consistent regulation in Europe’s network industries. CERRE’s members are regulatory authorities and operators in those industries as well as universities. CERRE’s management team is led by Dr Bruno Liebhaberg, Professor at the Solvay Brussels School of Economics and Management, Université Libre de Bruxelles. CERRE’s added value is based on: its original, multidisciplinary and cross sector approach; the widely acknowledged academic credentials and policy experience of its team and associated staff members; its scientific independence and impartiality. CERRE's activities include contributions to the development of norms, standards and policy recommendations related to the regulation of service providers, to the specification of market rules and to improvements in the management of infrastructure in a changing political, economic, technological and social environment. CERRE’s work also aims at clarifying the respective roles of market operators, governments and regulatory authorities, as well as at strengthening the expertise of the latter, since in many member states, regulators are part of a relatively recent profession. This study has received the financial support of CERRE members. As provided for in the association's by-laws, it has been prepared in complete academic independence. The contents and opinions expressed reflect only the authors’ views and in no way bind the members of CERRE (www.cerre.eu) 120710_CERRE_SO_FinalReport 3 120710_CERRE_SO_FinalReport 4 About the authors Jon Stern is a Senior Advisor at CEPA (Cambridge Economic Policy Associates) and a founder member of the Centre for Competition and Regulatory Policy at the City University. For over 15 years, Jon Stern was a Senior Consultant and Special Adviser at NERA, where he worked primarily on energy sector and utility reform, restructuring and regulation, initially in Central and Eastern Europe, Asia and Africa. Jon Stern has regularly worked as a consultant to the World Bank on energy sector and other infrastructure industry regulatory and restructuring issues. He has also worked on UK policy, including infrastructure industry and regulatory issues, labour market and energy policy. Prof. Stern has been an expert witness to the House of Lords Select Committee on Regulators and an expert adviser to the Jamaican Office of Utility Regulation. Jon has written extensively on regulatory governance issues, on labour market topics and on utility and energy sector reform, particularly in transition and developing countries. He is co-author of the World Bank Handbook for Evaluating Infrastructure Regulatory Systems. Recently, he has been working on UK water industry and environmental regulatory topics. Martin Cave, OBE, is a Joint Academic Director of CERRE and also Visiting Professor at Imperial College in London. He was until recently holder of the BP Millenium Chair at the London School of Economics and Political Science and Director of Warwick Business School’s Centre for Management under Regulation. He is an economist specialising in the regulation of sectors such as airports, broadcasting, housing, legal services, posts, telecommunications and water. Prof. Cave has been heavily involved in providing advice on these matters to the UK and other governments and to the European Commission. His independent review of the regulation of social housing for the UK Department of Communities and Local 120710_CERRE_SO_FinalReport 5 Government formed the basis for the creation of the new Tenant Services Agency by the Housing and Regeneration Act 2008. Advice in his earlier reviews of spectrum management for the Treasury has been adopted by the Government. Prof. Martin Cave has recently conducted a review of competition and innovation in the water industry and chaired an expert panel advising the Secretary of State for Transport on the future of airport regulation. Since January 2012, he is also Deputy Chairman of the UK's Competition Commission. Dr Guido Cervigni is a Research Director at IEFE-Bocconi. He is also an advisor to businesses and governments across Europe on a wide range of competition policy and regulation issues related to energy markets, ranging from market design to tariff regulation, contracts and asset evaluation. Dr Cervigni was previously the head of economic analysis and regulatory relations in the Regulatory Affairs Department at Enel S.p.A, and, before that, head of business development in an energy trading company. Guido started his career at the Italian energy regulatory authority, where he was senior economist in the Tariff Division and later Head of the Competition and Markets Division. In that capacity, he represented the Authority in several working groups of the Council of European Electricity Regulators. Guido holds a PhD in economics