Transparency for all and monitoring by few
February 27th, 2008 by Jacopo Torriti,The development of organised markets for electricity and gas requires a high degree of transparency and in turn it helps in providing it. Yet the virtuous circle does not happen spontaneously. Then a satisfactory degree of transparency should be a policy goal of the authorities in charge of the markets.
Most of Energy Authorities monitor the markets in order to foresee critical issues, prevent disturbances, enact timely regulatory actions. Obviously, to ensure this task, they need information. So, when discussing the task of organising an appropriate monitoring of the newly liberalized markets, which is one of the main tasks before regulators today, it is natural to have in mind the need for more ‘transparency’. In an ideal, transparent world, good market monitor analysts of -but not exclusively- electricity and gas markets would be able to read all the available information and tell us how markets perform; compare operations over time and across markets; publicly release all data submitted to and produced by the market and system operators; and even anticipate instances where small market flaws may develop into market failures. Transparency and monitoring could be seen as two parts of a same task, performed by the same people.
In fact, it is not so simple. An effective monitoring of the energy markets cannot be achieved by issuing rules on transparency only. There are at least three obstacles. First, there are data which companies have a right to maintain confidential. Second, there are data which are public in principle but costly to gather and assemble. Third, there is no general consensus on the desirability of transparency.
True, many observers and newcomers say that transparency is desirable because lack of transparency leads to incomplete information and inefficient screening of the market. Benefits from a transparent system include benefits to all players in the market and go beyond those of better regulatory monitoring. Information should be available not only for those who have the legal and financial capability to access data, but also to all market and non-market actors.
Yet others, and mainly incumbents, argue that there are instances where transparency may violate property rights, or harm business when the disclosure of crucial information can alter the competitive process.
Moreover, even new entrants may find transparency problematic. Perfect visibility of the strategies of competitors may be beneficial to the defense of market power by the dominant company. Some delay in making market bids transparent may help the strategies of new competitors.
So the issue is: how to find a favourable compromise on transparency?
Let us examine the US and the EU cases.
Looking rather superficially at the situation across the Atlantic, one may notice that market monitors within US regulatory authorities such as the FERC, compared to their EU colleagues, feature: (i) a higher legislative power for access to data and (ii) a greater financial capacity to purchase data. Since data are kept confidential by the regulator, business concerns of being negatively affected by data disclosure for competition purposes are limited. Hence, one might say that in the US some transparency is sacrificed in support of effective market monitoring.
In the EU institutional market monitoring activities are lagging. Some effort is being done by regulators and by the European Commission.
In some European countries, the regulator is recipient of a wealth of data and the main issue is whether to publish them or not. In other countries, data gathering does not represent a problem, but organizational deficiencies make the treatment of data rather difficult. In transnational realities, the issue of data gathering is more complex, because of the lack of a clear mandate and a system of fines for fighting against obstructing data provision.
In the European context not all national regulatory authorities are entitled or have the financial capability to access all data.
The European Commission is setting up an “Energy Market Observation System’ in charge of collecting commercial data for oil, gas and electricity; carrying out automated updates; and using geographical information systems for maps. In due time this may provide useful results, although the Commission does not seem to consider generating data per se as one of its objectives.
One can hope that the newly established ‘Energy Market Observation System’ will be able to fill the gap. However, this will not happen instantly.
Our opinion is that the arguments against transparency may be grounded in some cases, but they have been unduly expanded. In general, more transparency is likely to be useful and indeed necessary to the advancement of competitive markets. We suggest that a higher employment of resources on data gathering is the first necessary step in Europe, both for achieving greater transparency for all and for facilitating an effective market monitoring by regulators.
Jacopo Torriti and Pippo Ranci, Florence School of Regulation