EU Energy Policy Blog

To promote competition in the retail market of electricity and to ensure that the cost advantage of the fleet of nuclear reactors continues to benefit to French households and companies a commission has recently recommended to the government to introduce a price and quantity regulation of the nuclear kWh. No doubt planning à la française is alive and well.

The commission was headed by Paul Champsaur, former chairman of the French regulatory telecommunications authority. Half of the other members of the commission are MPs. It was created by the government in October 2008 to orient its future action in the organizing of the electricity market. Its paper was issued on April 24, 2009.

Champsaur commission’s recommendations are threefold: (i) withdrawing the current retail administered tariff for business, (ii) maintaining retail administered tariff for households, (iii) introducing a wholesale administered tariff on nuclear power generation.

They are supposed to simultaneously solve the following conundrums:
- promoting competition in facilitating the business development of EdF competitors, especially new entrants such as Poweo and Direct Energie,
- rewarding households with low price of electricity to maintain French people’s support vis-à-vis nuclear power generation,
- ensuring a cost-reflective price of base load electricity to large industrial consumers to avoid their delocalizing.

The first recommendation is welcome. Over the past two years, an incredibly complex and costly regulatory framework has been put in place to enable industrial consumers who quitted the administered tariff to switch back the umbrella of regulation against high market prices. The pretty name of TaRTAM which stands for Tarif Réglementé Transitoire d’Ajustement du Marché was given to this system.

The other two recommendations pave the way of a burdensome, inefficient, long lasting and anti-European regulation. They are an economic non-sense.

According to commission Champsaur, administered tariffs for households must not be withdrawn because individual consumers are not mature enough and smart metering is still in its infancy. Here, the commission’s reasoning seems illogical and a dead-end. On the one hand, it emphasizes the need to send correct price signals to consumers and to develop innovation in demand management; on the other hand, it supports the perpetuation of tariffs that are both below market price and flat! Is the inertia of consumer behavior not the consequence of administered tariffs rather than a reason to prolong them? To solve this chicken and egg problem, the commission counts on two driving forces. Firstly, thanks to the regulated access to nuclear base load, competition in supply to households will be strengthened. Rivals of EdF in supply will be more active and innovative. The commission expects that innovation which is currently dormant will flourish. Secondly, this technology push will be complemented with a safety net. As today, consumers will be allowed to make goes and returns between administered and market offers. Their risk in quitting the administered tariff to benefit from an innovative offer based on market price is close to zero because 6 months later they can switch back. In other terms, the Champsaur commission bets on a sophisticated and regulated learning process rather than on the most direct way: forcing consumers to swim in the market water by abolishing tariffs. Of course, if the technology push is less strong and consumers are less brave than expected by the commission, they will stay on the shore of the protected tariffs and never change their behavior in consuming electricity.

In my opinion, administered tariffs for households should be eliminated as well as those for business consumers. Their main drawbacks are threefold. Firstly, tariffs of today are a major obstacle to boost competition. In fact, new entrants (e.g., Poweo, E-On) cannot enroll new domestic consumers without losing money. They have to propose a price that at minima is equal to the administered tariff. The latter is low because it is partly based on EdF accounting costs of its nuclear fleet which is nearly amortized. As a consequence, there is no viable business model to compete with EdF in the domestic market. Secondly, administered tariffs disincentivize consumption reduction by households and investments in new plant buildings. Flat and low tariffs obviously reduce the benefit to save electricity, especially in peak hours. This is damaging in terms of CO2 emissions because a part of French households’ electricity consumption comes from non-nuclear plants and this part is larger during peak times. As far as investment is concerned, administered tariffs raise a regulatory risk. Once the plant is built, the government could renege onits commitment to align the tariff with full costs and could refuse to increase it for political reasons. This is what happened several times over the past when EdF and GdF had to pass on an increase in their cost to consumers (e.g., an increase in price of imported gas) but the tariffs were frozen by the Ministry of Finances. This regulatory risk lowers and delays investments. As a consequence, consumers of tomorrow will buy their electricity at a higher price. (Note that in addition to these negative allocative effects, administered tariffs also result in a redistributive effect that is detrimental to future consumers) Thirdly, the perpetuation of administered tariffs for households is against the spirit, if not the letter, of the creation of an internal energy market in the European Union. As required by EU law, France opened up the electricity market for supply of electricity to households in July 1, 2007. Today, as less than 3% of domestic consumers have abandoned the administered price, new entrants share of the retail market amounts to 2,3% (that is 3,3 TWh) against 97,7% to EdF (that is, 136,7 TWh).

The third recommendation of the Champsaur commission is the most innovative and disruptive. It consists in regulating both the price and the quantity of the nuclear baseload production. It concerns the existing EdF fleet of nuclear plants (i.e., new buildings such as the EPR at Flamanville are excluded). The price would be calculated on a full cost basis and would therefore cover inter alia: combustible costs, maintenance costs and dismantling costs. Note that the commission recommends an accounting costs approach that is mainly based on past expenditures rather than an economic approach based on the costs of replacement that would therefore take into consideration technological change (e.g., third generation nuclear reactor) and today costs of capital. The quantity would be set according to the customer portfolio of purchasers in the French market. For instance, E-On would benefit from the regulated wholesale price depending on the consumption of its business and domestic clients in France. Its quota would ex ante take into account the short-term perspective of increasing the number of its customers and would ex post be adjusted according to the actual development of its portfolio. As stated by the commission’s paper “the regulation will have to be dynamic” and “the monitoring be fine-tuned and continuous”.

The explicit objective of the price regulation of nuclear base load production is to level the playing field for EdF competitors and to ensure effective competition in the French electricity market. In fact, according to the commission, without regulation “rivals of EdF in supply are unable to compete with the incumbent with competitive offers to final consumers”. The implicit motivation to complement this regulation with a quantity regulation is to ensure business consumers and households in other members states don’t benefit from the cost advantage related to the existing French nuclear fleet. In fact, to understand Champsaur commission’ s recommendations, one has to keep in mind that most, not to say all, French law-makers strongly support the nationalist idea that the reward from the historical choice for nuclear power generation should only benefit to French enterprises and inhabitants. As mentioned before, nearly half of Champsaur commission’members are MPs. This explains why one finds such a shameful anti-European statement in the paper saying that “Il est légitime que le consommateur français bénéficient de la compétitivité des capacités de production d’électricité françaises”.

In my opinion, this third recommendation is flawed on its premise and in its outcome. Moreover, alternative solutions are available and would have been in-depth assessed.
Regarding the sharing of the French nuclear cake, let’s admit that social acceptability vis-à-vis nuclear power generation requires a pecuniary gain to people inhabiting the nation where plants are built. The dogma is then to believe this reward has to be allocated to consumers according to their level of consumption. This principle remains unquestioned in the Champsaur commission’s paper. Tis is a pity as it is unfair, distorts price signals and is based on a fallacy.

The fallacy is to think that the benefit of the France choice in favor of nuclear power generation could leave the country. Today the nuclear cake is shared between the benefiters of administered tariffs and EdF stockholders, especially the French State that owns 84,7 % of equity. In other terms, it benefits consumers and taxpayers in France. If the tariffs are eliminated, at least 86,9% (i.e., the state share plus the EdF employees’ stocks) of the nuclear cake will also stay in France. Even if EdF is fully privatized, the benefit will not be dissipated abroad: the selling price will include the discounted future profits based on the competitive nuclear power generation and the revenues of the privatization will be pocketed by the State. In other terms, conveying the pecuniary gain to consumers of electricity is not indispensable to ensure the wealth created by past investments in nuclear power generation will be kept within the French borders.

Rewarding consumers according to their level of electricity consumption, that is, via a flat tariff per kWh, distorts economic signals sent to consumers. As mentioned before, consumers are disincentivized to save electricity. Moreover, the fairness of this principle is questionable. Large domestic electricity consumers have higher income on average than small consumers, so they appropriate a large piece of the nuclear cake. Is there any evidence on a correlation between the level of consumption and acceptance disutility?
An alternative solution would be to eliminate administered tariffs, to tax the extra profit made by EdF due to the non-optimal energy mix prevailing in Continental Europe and to redistribute it to households independently of their level of electricity consumption. The pecuniary reward to gain acceptance is here both more visible than when the tax goes to the overall budget of the State and more incentivizing to save electricity than a flat administered tariff. We could imagine, for instance, the State will redistribute the whole revenue of the tax in giving an annual check of the same amount to each household. The amount will compensate the average increase in the electricity bill of households due to the suppression of tariffs. Consumers will the have an incentive to reduce their consumption because each kWh they save does not reduce the check.

It is true that the Champsaur commission envisages a taxation solution. However, the proposed redistributive channel would take the form of a rebate on consumers’ bill that will be proportional to their level of consumption. Moreover, the commission adds that the taxation solution is compatible with the perpetuation of administered tariffs for households and that therefore their maintenance could be envisaged. This proviso is puzzling. In principle, the administered tariffs are no longer useful because households are compensated through the rebate. Similarly, note that the introduction of a price and quantity regulation on the wholesale price of EdF base load production suppresses the need to regulate prices for households at the retail level. However, the Champsaur commission recommends both regulations. Why? Is it because its members believe that consumers and smart metering technology are not mature enough and that therefore the patronizing state is required (see supra)? Or is it because they fear French voters are irremediably attached to regulated tariffs and would oppose their suppression? It is also important to note that the commission expresses its preference for an administered wholesale price over a tax on EdF profit. It briefly argues that the latter is less visible and easier to manipulate than the former. These points are questionable. Firstly, as mentioned above, a tax could be redistributed via a check to be pocketed by households rather than siphoned by the state. Secondly, recent events show that administered energy prices are not immune against government opportunism. Over the past both EdF and GdF have been barred by the Ministry of economy and finances to pass on increases in their costs to consumers. For instance, in 2006, due to the price increase of natural gas imports, the administered retail tariff of gas for households was kept lower than GdF operating costs.

In comparing taxation and price regulation it is fair to say that a tax on EdF profit and its redistribution to households do not address the competition and competitiveness issues: EdF rivals and large industrial consumers would not have a larger access to the existing nuclear fleet and its low relative cost. Note, however, that their current access is not insignificant. About 100 TWh, that is one fifth of EdF production, is available to alternative suppliers. Half results from competition authorities’ decisions. They have been implemented as a remedy to the acquisition of EnBW by EdF in 2001 and to a complaint lodged by Direct Energie with the Conseil de la concurrence in 2007. The other half comes from partnerships and long term contracts with other electricity companies. For instance, Electrabel enjoys a 12,5% participation in the four 900 MW nuclear reactors at Tricastin. Regarding electricity intensive industrial consumers, a consortium, named Exceltium, recently signed a partnership with EdF to get an access to more than 10 TWh of nuclear production per year at a cost-reflective price. Regarding households note also that the main components of their electricity bill are the network part, the energy part and taxes. The part that pays the costs of commercialization amounts to about 7% of the total bill. In other terms, from a static perspective an increase in competition in retail only gives small room to reduce households’ bill.

Let’s assume in the remaining part of this paper that the maintenance of the administered retail price for households is a better redistributive channel than the introduction of a tax. Setting in addition a price regulation on the nuclear kWh could then only be justified by leveling the playing field to new entrants and enabling large industrial consumers to purchase base load electricity at a cost-reflective price. Is it worth? To put it another way, would the expected strengthening of competition in the retail market and the anticipated improvement of competitiveness of electricity intensive industrial consumers offset the regulatory costs? As we already mentioned at the beginning of the paper, retail competition could provide less gain on innovation than expected by the commission; as we just mentioned above, a decrease in commercialization costs thanks to retail competition would provide a small gain in a consumer’s bill. As far as electricity intensive companies are concerned, it is difficult to assess the effects of the third Champsaur commission’s recommendation. Firstly, impacts on competitiveness are uncertain because a firm’s choice to localize its investments depends on a plurality of factors. So comparing the growth rate of the electricity intensive domestic sector with and without a regulation of the wholesale price of base load is uneasy. Secondly, the effect of a change in competitiveness of a given sector is difficult to translate in terms of a nation’s competitiveness. Will France be wealthier tomorrow if today government industrial policy gives priority to mineral industries rather than, say communication and information industries?

Undoubtedly, the regulatory cost is also difficult to calculate. However, it is likely to be significant. The wholesale price regulation as envisaged by commission Champsaur requires a huge collection of information. For each nuclear plant, combustible costs, operating costs and maintenance costs will have to be audited and dismantlement costs will have to be forecast. Moreover, data on each clients and their consumption will also be required. As said before, the nuclear kWh will also be regulated in quantity in order to ensure only consumers in France will pocket it. Of course, the regulator will have also to cope with (i) information asymmetries on EdF costs and portfolio of purchasers and (ii) the resulting needs to incentivize EdF to reduce its costs and to sanction purchasers if they sell their electricity to non-eligible consumers (e.g., outside France). Last but not least, one may expect vested interests will spend a lot of money to influence the tariff and its adjustments. For instance, assuming EdF competitors will achieve a 50% market share (that is, 220 TWh) and the tariff is set at 45 €/Mwh. Obtaining a 1% increase (that is a tariff at 45,45 €/MWh) by lobbying the regulator, EdF will increase its revenues by nearly million € 100 per year. In other terms, in supposing the likelihood of EdF lobbying success is 0.5, it would be rational for EdF to spend million € 50 in paying external consultants and in-house employees in rent seeking. The same reasoning applies to litigation if EdF expects a judge will order the administration to increase the tariff.

As a conclusion, I urge the government not to follow the recommendation of the Champsaur commission to regulate the wholesale price of nuclear power generation. It will give birth to an economic and administrative monstrosity. The commission failed in squaring the circle. It was asked to solve non resolving contradictions: giving oxygen to new entrants such as Direct energy and Poweo without withdrawing administered retail prices for households; ensuring a past cost-reflective price of base load electricity to large industrial consumers without affecting incentives to invest in new power plants; re-regulating power generation to the exclusive benefits of French economy without infringing EU energy and competition law. Without a hierarchical list of compatible objectives, no commission can be liable not to find the Holy Grail. A French commission is no exception.

This entry was posted on Wednesday, May 6th, 2009 at 3:10 pm and is filed under Electricity. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.