Bosnia and Herzegovina State Electricity Regulatory Commission ERRA Workshop on Regulatory Monitoring of Electricity Sector Almaty, 31 Jan – 3 Feb 2006 Saša Šćekić Head of Licensing and Engineering Department Overview of the Southeast Europe Electricity Market and Monitoring

2 Energy Community Established by the Treaty signed on 26 October 2005 Parties: European Community The Republic of Albania, the Republic of Bulgaria, Bosnia and Herzegovina, the Republic of Croatia, the former Yugoslav Republic of Macedonia, the Republic of Montenegro, Romania, the Republic of Serbia, UN Interim Administration Mission in Kosovo Consolidated on the Athens Process and the 2002 and 2003 Athens Memoranda of Understanding Resolve to establish among the Parties an integrated market in natural gas and electricity, based on common interest and solidarity

3 Energy Community

4 The task of the Energy Community Create a stable regulatory and market framework Create a single regulatory space for trade in Network Energy Enhance the security of supply Improve environmental situation in relation to Network Energy Foster the use of renewable energy Set out the conditions for energy trade in the single regulatory space Develop Network Energy market competition on a broader geographic scale and exploit economies of scale

5 Institutions of the Energy Community Ministerial Council: Permanent High Level Group (PHLG) Regulatory Board Fora Secretariat

6 Implementation of EU Acquis Communautaire Acquis on Energy Directive 2003/54/EC concerning common rules for the internal market in electricity - within 12 months Directive 2003/54/EC concerning common rules for the internal market in natural gas - within 12 months Regulation 1228/2003/EC on conditions for access to the network for cross- border exchanges in electricity - within 12 months Eligible customers are: From 1 January 2008 – all non-household customers From 1 January 2015 – all customers Acquis on Environment Directive 85/337/EEC (amended by 97/11/EC and 2003/35/EC) on the assessment of the effects of certain public and private projects on the environment - on the entry into force of the Treaty Directive 1999/32/EC relating to a reduction in the sulphur content of certain liquid fuels (amending 93/12/EEC) - by 31 December 2011 Directive 2001/80/EC on the limitation of emissions of certain pollutants into the air from large combustion plants - by 31 December 2017 Directive 79/409/EEC on the conservation of wild birds - on the entry into force of the Treaty

7 Implementation of EU Acquis Communautaire Acquis on Competition Articles 81, 82, 86 and 87 of the Treaty establishing the European Community Acquis on Renewables Directive 2001/77/EC on the promotion of electricity produced from renewable energy sources in the internal electricity market and 2003/30/EC on the promotion of the use of biofuels or other renewable fuels for transport – adoption by the Ministerial Council for each Contracting Party Compliance with generally applicable standards of the European Community – the Ministerial council shall adopt the list drawn up by the Secretariat

8 Mechanism for operation of Network Energy Markets A single mechanism for the cross-border transmission and/or transportation of Network Energy Security of supply statements – diversity of supply, technological security and geographic origin of imported fuels Promotion of high levels of provision of Network Energy to all its citizens (Energy community may allow for the universal provision of electricity, foster effective demand management policies and ensure fair competition) Energy Community may make Recommendations to support effective reform of the Network Energy sectors (increase the level of payment, foster the affordability of Network Energy prices to consumers) Harmonization – may take Measures concerning compatibility of market designs, mutual recognition of licenses and Measures fostering free establishment of Network Energy companies Development in the areas of renewable energy sources and energy efficiency Safeguard measures

9 Single Energy Market Customs duties and quantitative restrictions on the import and export prohibited Possible aim of creating a single market without internal frontiers External energy trade policy – possibility of taking Measures necessary for the regulation of imports and exports of Network Energy to and from third counties with a view to ensuring equivalent access to and from third county markets in respect of basic environmental standards or to ensure the safe operation of the internal energy market Mutual assistance in the event of disruption

10 Priorities of the Energy Community in 2006 Ratification of the treaty Implementation of acquis communautaire Signing of the memorandum on social aspect due to changes in the market Continuation of negotiations with Turkey and other observers Further work with donors with the view to create a simplified infrastructural fund Development and adoption of the gas strategy Adoption and im­plementation of the action plan for market design Regional plan for demand management and energy efficiency Work on oil sector issues etc.

11 SEE Market Monitoring Different level of market development in SEE countries Some countries still in the stage of institutions strengthening There is no regional market monitoring formalized yet For that reason the SEE Market Monitoring Workshop held in October 2005 to gain the necessary knowledge and share experiences (SEE countries, USA, EU)

12 Topics covered on SEE MM workshop Overview of the electricity market in ECSEE The EU Market Monitoring Process Roles and approaches to market Monitoring Market monitoring tools Data availability and transparency Independent market monitoring MM aspects from the TSO position Role of the regulator in competitive energy markets USA MM experiences Examples from SEE

13 The EU Market Monitoring Process 2005 report considering: non-discriminatory network access, effective regulation, development of interconnection and security of supply situation, benefits to small companies and households, market dominance, market concentration and predatory or anti-competitive behavior, extent to which customers are actually switching suppliers and renegotiating tariffs, price developments (including supply prices), the experience gained in the application of the Directive as far as the effective independence of system operators in vertically integrated undertakings is concerned DG Competition inquiry of the sector prompted by prices – rising prices raise questions about competitive conditions

14 Roles and Approaches to Market Monitoring Monitoring the process of liberalization: Clear roadmap for restructuring and liberalization (targets, deadlines) Development from national markets to regional markets (integration, non- discrimination, regulatory issues) Monitoring the state of liberalization: Competition Network Regulation

15 Market Monitoring Principles Availability of information/data Structural approach to data – indicators Regularity of data collection and assessment Clear responsibility of market players (national/regional) level: Who is responsible for market monitoring? How are corrective measures proposed? Who is responsible for implementing corrective measures?

16 Market Power Detection Tools Need to choose suitable tools for different tasks: Ex-ante vs. ex-post analysis Long-term vs. short-term/real time analysis System-level market power vs. local market power vs. firm level market power Horizontal market power vs. vertical market power Different tools: Behavioral indices and analysis: bid-cost margins (e.g. Lerner Index), net revenue benchmark analysis Structural indices and analysis: concentration ratios and HHI, residual supply index, residual demand analysis Simulation Models: competitive benchmark analysis, oligopoly models Market share methods: C1 (share of largest firm), C3,C4

17 Lessons from around the world Market monitoring process should be forward-looking, anticipating how small market design flaws can develop into market failures that significantly harm market participants Market monitoring process must be fully supported by the regulatory process Need for the market monitor to prepare consistent measures of market and system performance that are comparable over time and across markets Need for public release of all data submitted to and produced by the market and system operators Market monitoring process should be independent of the market operator, system operator and the political process The worst case – no monitoring at all

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