A research of the development of electricity and natural gas markets and the experiences gained from implementation of the electricity and natural gas market laws

In the beginning of 2005 several changes in the electricity and natural gas market law came into effect. This report examines the influence and impact of these changes on the behaviour and development of these markets, looking at the role and position of both the energy industry and customers. The report combines existing data with new research data collected during spring and summer 2006. Whilst the recency of the law changes, along with the simultaneous impact of other market variables limits the salience of any impact, the report nevertheless provides clear and interesting conclusions. In the electricity market, one major legislative change that came into force in the beginning of 2005 concerned the supervision of the reasonableness of electricity distribution pricing. According to the newly adopted ex ante regulation principles, the regulatory authority now determines the guidelines for reasonable pricing prior the start of a predefined regulatory period. So far, the price development under the new regulatory system has been positive since, on average, the customers have experienced price decreases over the past year and a half. However, final conclusions on the overall price development are possible only after the second regulation period that ends in 2011. In general, the new regulatory system has improved the predictability of regulation but there are also some problems, namely the low level of regulated returns and the practically non-existent incentives for preventative maintenance of the distribution network, caring for the electricity quality and service level improvements. Even if the changes in the electricity market law are generally seen as a positive step forward, they have not had (and were not expected) a radical impact on e.g. electricity prices. Regarding electricity prices the most significant law changes comprise more extensive unbundling, the obligation to publish offer (competitive) price information and the limitation of 'obligation to supply' to smaller customers. Generally and maybe surprisingly unbundling has tended to clearly increase electricity retail prices and their volatility, though it is too early to separately estimate the impact of the law changes on unbundling. Limitation of obligation to supply has not significantly influenced electricity prices. Public offer price information is believed to make different electricity suppliers' prices more similar to each other and possibly also higher. In the gas market, the recent developments have resulted mainly from other factors besides the legislative changes that came into force in the beginning of 2005. The legislative changes had perhaps the strongest impact on the supervision of the reasonableness of gas distribution pricing. However, it would be premature to evaluate the consequences of the new regulatory system at this stage because the new system has been in place only since the beginning of the year 2006. The recently adopted regulation principles in the gas distribution sector are largely determined based on the experiences obtained within the electricity distribution sector. In future, however, an approach that takes into account the structure and special characteristics of the Finnish gas markets is required when developing gas sector regulation. (orig.)