Vertical Integration, Separation and Non-Price Discrimination: An Empirical Analysis of German Electricity Markets for Residential Customers

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:http://ftp.zew.de/pub/zew-docs/dp/dp11069.pdf Non-technical SummaryVertical integration of electricity distribution network operator and electricity supplier is a key issue in European energy markets, in particular since the European Commission (EC) has initiated a sector inquiry in 2005. The EC argues that vertical separation of electricity networks from other activities (such as production and retail) increases consumer surplus, while opponents argue that vertical integration enables cost savings due to economies of scope. The European Competition Commission too indicates the disadvantage of vertical integration in energy markets for retail customers caused by potential discrimination of competitors. Aiming at preventing non-price discrimination the EC suggests alternative regulatory approaches to overcome the challenge of vertical integration. Legal unbundling, as an intermediate approach between ownership unbundling and vertical integration, describes a particular type of separation. In this case, the regulation requires legal separation of a grid unit from the retail/production and the operation of the grid by independent management.In a theoretical model we show that vertically integrated incumbents in the electricity market might have an incentive to favor their own downstream unit over competitors. We distinguish between demand decreasing and cost increasing non-price discrimination. Delaying supplierswitching or withholding important information from competitors are examples for such types of non-price discrimination. This discriminatory behavior might affect the retail prices. Therefore, consumers might be worse off if the distribution network operator and the downstream retail incumbent remain vertically integrated. We further consider the effects that arise from introducing legal unbundling as already implemented in several European Countries. In line with other studies, the results show the legal unbundling regime to be favorable if it works perfectly, i.e. can indeed prevent non-price discrimination.To test our hypotheses derived from the theoretical model we employ cross-sectional data for geographically separated submarkets for household customers in Germany, each served by one distribution network operator, one downstream retail incumbent and a number of small energy providers. As the vertical structure is heterogeneous across the 850 German electricity submarkets for residential customers (t...

Unbundling, Regulation, and Pricing: Evidence from Electricity Distribution

“…Our findings alleviate the concerns of a broader strand of literature (e.g. Arocena et al, 2012;Gugler et al, 2017;Triebs et al, 2016), which finds that unbundling destroys scope economies, and we contrast previous empirical work that does not find an effect of legal unbundling on distribution grid charges in Germany (Nikogosian and Veith, 2012).…”

“…The only empirical paper we are aware of that (directly) examines the effect of unbundling measures on grid charges itself is Nikogosian and Veith (2012). They analyze German DSOs using cross-section data from August 2008 but do not find statistically significant effects of required legal unbundling and of ownership unbundling on grid charges.…”

“…. E.g Nikogosian and Veith (2012). do not consider the fact that DSOs with less than 30,000 customers are subject to a different type of price regulation.6 / The Energy JournalAll rights reserved.…”

The EU internal electricity market: Done forever?

“…This may result in billions of euros of "tariff deficits," as has notably been the case in Spain [10]. Moreover, insufficient unbundling of distribution companies can be a serious obstacle to competition [11], [12], provided that DSOs shall act as "entry gates to retail markets […] making them an important influence on the level of competition as well" [13].…”

Unbundling, Regulation, and Pricing: Evidence from Electricity Distribution

“…The only empirical paper we are aware of that (directly) examines the effect of unbundling measures on grid charges itself is Nikogosian and Veith (2012). The authors show in a theoretical setup that vertically integrated electricity utilities have incentives to discriminate against downstream retail competitors (they argue for demand-decreasing and cost-increasing non-price discrimination, e.g.…”