Simulating the restructuring of the Flemish electricity distribution sector

In Flanders (Belgium), distribution companies are to a large extent owned by the municipalities and as such these municipalities collect an important share of the profits from electricity distribution. This situation (by many it is seen as a hidden tax) cannot be maintained because, in the process of electricity market liberalisation, the ownership will be reshuffled and because the old regulation mechanism, allowing for such cash flows, will be revised. This paper presents some simulations on the restructuring of the electricity distribution sector, using a partial equilibrium model. The focus of the simulations is on the impact of the choice of the regulation mechanism on prices and on the municipalities' budget. Three regulation schemes are simulated, 'rate-of-return' (ROR) regulation, 'constant profit per unit of output' (CPU) regulation and 'price-cap' (PC) regulation. The simulations show that, irrespective of the regulation scheme, it is not obvious that end-user electricity prices will decrease after the liberalisation. Moreover, the restructuring will have a large impact on the profits received by the municipalities. The sign of this impact depends on the regulation mechanism that is imposed, but it appears that, from the three regulation mechanisms that were analysed, the ROR mechanism performs worst, both in terms of municipal cash flows and of economic welfare.