The liberalization of energy markets in Europe and Italy

In this paper we review the recent liberalization process in energy markets promoted by the European Commission in the late Nineties and implemented in all the member countries. The electricity and gas industries are characterized by a predominant role of network infrastructures, and by upstream and downstream segments that can be opened to competition. The key issues that must be addressed to design a liberalization plan include the horizontal and vertical structure of the industry, the access to the transport facilities, the organization of a wholesale market and the development of competition in the liberalized segments. We analyze the liberalization policies in the EU as a two step approach: the Directives and the national liberalization plans have focussed so far on the goal of creating a level playing field for newcomers through Third Party Access to the network infrastructure, the unbundling of monopolized from competitive activites of the incumbent and the opening of demand. Today, within a heterogeneous picture, all the member countries are implementing this phase. The second step refers to the development of a competitive environment in the liberalized markets, a goal that requires, but is not implied by, the creation of fair entry conditions to new comers. The reduction of market power of the incumbent the through divestitures and the entry process, and the design of the market rules are the crucial issues, and neither the Directives nor the Directives not the national plans have been in most cases very effective on this issue. As a result, while we can start appreciating the entry of new operators in both the electricity and the gas industry, the effects on consumers choice and final prices are rather limited, in particular in the gas industry. In the second part of the paper we move our attention to the Italian case, describing the national liberalization plans and the policy issues still opened. Both the electricity and the gas reforms are now more advanced than the minimum standards required by the Directives, and include in some cases interesting innovations. In particular, the Bersani Decree on electricity requires capacity divestitures in the generation plans and adopts a proprietary unbundling of the transport network, while the Letta Decree on gas introduces antitrust ceilings and a very quick schedule towards complete demand opening. Among the more relevant open issues, in the electricity industry the incumbent firm can maintain a market share of 50% in generation, with likely distortions in the wholesale market. There are two possible ways out of this central problem: a "market solution" that requires further reductions in the generation capacity of the dominant firm and an improvement in transborder interconnection capacity together with the start up of the wholesale market; an "administrative solution" that tries to limit the effects of the incumbent market power on prices by assigning the foreign low cost energy to some categories of (large)customers and introducing bid caps on prices, while delaying the opening of the wholesale market. It is not clear which choice has been made by the Government, even if the latter emerges from many recent decisions. In the gas industry the insufficient unbundling of the dominant firm is the most serious obstacle to developing competition. The antitrust ceilings may even determine perverse effects, with the new firms acting as (upstream)customers and (downstream) competitors of the dominant firm. Moreover, the access to international transmission capacity seems a crucial issue. Finally, the nature of competition with take-or-pay contracts suggests that a wholesale market for gas would be necessary. The last open issues are institutional: we argue that the recent assignment of the energy policy at the regional level and the prospected reduction of independence of the energy authority are two institutional reforms with a very negative impact on the liberalization process.