3.2 Tariff regulation - fundamental considerations
Netbound markets, such as gas and electricity markets, are characterised by the fact that suppliers and customers depend on access to a grid that, in practice, constitutes a monopoly infrastructure. On this basis, much regulatory effort has been put into the task of regulating the grid monopoly in otherwise competitive markets, in order to ensure that grid owners do not reap monopoly profits and that all market participants can compete on transparent and non-discriminatory terms. It is generally recognised that not only access to the infrastructure as such, but also the economic terms for such access, need to be regulated in some form, in order to ensure a level playing field for market participants.
Transportation tariff regulation can be structured in many ways. One fundamental distinction may be drawn between negotiated access regimes, where the owner is required to provide access on reasonable terms, which are then subject to negotiation and agreement between the parties, and regulated access regimes, where public authorities regulate the tariff - or at least the tariff methodology. EU and EEA laws require the application of regulated tariff schemes for gas and electricity transmission and distribution systems in EU/EEA Member States. Although the Gassled system has been considered to be an upstream gas pipeline system not formally bound by the rules applicable to transmission and distribution systems, a regulated tariff system has been chosen for this system as well.
Tariff regulation needs to balance, on the one hand, the legitimate expectations of the infrastructure owner in receiving a reasonable rate of return on the infrastructure investment and, on the other hand, the need of other market participants to have access to the infrastructure on fair terms. Moreover, given that a regulated tariff scheme substitutes for ordinary market pricing, it is important that the scheme ensures both predictability for the infrastructure owners and users, and sensitivity to other concerns that would ordinarily have been taken into account in a functioning market. In the absence of a predictable tariff scheme, owners cannot calculate whether future revenues will be sufficient to cover potential new investments, and users cannot assess the future marginal price of their product. Given that tariff regulation represents a heavy-handed intervention in the asset management of infrastructure investors, it is clearly important that the function is exercised with due care towards the long-term interests of both the owners and the system.
The public authority in charge of grid access and tariff issues is typically referred to as an energy regulatory authority. In practice, these regulatory authorities often have a number of tasks and responsibilities beyond access and tariff regulation, such as supervision and licensing tasks throughout the value chain, but tariff regulation is arguably among the most central tasks of the authorities. Given that the authorities decide on the infrastructure owners’ return on investment, it is of great importance that this task is carried out in a fair and predictable manner.
Two categories of requirements are typically imposed on energy regulatory authorities, in order to promote good regulatory conduct. These categories are first, the institutional requirements for independence of the authority, discussed below in section 4.3, and second, the requirements relating to the tasks and conduct of the authorities, discussed in section 4.4.