Et Lux Non Fuit. The Privatisation of ENEL and the Structure and Performance of the Electricity Market in Italy

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1 Et Lux Non Fuit The Privatisation of ENEL and the Structure and Performance of the Electricity Market in Italy Bruno BoSco parisiopelagatti* DEMS, University of Milan-Bicocca, Milan (Italy) Introduction of a SOE has remained partial and the State has retained a fraction of the leading role in management (this phenomenon has been called reluctant th

2 Public Enterprises Today: Missions, Performance and Governance resources because they were not challenged by market competitors. As be analysed considering the peculiar structure of the new shareholding and operating in those sectors in the lights of the new market architecture the allocation of resources. The history of ENEL is therefore an interesting case to be studied in conjunction with other cases of successful public liberalised industry from inside. In this paper we analyse one such a case of former public monopoly

3 Et Lux Non Fuit e de facto partially controlled by the Ministry opening and functioning of a wholesale electricity market (Italian Power public and now semi-public enterprise and the regulation framework in architecture and functioning of the newly created electricity market that that nowadays compete with what has remained after the unbundling ENEL cannot be understood without the analysis of the new wholesale were introduced. This will affect also the analysis of the possible public establishment of the Italian electricity industry and the history and role of 1. The History of ENEL ENEL was constituted as a new public enterprise on the basis of a political debate and it was organised on the basis of a peculiar legal and thereafter became the public monopolist working on a national

4 Public Enterprises Today: Missions, Performance and Governance the following sections a brief history of ENEL is outlined ENEL and the Development of the Electricity Sector in Italy th century but thermoelectric as well as the expansion of the national public railways system after the co-owners of the electric companies. To some extent we may say that electricity sector. Gruppo Edison Gruppo SIP Gruppo SADE Gruppo La Centrale Gruppo SME Gruppo Bastogi. Each group was dominant th century. They were part of a larger political

5 Et Lux Non Fuit the maximum allowed production limits. electricity in Italy from the birth of the industry until nationalisation. Table 1. Production and Consumption in Italy Until Nationalisation (GWH) Years Gross production Energy for auxiliary services Net Imp/Exp Energy consumed As a result of the fact that the national territory was fragmented in industrial consumption in some large Italian towns. A common decreasing Table 2. Prices (Cents of Italian Lira per kwh) Domestic consumption Industrial use Bologna

6 Public Enterprises Today: Missions, Performance and Governance Domestic consumption Industrial use Milano - Napoli - - Palermo - 55 Roma Torino Table 3. Total Installed Power of Private Companies (MWH) Group 1946 % 1954 % 1962 % Edison SIP 9.9 SADE La Centrale 7.9 SME 7.7 Bastogi AEM Others Total Self-producers Total economies of scale could not be exploited and a balance of supply and shortcoming of the market structure did not represent an obstacle to the 1.2. The Budget Performance of the Private Firms nationalisation.

7 (Millions of Current Italian Liras) Et Lux Non Fuit Year Edison Idroelettrica Piemonte Società Romana elettricità SADE Società generale elettrica della Sicilia Storia dell industria elettrica that permitted to maintain a non-increasing burden of debt. The following Edison Sip SADE SME Figure 1. Debt on Capital (AVD) and Return on Capital (AVR) Before Nationalisation (Average Values) AVD AVR ROE for the same time period.

8 Public Enterprises Today: Missions, Performance and Governance Table 5. ROI for a Group of Private Companies Firms Sip SADE SRE SME SGES SES Storia dell industria elettrica Table 6. After tax ROE for a Group of Private Companies Firm Sip SADE SRE SME SGES SES Storia dell industria elettrica Summing up we may stress that before nationalisation the electricity partial matching of the potential industrial and household demands The Nationalisation of ENEL and its Economic and Financial Performance The nationalisation of the Italian electricity industry followed (quasi

9 Et Lux Non Fuit (Billions of Italian Liras) Before and After Privatisation ENEL LOSS/PROFIT not to the Treasury the burden of that debt. The debt totalled more than interest. This implied an immediate undercapitalisation of ENEL which

10 Public Enterprises Today: Missions, Performance and Governance Table 7 summarises the compensation schemes adopted by the Italian Table 7. Direct Compensations Paid till 1978 Compensation criterions Value (Billions of Italian Liras) Share Values (if listed) Balance Sheet Technical estimates Total be paid Net Total Fondo di Dotazione block that lasted for almost thirty years. distress since in that period the thermoelectric generation was already the

11 Table 8. Industrial Results ( ) Et Lux Non Fuit Gross production (bn of kwh) Net return of thermoelectric 7 Energy sold per employee (millions of kwh) Customers per employee Cost of each kwh sold (index the explicit purpose of expanding national production and supporting such as the municipal public producers. The policy of ENEL was dictated by the National Energy Plans which were prepared by the Ministry of electricity at the minimum charge and to expand their consumption The Incorporation of ENEL (S.p.A.) the Pinochet s era of economic reforms. But the largest and best-known

12 Public Enterprises Today: Missions, Performance and Governance emphasised widespread public share offerings rather than auctions to of support. sui generis legal form of the whose share capital was initially entirely owned by the Treasury and series of public offers. This process was accompanied by measures segment by eliminating the legal monopolistic condition of ENEL as

13 Et Lux Non Fuit total production of any single operator was introduced and ENEL Spa portion of its generation capacity. A separate public company (Gestore della Rete GSE the whole national transmission system. A Single Buyer (Acquirente Unico of guaranteeing the supply of electricity to all the non-eligible customers. wholesale physical electricity market as a pool market (operational as an dominant producer (see below). incorporated companies) each one responsible for one of the production was subjected to a breaking-up process that generated a new legal company (Terna) which owned and managed the nation-wide grid public enterprise. In the last ten years this structure of the group has expectation that separate entities would compete on a liberalised market sale companies from the transmission operators.

14 Public Enterprises Today: Missions, Performance and Governance retailers and institutional). The main shareholder is still the Treasury 2. The New Market Oriented Mission and Governance to the shareholders meetings. The most interesting part of the analysis of increasing supply function and generating units are selected on the basis

15 Et Lux Non Fuit subjected to the accountancy control on the part of the public accounting judiciary system (Corte dei Conti) like any structure belonging to the de jure and de facto. whose main structure is reproduced below. Figure 3. Stakeholder s Meeting principles of highest standards of transparency and correctness in and with CONSOB (Italian National Commission for Companies and

16 Public Enterprises Today: Missions, Performance and Governance listed companies and with international best practices. According to Italian listed companies. Such information is included in the Report on 3. The New Market Regulation The reorganisation of the Italian electricity industry started at the independent power producers were allowed to produce and inject and Gas (AEEG) was established with responsibilities ranging from the Bersani Decree of and managed by different entities. Generation was opened to competition with suppliers subjected to a merit order dispatching whereas GRTN was a newly established (public) entity responsible for the transmission on the national grid. A new operator named Acquirente Unico (AU) was made responsible for the purchasing of electricity for non-eligible customers. A new platform managed by the GME was designed as the market place

17 Et Lux Non Fuit in a non-discriminatory way. Producers paid regulated tariffs for the access to the essential facility. GRTN was established as an incorporated whole shares of both AU and GME. The Marzano Decree setting an eligibility threshold for those customers who were allowed to buy directly electricity in the wholesale market and then lowering that st mercato tutelato mercato libero electricity bill). tariff scheme designed to reward separately the different components The price component is therefore the part of the electricity bill which procedure and the introduction of competition in the wholesale and in the cheaper wholesale prices. a close look at the results obtained in the liberalised portions of the

18 Public Enterprises Today: Missions, Performance and Governance liberalisation only a small portion of customers switched to the free make the market demand more elastic and this would reduce market power on the supply side The Italian Electricity Industry and the Wholesale Market Table 9. Production by Technology Technology Share 2004 Share 2011 Thermo Renewable Hydro TOTAL

19 Et Lux Non Fuit Italian budget. Table 10. Production Data Main Companies Production % Capacity Thermo Hydro Ren ENEL Eni Edison Endesa (from 2008 E.On) Edipower Tirreno Power A2A (AEM Mi + Asm BS) GdF Suez Erg Sorgenia Iren Axpo Group Saras Others We notice that ENEL s market share in electricity production segment of green generation.

20 Public Enterprises Today: Missions, Performance and Governance of AEEG. Below we reproduce the structure of the Italian Electricity Figure 4. Structure of IPEX infraday market (MI) and a real time market (MSD). The forward market of the (MSD) is implemented by Terna to continuously match demand and st in Figure 5.

21 Et Lux Non Fuit Figure 5. Series of European Electricity Prices The comparison between the Italian market and other European in their dynamics (Bosco et al. the European power consumption. power market was realised through the public diffusion of some standard

22 Public Enterprises Today: Missions, Performance and Governance Table 11. Price-setting Operator Index IOM (%) ENEL 77 Edison 7 E.on 9 Tirreno power 5 Others 9 compared to larger oligopolistic competitors. 4. The Behaviour of Privatised ENEL on the Market the wholesale electricity market. To this end a model of optimal bidding in multi-unit auctions can be considered the benchmark of the analysis. integrated and might hold forward contract positions. Three research the same group. This for example the case of ENEL (ENEL Produzione for generation and ENEL trade) which has two branches acting independently on the two sides of the electricity market.

23 Et Lux Non Fuit Authors using the GME public database of the day-ahead market (MGP). estimated 5 price-cost margins and Lerner Indexes for a set of Italian markets. Estimates Figure 6. Lerner Index vs. Net Quantities ENEL Enel market power Lerner index Net dispatched quantity (MWh) et al. 5 Bosco et al. Bosco et al.

24 Public Enterprises Today: Missions, Performance and Governance The main results that emerged from the applied analysis of bidding price arbitrarily high. In this case regulatory authorities should take price- possible. An example 7 Figure 7. Socially Responsible Price Policy et al. 7 See Bosco et al.

25 Et Lux Non Fuit is important to remark that the ex-monopolist displayed its still (partly) public mission in limiting the extent of price spikes in periods when extreme monopolistic conditions. ENEL Produzione belonging to a group as a possible explanation of generators supply price moderation in wholesale electricity markets. Generators sell in the wholesale auction and retailers buy in the auction and resell at regulated by the difference between the selling price (which is regulated by AEEG

26 Public Enterprises Today: Missions, Performance and Governance Tariffs and Distributional Issues in the Liberalised Electricity Industry Due to the full liberalisation of the retail segment of the electricity st regulated market still pay an energy price component which is under the consumers to the free market. Table 12. Switching Rate 2012 Customer Vol. (%) No. of Withdrawal points (%) Domestic Low Medium TOTAL sold. See Bosco et al. 9

27 Et Lux Non Fuit and in particular the ones concerning the access to the network. For year consumption. Figure 8. Electricity Prices for Final Customers (2012)

28 Public Enterprises Today: Missions, Performance and Governance of redistribution that implicitly assumes that low consumption is strictly high consumption can be explained by other reasons like for example the poor people or people with special needs has been introduced (the socalled Social Tariff). Conclusion In this paper we analysed the history of ENEL and the related th phases of the electricity industry. In this connection ENEL sustained the We then analysed the new phase that started with the season of whose share capital was initially entirely owned by the Treasury and then electricity industry (generation and sale) and a new industrial architecture in which transmission remained a national monopoly under the control of an independent TSO. Generation was open to competition and a newly created wholesale electricity market was established to coordinate the analyse the new ENEL without referring to the new regulatory structure on the grid due to better line interconnections and the decrease in demand

29 Et Lux Non Fuit market restructure is not easy to make. Italian prices are still higher References Working Paper The Global Economics Crisis International Advances in Economic Research Energy Market (EEM) th Journal of Applied Econometrics Energy Economics Energy Market (EEM) th International Conference on the Storia dell industria elettrica in Italia. Dal dopoguerra alla nazionalizzazione, The great divestiture

30 Public Enterprises Today: Missions, Performance and Governance La nazionalizzazione dell energia elettrica Storia dell industria elettrica in Italia. 1. Le origini ( ) International Tax and Public Finance Energy Economics Elettricità senza Baroni Storia dell industria elettrica in Italia. 1. Le origini ( )