222. An important way of evaluating the progress a country has made in regulatory reform is cross- country comparison. This method generally works well across most OECD countries and is indeed frequently used in the context of assessing regulatory reform.
223. There is, however, no easy way of comparing Hungary’s reforms with the reforms in most other OECD countries and reaching meaningful results. This is due to the fact that, like other transition economies, the set of electricity reforms Hungary has completed represents essentially an exercise of catching up with the establishment of institutions and procedures developed in the market economies over the last 50 to 100 years. In contrast, the first functioning competitive power markets are no more than 10 years old.
224. Hungary has without doubt benefited from relatively recent experiences made in the OECD, but its first wave of reforms has essentially brought it to the level of some OECD member countries before these countries introduced competition, or only very slightly beyond. The Hungarian system today is fully vertically integrated, mainly through long-term power purchase agreements but also through ownership. Power plant dispatch is based on long-term, regulated prices. Price regulation contains an efficiency factor that is meant to exert pressure on costs, but the incorporation of additional cost elements into the rate base, justified as it may be, nevertheless amounts to cost-plus regulation in practice. In this sense, the Hungarian power industry may not contain more incentives for efficiency than the UK’s Central Electricity Generating Board did before the competitive UK power market was created.
225. One feature that is different is the bidding procedure for new generating capacity. Bidders compete by offering their power plant project at the lowest possible electricity sales price to MVM. During every bidding round the effects of competition – productive efficiency, which reduces costs, and allocative efficiency, which reduce prices - are at work once, at the generation level. Whether any of these efficiency improvements are ever passed on to ultimate consumers is unclear, and once the capacity is contracted for and installed, there are hardly any more incentives for efficient operation and efficient capacity replacement (dynamic efficiency) from competition. The system is reminiscent of the power industries in developing countries, such as Indonesia or the Philippines, where foreign power companies build and operate capacity for the incumbent utility which often remains in state ownership.
226. The difference is that Hungary has a developed regulatory system. While this system may not be as independent from the Government as it should be, it goes significantly beyond both the CEGB and an IPP set-up.
227. Another reason why it is difficult to draw direct comparisons between most OECD countries and Hungary is that the centrally-planned economy has affected the development of electricity prices in a major way. Below-cost electricity prices and ample cross subsidies have meant that regulatory reform towards greater efficiency and competition result in rising electricity prices, unlike in most OECD countries where regulatory reform and competition are introduced to reduce prices.
228. On the other hand, the second wave of reforms that is currently under preparation in Hungary is not yet defined in sufficient detail to allow much comparison, and certainly does not allow drawing any conclusions about the efficiency gains to be expected. It is only possible to compare the broad outlines of the system that are already determined. According to these, the country will opt for a combination of a centralised, non-competitive market segment and a competitive market segment for eligible consumers. While most liberalising power markets go through a transitional phase during which the traditional, centralised segment of the power market co-exists with a newly competitive segment for those consumers that are already eligible, the maintenance of a permanently centralised market segment is a feature of the
European Union power market. Within the EU, only Portugal, Italy, and, for a transitional period, Germany, plan to adopt this system.
229. Table 9 provides an overview of number of other features that are important for a competitive power market. It should be noted that Hungary plans to open its market for the 100 GWh consumers by the time it accedes to the European Union, i.e. in 2002 or 2003. Hence, the initial 10% market opening should be interpreted as a tentative opening only, to be followed by further opening of 13.5% soon after.
Table 9. European electricity market reform
as of September 1999
Market opening Independent? Generation
Country
% of EU Demand (2235 TWh)
Fraction Year TSO Regulator Ownership
Germany 22% 100% 1998 no no * private/Länder
+ municipal
France † 17% 35% 2003 no no public
UK 14% 100% 1999 yes yes privatised
NordPool
(Swe, Nor, Fin) 14% 100% 1996 yes no mixed
Italy 11% 40% 2002 no yes public/divest
Spain 7% 100% 2007 yes yes ‡ privatised
Netherlands 4% 100% 2007 yes no municipal/
privatised Belgium 3% 40% 2006 no no privatised Austria 2% 50% 2003 no no mixed Hungary † 2% 10% 13.5% 2001
2002 yes yes ‡ mixed
Greece † 2% 35% 2005 no no public
Denmark 1% 100% 2003 no yes ‡ municipal/coop
Portugal 1% 35% 2003 no yes mixed
Ireland 1% 32% 2003 no no public
Luxembourg 0% 45% 1999 no yes mixed
Notes: † National legislation not in place as of 1 September 1999. ‡ Independent regulator with limited powers.
* competition authority is fully responsible. TSO = transmission system operator. NordPool data does not include Denmark.