okanyardimci priceregulations bilkent...

Price Regulations in Energy MarketsDr. Okan YARDIMCI

March 15, 2018

Energy Policy Research CenterBilkent’s Energy Lectures

Dr. Okan YARDIMCIPrice Regulations in Energy Markets

March 15, 2018

Education1999-04 (B.Sc) Petroleum and Natural Gas Eng. (METU)2005-08 (MBA) Business Management (Atılım U.)2008 (Executive P.) Public Utilities (Michigan State U.)2013-15 (LL.M.) Law (Penn State U.) 2010-16 (Ph.D.) Finance (Hacettepe U.)

Work Experience2002 Intern, TPAO (NOC of Turkey)2003 Intern, Perenco (IOC) 2004-2006 Reservoir Engineer, Perenco2006-Cont. Energy Expert, Energy Market Regulatory Authority, Turkey

OtherPart-time instructor @Bilkent, METU, Hacettepe (energy - economics, regulation, finance, law)Mediator @Energy Community, ViennaInterests; economics of regulation, tariffs, contracts, international business transactions, global

energy markets, shale gas, Turkish energy market, oil and natural gas prices, finance, energylaw, international law, economy of law, arbitration, negotiation

Bilkent’s Energy LecturesEnergy Policy Research Center

Price Regulations in Energy Markets


March 15, 2018


Competition and Regulation Conseptsin Modern Economic Systems

Classical EconomicsInvisible hand, laissez faire…

Keynesian EconomicsGovernmentinterventions, over-regulations…

NeoliberalismUnbundling, privatization,liberalisationin the EU, Deregulationin the USA…

?What About a Special

Approach for the Energy Industry?

John Tirole (market power and regulation,

sectoral differences)

Stiglitz (American style socialism)


March 15, 2018


Basic TermsProduction

Transmission

Distribution

Storage

Wholesale

Retail

Unb

undl

ing

of

Vert

ical

Inte

grat

edSt

ruct

ures Natural Monopol

Problem of forecastable rents, problem of windfalls

competition within the fieldor competition for the field

Account Unbundling Physical Unbundling Legal Unbundling

What about horizontal integration?


March 15, 2018


State owned comp. BOTAŞwas the monopoly on;

q Import & Wholesale,q Transmission, q Distribution, q Storageq Sale

+

Determination of wholesale prices, retail prices,connection fees

Imported Gas

Residential

Domestic Gas

Power

Industry

Distribution

BOTAŞ

LNG Facility

BOTAŞ, before the market lawCase Study: Reshaping of the Turkish Natural Gas Market


March 15, 2018


Import

Domestic Prod.

Wholesale

SUPPLY MARKETING CONSUMPTION

Export

Eligible Customers

TSO

Storage

CNG

Non-Eligible Customers

Distribution


March 15, 2018


Transmission & Dispatch Control

Wholesale

Distribution

Connection(non-eligible customers)

Price is determined by the parties

Regulated tariffs

Connection(eligible customers)


March 15, 2018

Storage

Natural Gas Tariffs in Turkey


Natural Gas Distribution Sector

KIRKLARELİ

İSTANBUL

KOCAELİ

YALOVA

BURSA BİLECİK

ESKİŞEHİR

SAKARYA

BOLU

KARABÜK

ANKARA

KONYA

KIRIKKALE

AKSARAY

KIRŞEHİR

NEVŞEHİR

NİĞDE

ADANA

KİLİSGAZİANTEP

DÜZCE

BARTIN KASTAMONUSİNOP

ÇANKIRIÇORUM

SAMSUN

AMASYA

ZONGULDAK

TOKAT

SİVASYOZGAT

OSMANİYE

MALATYA

ADIYAMAN

DİYARBAKIR

ŞANLIURFA

İÇEL

KAHRAMANMARAŞ

ELAZIĞMUŞ

TUNCELİ BİNGÖL

BATMANSİİRT

ŞIRNAKHAKKARİ

VAN

ERZİNCANERZURUM

KARS

AĞRI

IĞDIR

ARDAHANARTVİN

RİZE

BAYBURT

TRAHABZON

GÜMÜŞHANEGİRESUNORDU

KAYSERİBİTLİS

MARDİNKARAMAN

ANTALYA

BURDUR

ISPARTA

AFYONUŞAK

DENİZLİ

MUĞLA

AYDIN

EDİRNE TEKİRDAĞ

ÇANAKKALE

BALIKESİR

MANİSA

İZMİR

KÜTAHYA

HATAY

6 ilde 7 adet dağıtım şirketi4 adet belediye iştiraki + 2 adet BOTAŞ’ın işlettiği1 adet özel şirket (Bahçeşehirgaz)

KIRKLARELİ2006

İSTANBUL1992 YALOVA

2005

BURSA1992

BİLECİK2006

ESKİŞEHİR1992

KARABÜK2008

ANKARA1988

KONYA2004

KIRIKKALE2004

AKSARAY2004

KIRŞEHİR2004

NEVŞEHİR2006

NİĞDE2006

ADANA2008

HATAY2011

KİLİS2011

GAZİANTEP2006

DÜZCE2005

BARTIN2015 KASTAMONU

2007 SİNOP

ÇANKIRI2007

ÇORUM2004

SAMSUN2004

AMASYA2008

ZONGULDAK2014

TOKAT2008

SİVAS2004

YOZGAT2006

OSMANİYE2008

MALATYA2006

ADIYAMAN2007

DİYARBAKIR2007

ŞANLIURFA2007

İÇEL2005

KAHRAMANMARAŞ2006

ELAZIĞ2007

MUŞTUNCELİ

BİNGÖL

BATMAN2011

SİİRT2009

ŞIRNAK HAKKARİ

VAN2007

ERZİNCAN2008

ERZURUM2004

KARS2006

AĞRI2006

IĞDIR

ARDAHAN2006

ARTVİN

RİZE2008

BAYBURT2007

TRABZON2008

GÜMÜŞHANE2008

GİRESUN2010

ORDU2007

KAYSERİ2004 BİTLİS

MARDİNKARAMAN2006ANTALYA

2007

BURDUR2006

ISPARTA2006

AFYON2006UŞAK

2003

DENİZLİ2006

MUĞLA2011

AYDIN2009

EDİRNE2007

TEKİRDAĞ2007

BALIKESİR2004

MANİSA2006

İZMİR2005

KÜTAHYA2004

ÇANAKKALE2006

KOCAELİ1992

BOLU2006

SAKARYA2002

Evsel doğal gaz kullanımının başlangıç yılı

77 ilde 69 adet dağıtım şirketi faaliyet gösteriyor68 adet özel şirket 1 adet belediye iştiraki (İGDAŞ)

Dağıtım lisansı tamamlanmış olup yakın zamanda gaz arzının başlanması beklenmektedir.


March 15, 2018


competition no competition or

natural monopoly

price regulation


March 15, 2018

Competition vs Monopol


Competition vs Unregulated Monopol

Price

Quantity

Marginal Cost (MC)

Pm

Pc

Qc

Demand

Marginal Revenue

Qm

Deadweight Loss

Wealth Transfer (passes from the consumer to the producer) (producer surplus)

Consumer Surplus(Area Above Pm)

Fiyat

Miktar

Fr

Mr

Talep

ArzA

B

Price

Pc

QuantityQc

Supply

Demand


March 15, 2018


AvC

Q

PAvCMgC

MgCMgR

D

PM

QM

P=MgC

QB

P=AvC

QC

Consummer surplus

Producer surplus

MgR =MgC Maximizes producer surplus(Sells QM at PM)

Unregulated Monopol

Source : Training Notes, Advanced Training Course: Price Regulation & Tariffs, ERRA.


March 15, 2018


AvC

Q

PAvCMgC

MgC

MgRD

PM

QM

P=MgC

QB

P=AvC

QC

Consumer surplus

Maximizes social welfareMaximizes consumer surplus(does not assure financial viability of the regulated company)

P=MgC

AvC

Q

PAvCMgC

MgC

MgRD

PM

QM

P=MgC

QB

P=AvC

QC

Producer loss

Optimization problem: Max W (social welfare)

Regulated Monopol (P=MgC)



March 15, 2018

AvC


Q

PAvCMgC

MgC

AvC

MgRD

PM

QM

P=MgC

QB

P=AvC

QC

Acccounting solution(assures financial viability of the regulated company)

P=AvC

Consumer surplus

Producer surplus = 0

Social welfare = Consumer surplus

Regulated Monopol (P=AvC)



March 15, 2018


Efficiency?• Productive Efficiency• Allocative Efficiency• Dynamic Efficiency

Sullivan, E. T., Hovenkamp, H., Shelanski, H. A. (2014). Antitrust Law, Policy and Procedure: Cases, Materials, Problems, Sixth Edition. LexisNexis.

• Pareto Efficiency“no one can be made better off without makinganother worse off”

Stiglitz


March 15, 2018


What About Service Quality?


March 15, 2018

Efficiency

Service Quality

Alternative-1: Your electricity bill will be 100 TL/month in a good service quality

Alternative-2: Your electricity bill will be 50 TL/month 5 hours/week power cut,2 hours waiting in the line in order to pay the bill


Tariff Setting

Revenuerequirement

Cost-plus regulationAka; Rate of Return

(ROR) regulationIncentive regulation

Price-cap regulation(Aka; RPI-X

Revenue-capregulation Yardstick

competition

RegulatoryAsset Base*

ConsumptionForecast

Fair / Reasonable

Rate of Return

(WACC)

Tariff Design

Tariff = Revenue Requirement / Consumption

RR = (RAB X WACC) + D + OPEX

P1 = P0 (1 + inflation – X)

*Alternatives of RAB Calculations

1- Original cost valuation”, “historic

cost” or “historic value”

2- Reproduction cost

3- Replacement cost

4- Stock value

5- Privatization value


March 15, 2018


OPEX ReturnDepreciation RevenueRequirement

QualityFactor

(not applied)

Updateby CPI

Tariff

+

CorrectionMechanism

Investment(Asset Value)

AverageRAB

+

EfficiencyFactor

Corrections► Revenue Difference Correction► Investment Difference Correction► Cost Difference Correction

Revenue Cap – Transmission (Natural Gas)

Source : Kamil Yalçın HATİPOĞLU’s Presentation


March 15, 2018


Source : Kamil Yalçın HATİPOĞLU’s Presentation

Risk of ShareholdersEQUITY

Risk of CreditorsDEBT

Risk Free Rate + Debt Risk PremiumRf + ( Spread )

Risk Free Rate + Equity Risk PremiumRf + ( βe x Market Risk Premium )

+

“fair” rate of return?


March 15, 2018


Risicare vs GainYou have 10 million TL, and 12 alternatives… Which one is your choice?

1) put it under your pillow10 million TL remains same…

2) lend your money to the governmentinterest rate: 11%

3) lend your money to the bankinterest rate: 13%

4) buy 10 housesrent fee: 3000 TL/month/house

5) own a distribution company (gas or electricity)license fee: 5 million TL, WACC: 13% (reel and before tax), price cap method

6) operate a pump stationinitial investment: 8 million TL, margin of the last year: from +4% to +10%

7) invest in stock exchange last year’s gain: 15%, the year before it was -10%

8) operate a wholesale company (electricity or natural gas)license fee: 0.5 million TL, margin of the last year: from -5% to +25%

9) construct a hotelif it goes well IRR is 35%, if not it is 5%

10) drill a production well (oil or gas)drilling cost: 3 million TL, success ratio:1/2, expected production if succeed: 20 bbls/day

11) drill an exploration well (oil or gas)license fee: 1 million TL, drilling cost: 4 million TL, success ratio:1/6, e.p.: 100 bbls/day

12) gambleone shot - 50% bankruptcy, 50% 20 million TL

Increasing risk

Increasing gain?


March 15, 2018


1) put it under your pillow2) lend your money to the government3) lend your money to the bank4) buy 10 houses5) own a distribution company (gas or electricity)6) operate a pump station7) invest in stock exchange 8) operate a wholesale company (electricity or natural gas)9) construct a hotel10) drill a production well (oil/gas)11) drill an exploration well (oil/gas)12) gamble

12

1110

9

87

6

5

4

3

2

1

The Efficient Frontier

M

@OkanYardimci


March 15, 2018


Risk Free Rates in Turkey(10-year treasury bonds)


March 15, 2018


Tariffs

Other Principles• Transparency in the methodology, so that all employed criteria

& procedures are made public• Stability in the adopted methodology, so that the concerned

agents have the least possible regulatory uncertainty. • Simplicity in the methodology & its implementation, as far as

possible• Non-discrimination among equal parties• Cost reflective prices should be applied. Costs not directly

related to market operations shall not be included. Cross subsidies shall not be allowed

Main principles of tariff structure

Source : Okan YARDIMCI’s Training Notes, Advanced Training Course: Price Regulation & Tariffs, ERRA, Budapest.


March 15, 2018


THANK YOU!

Dr. Okan YARDIMCI+90 532 798 85 50

[email protected]

Energy Policy Research CenterBilkent’s Energy 101 Series


March 15, 2018

Bilkent’s Energy 101 SeriesEnergy Policy Research Center

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