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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
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
Bilkent’s Energy LecturesEnergy Policy Research Center
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)
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
Bilkent’s Energy LecturesEnergy Policy Research Center
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?
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
Bilkent’s Energy LecturesEnergy Policy Research Center
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
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
Bilkent’s Energy LecturesEnergy Policy Research Center
Import
Domestic Prod.
Wholesale
SUPPLY MARKETING CONSUMPTION
Export
Eligible Customers
TSO
Storage
CNG
Non-Eligible Customers
Distribution
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
Bilkent’s Energy LecturesEnergy Policy Research Center
Transmission & Dispatch Control
Wholesale
Distribution
Connection(non-eligible customers)
Price is determined by the parties
Regulated tariffs
Connection(eligible customers)
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
Storage
Natural Gas Tariffs in Turkey
Bilkent’s Energy LecturesEnergy Policy Research Center
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.
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
Bilkent’s Energy LecturesEnergy Policy Research Center
competition no competition or
natural monopoly
price regulation
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
Competition vs Monopol
Bilkent’s Energy LecturesEnergy Policy Research Center
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
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
Bilkent’s Energy LecturesEnergy Policy Research Center
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.
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
Bilkent’s Energy LecturesEnergy Policy Research Center
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)
Source : Training Notes, Advanced Training Course: Price Regulation & Tariffs, ERRA.
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
AvC
Bilkent’s Energy LecturesEnergy Policy Research Center
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)
Source : Training Notes, Advanced Training Course: Price Regulation & Tariffs, ERRA.
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
Bilkent’s Energy LecturesEnergy Policy Research Center
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
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
Bilkent’s Energy LecturesEnergy Policy Research Center
What About Service Quality?
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
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
Bilkent’s Energy LecturesEnergy Policy Research Center
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
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
Bilkent’s Energy LecturesEnergy Policy Research Center
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
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
Bilkent’s Energy LecturesEnergy Policy Research Center
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?
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
Bilkent’s Energy LecturesEnergy Policy Research Center
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?
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
Bilkent’s Energy LecturesEnergy Policy Research Center
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
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
Bilkent’s Energy LecturesEnergy Policy Research Center
Risk Free Rates in Turkey(10-year treasury bonds)
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
Bilkent’s Energy LecturesEnergy Policy Research Center
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.
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
Bilkent’s Energy LecturesEnergy Policy Research Center
THANK YOU!
Dr. Okan YARDIMCI+90 532 798 85 50
Energy Policy Research CenterBilkent’s Energy 101 Series
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
Bilkent’s Energy 101 SeriesEnergy Policy Research Center
Dr. Okan YARDIMCIPrice Regulations in Energy Markets
March 15, 2018
Bilkent’s Energy 101 SeriesEnergy Policy Research Center