Growth Strategies of Electric Utilities in Context of Deregulation and Liberalization of Electricity Market

By Đogić, Maria | Management : Journal of Contemporary Management Issues, December 2017 | Go to article overview

Growth Strategies of Electric Utilities in Context of Deregulation and Liberalization of Electricity Market


Đogić, Maria, Management : Journal of Contemporary Management Issues


1.INTRODUCTION

Liberalization and deregulation of the electricity market are a part of a wider trend towards the withdrawal of state influence from the infrastructure industry (Schneider & Jäger, 2003). The main goal of liberalization in the electricity market is to enable competition through restructuring of the entire power sector which was often based on ownership transformation of incumbent electric utilities that generated, transmitted, distributed and supplied electricity (Ernst & Young, 2006) Incumbent electric utilities are the electric utilities that were present before the official liberalization of the electricity market as a state-owned monopoly. These companies had sole ownership of all the production facilities, as well as the entire transmission and distribution network. Private investors were unable to enter the market and consumers were unable to choose their own electricity. Power industry was fully regu- lated, and electricity prices were determined by calculating the required revenue needed to cover the costs of production and transmission/distribution as well as the administrative costs of the company. Through the implementation of the public tariff procedure, regulatory agencies directly influenced the electricity prices. This was manifested in the existence of cross-subsidies between the consumer categories. Cross-subsidization served as a tool for implementing a specific kind of social policy, i.e. considerably lower electricity prices for households were subsidized by the higher prices of electricity for the commercial consumers. The need for deregulation in the case of public utility companies in the power sector emerges from the idea that public companies do not have proper incentives to optimize and reduce their costs, and are subject to political pressures of governments and political parties and, therefore, they do not operate at an optimal level (Mejía-Dugand, Hjelm, & Baas, 2017).

Despite the formal liberalization of the electricity market, changes in the power sector in many European countries have been rather slow and modest (Ratinen & Lund, 2014). Competition in the power industry is still scarce, primarily because barriers for new competitors remain high. Incumbent electric power companies still retain the largest share in the infrastructure in the process of electricity generation and are therefore perceived as key drivers of future changes in this industry (Humphreys & Padgett, 2006).

Previous research on strategic behavior of electric utilities focused on examining the specifics of the electric utilities' strategies or testing the established theoretical models in specific environments. Only a few studies (Russo, 1992; Mahon & Murray, 1981; Vietor, 1994; Ghobardian, et al., 1998) analyzed current business and strategic management of former monopolies or companies whose business was largely regulated, in new environments and in the context of liberalized electricity markets. Bonardi (2004) emphasizes that the strategies of now deregulated former monopolies must be a subject of interest of comprehensive research and not just a specific area for testing the theory of strategies or competitive advantages in changing environments. This paper analyzes the growth strategies adopted by the electric utilities using a proposed system approach (Whittington, 1993) and a typology presented by Ratinen and Lund (2014) in order to compare the growth strategies of electric utilities in the selected countries. Such approach takes into account the slow technological changes inherent to the electricity infrastructure that was a product of specific historical, socio-economic, resource and other conditions. (Ratinen & Lund, 2014)

2.THEORY REVIEW

2.1.Liberalization and deregulation of the electricity market

Electricity industry is characterized by a number of specifics that shaped its optimal regulatory framework (Jamasb & Pollit, 2005), including:

* Large non-refundable costs that limited the entry into the market

* Vertical integration of electric utilities (production-transfer-distribution-supply)

* The fact that electricity cannot be stored and is transferred through network that requires the immediate physical balance of supply and demand. …

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