Vertical Integration in Spanish Electricity Market

By Aitor Zurimendi Isla (Universidad del País Vasco)

Given the circumstances of the electricity market, especially the need for a monopoly in transport and distribution activities, and the presence of market power in generation, the ideal structure market requires a limitation to vertical integration or to possibility of taking part at the same time in regulated activities (transmission and distribution), and in generation and commercialization markets (“free activities”). It seeks the regulation of the European Commission. On the other hand, transport network should not be controlled by companies involved in the generation or distribution. The no separation of these activities would extend the distorting effects of natural monopoly to other activities in which competition can exist. So that the effective separation between them is essential.

However, measures of effective separation, that the Spanish law has been established, have been limited in scope. It has combined a number of structural measures with other behavioral requirements (restricting legal rights for companies), but the former are usually much more effective than the latter, and the cost of monitoring the latter is very high. In this paper all these measures are analyzed focusing on their success or failure to achieve efficient regulation, making some suggestions for the improvement of regulation. This regulatory failure causes structural inefficiency that among other negative consequences, leads to electricity prices are above their competitive level.

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