Introducing competition in the power sector : open access and cross subsidies

Abstract

Open access and multiple distribution licensees in the same area are two key provisions in the Electricity Act 2003 for introducing competition in the power sector. However, open access is subject to a cross-subsidy surcharge to compensate the incumbent distribution licensee for loss of cross-subsidy. Similarly, new distribution licensees may be required to have a mix of cross-subsidising and subsidised consumers to prevent 'cream skimming'. These restrictions will reduce the competitive impact of these provisions since cross-subsidy is likely to be difficult to reduce, especially for agriculture and rural consumers. Two steps are, therefore, necessary for introducing competition in the power sector. First, there should be a physical and organisational separation of agriculture and rural supply. Second, cross-subsidy in tariffs should be eliminated for urban domestic consumers and replaced with 'lifeline' rates for low income consumers and subsidised extension of the network to high cost areas. As in the case of telecommunications this may be funded through a sector specific 'universal charge