Electricity Retail Regulation in a Context of Vertical Integration: the Debate on Regulated Tariffs

The deregulation of power markets gave origin to a new activity: the retail business. Although it should, together with generation, be opened to competition, its implementation has been usually postponed to the last stages of the liberalization process. The diversity of situations that can be found in the international experience illustrates the lack of consensus about the appropriate design of the retail market. In particular, the advisability of maintaining a regulated tariff once the retail market has been liberalized is still a subject of debate. After considering two opposite views and some additional arguments, our proposal tries to integrate the future benefits that competition could bring, as well as its inability to compete against a well-designed regulated tariff in most markets. Therefore, the recommendation is to keep a last resort regulated tariff as an available option. Such a tariff should include a shopping credit, with the purpose of giving an initial impulse to the development of the retail market. In addition, on the basis of the experience revealed by the Spanish situation, as reported in a recent White Paper (Pérez-Arriaga 2005), the main barriers to introducing competition in the retail business are analyzed for the case of vertically integrated firms, together with some proposals to mitigate them, mostly addressed to achieving an adequate unbundling of the retail and distribution activities.