The role of system operators in network industries

10.07.2012

In this report we consider the role of system operators of various types, including ‘virtual’ system operators, in the electricity, natural gas, railways and water supply industries. In this section, we discuss some general issues about system operators (SOs) – what they are and what they do as well as their historical development over the last 20 years. In subsequent sections we discuss the roles of alternative types of SO, firstly, in single-area jurisdictions – primarily nation states, except for water supply; and, secondly, in multi-area jurisdictions e.g. regional groupings of states or, for water supply, regional water markets.

Our focus is primarily on arrangements that have been agreed or are proposed for the European Union. However, much of the development of SOs has been in the US and, apart from the UK, attempts at creating water markets with independent or integrated SO-type entities have mainly been in Australia. The development of ‘explicit’ SOs as separate institutions, i.e. independent system operators (ISOs), started in US electricity in the 1990s. There has, of course, been a long debate about the role of SO-type institutions in the EU with extensive argument over preferred variants both for electricity and gas. The 3rd Package of 2009 appears to have settled the debate at least for national arrangements, even if a number of countries have not yet transposed it into national legislation .

However, the debate has now moved on to the goal of creating an EU-wide single energy market, for which the target date of implementation is 2014. A single European energy market with multi-national arrangements involves major new and difficult issues: technical, economic and political – particularly in gas. For gas, the upheavals involved to existing market arrangements from the 3rd Package are much greater and there are real questions as to the feasibility, let alone the desirability of the reforms. Russia and other gas exporters to the EU have voiced considerable hostility . Finding effective SO (and SO-type) arrangements are at the heart of this debate.

For railways, system operator functions have existed from at least the 1840s. As railway networks developed, there was a need initially for common track gauges across areas and timetables - as well as for common signalling procedures, common emergency procedures, rail network expansion plans and investments, etc. The nineteenth century compilers of railway timetables were the first modern SO. These operations covered what we would now term SO functions even if they were not given that label then. They were particularly important in countries, like the UK, where there were multiple train companies operating on the tracks.

In recent times within the EU, there have also been three Rail Packages, the first two concerning inter-country freight travel and safety issues and the third covering inter-state passenger travel. However, as yet, they are much less prescriptive than energy in terms of national structure and national SO arrangements.

For water supply, there has been no EU legislation as yet on inter-state water trade nor on SO-type arrangements. Apart from England and Scotland, vertical integration without any explicit SO remains the overwhelmingly dominant - and largely unchallenged – model.

In what follows, we will firstly discuss in more detail the general economic issues behind the SO and variants debate, including competition issues. We will use that framework to amplify and organize the discussion introduced in this section. This will then be followed by analyses of (a) single area SO arrangements and proposals for the four industries and (b) multi-area arrangements and proposals.

Authors: 
Prof. Jon Stern (Centre for Competition and Regulatory Policy, City University), Prof. Martin Cave (CERRE & Imperial College), Prof. Guido Cervigni (IEFE-Bocconi)
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