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Consumers and deregulation of the electricity market in Germany

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J Consum Policy (2006) 29: DOI /s z ORIGINAL PAPER Consumers and deregulation of the electricity market in Germany Lucia A. Reisch Æ Hans-W. Micklitz Received: 15 January 2006
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J Consum Policy (2006) 29: DOI /s z ORIGINAL PAPER Consumers and deregulation of the electricity market in Germany Lucia A. Reisch Æ Hans-W. Micklitz Received: 15 January 2006 / Accepted: 15 July 2006 / Published online: 4 January 2007 Ó Springer Science+Business Media B.V Abstract Against the backcloth of EU regulation, this note looks at the politics of necessity regarding electricity provision in Germany. Electricity as a case is chosen because its provision has been undergoing a profound process of liberalisation and deregulation, and there is a considerable amount of experience with the chances and pitfalls of liberalisation in this sector. Secondly, electricity is a network industry and a natural monopoly subject to systematic market failure, which calls for regulation. The paper starts out with a closer look at the consumer as an actor in the regulation process, proposing a three-role model of the consumer as a market player, as a citizen, and as a micro-producer in households and networks. In these roles, consumers take on different social and political identities; they are affected differently by (de)regulation of essential services and have different options for reacting to quality and price issues. It then describes the legal state and the development of deregulation in the electricity sector in Germany. Selected empirical data are presented, and consumer policy implications are drawn. Keywords deregulation Æ electricity market Æ politics of necessities Æ consumer policy Introduction Since early 2005, an increasingly heated public debate on sharply rising energy prices (i.e., electricity, gas, and oil) in Germany has put the politics of necessities higher L. A. Reisch (&) Department of Intercultural Communication and Management, Copenhagen Business School, Porcelænshaven 18a, 2000 Frederiksberg, Denmark Hans-W. Micklitz Chair for German and European Private and Economic Law, University of Bamberg, Kirschäckerstr. 39, Bamberg, Germany 400 J Consum Policy (2006) 29: on the political agenda. Lately, the German Monopolies and Merger Commission has asked the four largest energy providers to provide full transparency of their end-user price calculation, and the newly founded Federal Net Agency is currently auditing their net user fees. At the same time, increasing consumer resistance to the acceptance of rising prices can be witnessed, mirrored by intensified consumer lobby activism (and tentatively reacting politicians), as well as by individual consumers payment refusal, legal actions, and claims. In some sense, energy prices have become the bread prices of the twenty-first century. Moreover, they have been depicted as a key factor in depriving private households of the purchasing power so badly needed to reach the Lisbon goals of economic growth. This point has not only been made by consumer activists, but also by the German Federal President. While the access problems to basic goods such as energy, clean water, and public transport are doubtlessly much more profound for people in less developed countries (as shown, e.g., by the yearly UNDP Human Development Reports), the physical or financial exclusion of access to such basic utilities is also a relevant problem for consumers in well-off societies. In the eyes of most European consumers, the main problem with services of general interest is less the physical access, but rather the quality and the price of the services (European Commission, 2003a). Quality comprises the constant and reliable availability of the service, its value of benefit, its long-term security of supply which becomes more and more shaky as the break down of the supply due to heavy snow falls in the winter of 2005/ 2006 in Germany demonstrated as well as the protection of collective goods such as the environment. Fair prices mean that beyond market conditions, prices are calculated based on the principle of solidarity, so that also vulnerable consumers have access to these services independent of their income and domicile. The provision of public distributive services such as electricity is a basic function of society and significantly contributes to the quality of life. For the supply side, this is captured in the term basic industries, for the demand side, the discussion falls under the heading universal services (European Commission, 2003b). The present paper contributes to this debate. Against the backcloth of EU regulation and policy, it looks at the politics of necessity regarding electricity provision in Germany. Admittedly, an evaluation of the effects of liberalisation on the power of consumers could be carried out in any other Western European country with a similar market and power structure, since the development has to some extent been parallel. Electricity as a case was chosen for several reasons: (1) Firstly, because its provision has been undergoing a profound process of liberalisation and deregulation since the late 1980s, accompanied by intense lobbying by both industry and consumers organisations. Hence, there is a considerable amount of experience with the chances and pitfalls of liberalisation in this sector. (2) Secondly, electricity is a network industry (European Commission, 2003b). These industries are subject to systematic market failure. The normative theory of regulation justifies state regulation with the correction of these failures. Six actors of the regulation process can be identified (Genoud, 2001, pp ): Government and parliament set the legal framework for the liberalisation; the sector specific regulator (in our case: the Federal Net Agency) monitors the regulation process and implements the regulation design; public and private suppliers offer their services both in the realm of basic services and in the J Consum Policy (2006) 29: competitive realm; private households and companies demand the services on the market; courts administer the law in case of conflicts between the actors; and the competition regulator (here: the Federal Monopolies and Merger Commission) monitors the markets. (3) Thirdly, electricity is a (unpure) collective good with external effects of supply and use, and its supply is provided by natural monopolies with the typical problems of market concentration and power-imbalances (Abegg, 2005). According to the theory of merit goods (Musgrave, 1987), community preferences of merit goods are a key case for state intervention, regarding both their allocation and distribution. Hence, it can be expected that policy implications derived from the electricity case may, up to a point, be also applied to other network-based industries such as gas, telecommunication, and public transport. The goal of the paper is to look at and comment on the process of deregulation in the German electricity sector from an explicit consumer perspective, and to draw some implications for a politics of necessities that deliberately encompasses the consumer interest. The aim of this note is not to analyse theoretically and empirically all the actors involved in regulation and their interplay within the respective regulation regimes (Grande & Eberlein, 1999, p. 641). 1 The paper starts out with a closer look at the consumer as an actor in the regulation process, proposing a three-role model of the consumer as a market player, as a citizen, and as a micro-producer in households and networks. In these roles, consumers take on different social and political identities; they are affected differently by (de)regulation of essential services and have different options for reacting to quality and price issues. It then describes the legal state and the development of the deregulation in the electricity sector. Selected empirical data are presented, and consumer policy implications are drawn. The three roles of the consumer In consumer policy, the term consumer appears in different contexts and terminologies. In consumer policy discourse, it has been proposed (Reisch, 2004) that consumers should not be conceptualised exclusively as market players, but also as citizens and producers in households performing so-called informal work. This is in accordance with household behaviour theory (Cécora, 1991) that recognises three basic collective entities that frame consumer behaviour: enterprises, the state, and households. Empirically, consumers do not behave as fully informed, economically rational, isolated market actors the way demand is conceptualised in neoclassical consumption theory. Rather, preferences and consumption decisions are codetermined by informal and formal institutions and networks. They are framed by eventually countervailing political preferences from being a citizen of a community and a state. They are steered by needs from being a member of households, of associations, and of peer groups, and supply side communication is constantly evaluated by peers and other relevant persons in communications arenas. Such more empirically valid concepts of the consumer are increasingly proposed by 1 For such an attempt based on the positive theory of regulation see Bonde (2002), and also Cox (2001). From a legal perspective see Hellermann (2001). 402 J Consum Policy (2006) 29: institutional, evolutionary, and behavioural economics as well as by demand-side approaches to consumer policy (OECD 2006). Consumers as market players As soon as people spend money for a service or product, they become consumers. Consumers are therefore, above all, defined as market players and consuming actors, representing the corresponding opposite side of producers. The opportunities for consumers to act successfully on markets depend on several factors such as: the focus of (EU, national) economic policy on either the demand or the supply side of the market; the leitbild of the consumer shared by political decision makers and the courts, i.e., the average circumspect and comprehensible consumer or the unknowing weak consumer that has to be protected (or something in between); national law and legally binding agreements at bilateral and multilateral levels; for instance, the right to transparent pricing in the new European energy law must be regarded as a genuine individual enforceable right; the quality of implementation of these laws; this depends, inter alia, on how well suppliers market practices are monitored and how rigorously fraud is made public, e.g., through consumer watchdog schemes; shifts in purchasing power within the market due to unequal direct or indirect state subsidies for producers or consumers or specific technological pathways (e.g., subsidies supporting nuclear power or renewable energies); the symmetry or asymmetry of different market players access to information, which in turn depends on the market structure and the transparency politics of both companies and government. These conditions can be influenced by consumer policy, depending on the extent of consumers organisational structuring, financial strength, and political power to fend for their interests. Yet, it has to be taken into account that the interest of the consumer is not a monolithic one, but an individual one, depending on the respective consumer s socio-political position and personal values and priorities. Political economy (Olson, 1971) has shown that this is a reason why consumers are difficult to organise; however, empirical evidence and more recent theoretical work (Udéhn, 1993) has proved that in fact consumers do engage in collective action. This is supported by EC Member States engaged in paving the way for bundling consumer law suits in the courts (Micklitz & Stadler, 2005). Market theory distinguishes between two forms of market signalling that consumers may draw upon to reveal their preferences: pro-articulation and contraarticulation (Specht, 1979, pp ). Contra-articulation is the essence of the concept of countervailing power on markets. It tells the supply side that it has violated consumer interests. The signals used to achieve this are exit, voice (Hirschman, 1970), and boycott (Friedman, 1997). Pro-articulation comprises strategies that aim at bringing about desired producer performance via positive sanctioning of suppliers actions. The signals used are entry, confirmation, and approval (Scherhorn, 1983), as well as buycotts (Friedman, 1996) and prototyping (Neuner, 2000). In prototyping and buycotts, consumers are actively involved. As so-called prosumers, they co-produce in one-way or another the desired product or service. J Consum Policy (2006) 29: The effectiveness of all those signals can be improved, if they take the form of collective consumer action (Neuner, 2000). Obviously, consumers as market players have many more options than the simple exit strategy, and those options bear elements of (sub-) political action (and hence of the consumer-citizen ). The law strongly supports the role and function of consumers as market players in granting him or her individual and/or collective rights. This development started in Europe in the 1970s. Since the adoption of the European Single Act the European Community has taken the lead in adopting a whole set of regulations and directives which form today the core of what might be understood as European consumer law (Reich & Micklitz, 2003; Weatherill, 2005). However, it is only in the aftermath of the liberalisation policy of the European Commission that consumers as market players have entered the electricity market. Consumers as citizens As citizens, consumers are the sovereigns of democracy. Since their quality of life both individually and collectively is strongly influenced by the availability of and access to goods and services, consumption issues do influence political preferences. Consumers as citizens express their political preferences through election and consumption decisions, and they organise themselves to fend for their interests: Ideally, political will is generated by citizens through discourse, inquiry, and the balancing of conflicting interest. By their votes for specific parliamentary representatives, citizens give orientation to the development of legal frameworks governing the market and their own role as consumers within that market. Upcoming elections have lately made governments more responsive to consumers critique of energy prices. Through their purchasing decisions, they influence market and living conditions, including the protection of human rights and the environment, in their own countries and elsewhere. Consumption decisions made by consumer-citizens are not exclusively based on market-related interests, but also on common welfare, environmental, and social values. Consumers as citizens are interested not only in the quality of the product or service in the conventional sense ( product quality ), but also in the ethical quality of the process of production and provision ( process quality ). This approach to consumption has been termed political consumption (Micheletti, 2003). Individually and collectively, consumers exercise exit and voice (Hirschman, 1970). They organise themselves as members of civil society in order to promote consumer-related interests (e.g., consumer organisations, boycotts, buycotts, and campaigns). The law recognises the right of consumers to organise themselves. In so far, Article 153 EU Treaty reiterates what can be taken for granted in the Member States. However, the factual possibilities for consumers to fend collectively for their interests, are limited, mostly due to the lack of resources.the growing political resistance against energy prices demonstrates that consumers are making use of their right to organise themselves. Liberalisation of the energy market and formation of citizen groups seem to go hand in hand. In the UK, so-called consumer watchdogs take a hard look at the degree to which liberalisation produces consumer benefits, in terms of competitive energy prices (vzbv, 2005a, b). 404 J Consum Policy (2006) 29: Consumers as producers Consumers are members of networks and households where they do informal work (i.e., work without payment and contract). In so doing, they are also producers of highly relevant goods (e.g., family meals, subsistence farming) and services (e.g., caring, education, mutual help in neighbourhoods). In economics, informal work is seen as belonging to the so-called informal sector as opposed to the formal sector of the economy (i.e., with formal employment and payment) (Cécora, 1991). The former is less visible since its immaterial and material contributions generated for society are not adequately put on record; they are, for instance, not included in the GDP. However, informal work adds significantly to the quality of life, and many activities that are coined consumption are really household production. These activities are highly productive, not destructive. The formal and informal sectors are interdependent: The market often externalises its transaction costs into private households into housework and family care, and into consumers so-called free time. To a large extent, work required for information, coordination, storage, waste management, organisation, and transportation takes place in households. Moreover, the formal sector tends to outsource less productive work (such as caring) to the informal sector. Households also mobilise around the provision of basic goods and essential services if the quality and/or price of provision does not meet their expectations. Through collective action (Olson, 1971), they also co-produce goods and services. The self-provision can take on forms of public private partnerships or similar intermediate forms of co-production, but sometimes even of full self-provision. For instance, one Black Forest community has provided its own electricity grid with nuclear energy-free power since the 1990s. As a result of the Chernobyl reactor fallout in 1986, the action group Parents for a Nuclear-free Future ran competitions to save energy and unsuccessfully approached the town s electricity provider. After 13 years, two town referendums, and a successful nationwide campaign to raise funds, the Schönauer Electricity Rebels became the first German community to buy back their old power grid. They started to produce the energy their town needed by building block heating stations and installing solar panels. What they could not produce themselves, they bought. In 1999, Elektrizitätswerke Schönau 2 went national; a year after the German electricity market was liberalised (Graichen 2003; Neuner, 2000). Today, the initiative heads one of the largest of Germany s half dozen green electricity companies that attract together between 5 and 10% of customers. They still perceive themselves as a political energy organisation, not a commercial enterprise. Deregulation and liberalisation of necessities Interest in the deregulation of infrastructure increased during the last two decades of the twentieth century, when many countries worldwide turned to private companies to build and operate infrastructure and utility services. In the 1980s Britain was a leader, selling off its telephone, electricity, gas, water, and railway companies in the hope that the private sector could provide better service at lower cost. In the 1990s, 2 J Consum Policy (2006) 29: many other countries (including the EU) followed suit (Hodge, 2000). Yet, by the first years of the twenty-first century enthusiasm for private utilities waned (Von Weizsäcker, Young, & Finger, 2005), and the pace of privatisation slowed. Many governments faced growing popular resistance to proposals to privatise the utilities that still remained in public hands. Consumers were increasingly sceptical that the tariffs they were being charged were fair and the service adequate. Liberalisation, i.e., the introduction of competition into parts of infrastructure services, has been much more significant as a means of privatisation than asset sales (Finger, 2005). It is a form of dereg
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