Electricity Reform Abroad and U.S. Investment
Release date: September 1997
Over the past decade a number of nations have restructured their electricity industries. Several nations have also significantly reduced the government’s role in the ownership and management of domestic electricity industries—both at the state and at the national level. The Energy Information Administration selected Argentina, Australia, and the United Kingdom (UK) for this study partly because of the extent to which these nations have undergone electricity reforms but also because of the role major that U.S. companies have played as investors in these nations’ reformed and privatized electricity sectors. Understanding how Argentina, Australia, and the United Kingdom each addressed the issues of primary importance to their country’s electricity sector reform may be informative to those who will fashion the structure of similar reforms in the United States. This understanding may be all the more important because of the experiences that U.S. electric companies will have gained from their investments in these countries.
Since the early 1990's, investment in overseas electricity assets has been a rapidly growing target of U.S. companies’ foreign investment. The predominant share of this investment has been directed at the United Kingdom and Australian electricity industries. The investment expenditures of U.S. companies in the electricity industries of the United Kingdom and Australia alone far exceed all U.S. overseas electricity investment in the rest of the world combined. Electric utilities from the United States have also been the most prominent foreign investors in the recently-privatized Argentine electricity companies—although the dollar value of investment in Argentina’s electricity industry has been smaller relative to the investment dollars flowing to Australia and the United Kingdom.
In Argentina, Australia, and the United Kingdom, electricity reform has involved a combination of the following issues:
- an unbundling of electricity assets
- the creation of electricity pools
- the creation of independent system operators
- the privatization of electricity assets through sale or public auction
- the deregulation of electricity and the implementation of a more restrained form of regulation where regulation was retained
- the adoption of price cap regulation and movement away from rate-of-return regulation
- the realization of a competitive market in generation;
- the separation of the “wires” function of distribution from the “marketing” function
- the gradual introduction of competition in electricity marketing
- an opening up of domestic electricity assets to foreign investment; and
- determination of the degree of recovery of stranded costs.
In each of the three case study countries, issues surrounding electric industry restructuring, competitive electricity pools, privatization, deregulation, and stranded costs are unique to each country’s electricity reform experience. However, there are often more commonalities than differences, particularly in the case of Australia and the United Kingdom. In all three countries, electricity reform involved a greater opening to foreign investment in electricity.
In Argentina, Australia, and the United Kingdom, electricity restructuring and privatization were carried out in an atmosphere of general economy-wide restructuring and privatization. In all three countries, a primary goal motivating electricity reform was to achieve lower electricity costs for consumers through encouraging efficiency improvements in the electricity industry. Reduced costs were also to serve the purpose of improving the efficiency of the overall economy. In all three countries, raising revenues for the treasury to reduce public borrowings was another overriding motive. In Argentina, obtaining badly needed capital for electricity infrastructure improvement and expansion was an additional motivating factor for re form and privatization.
In order to explain more fully how Argentina, Australia and the United Kingdom each proceeded with the transformation of their electricity industries, these issues are discussed in detail (on a country-by-country basis) in the individual chapters of this report.