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Part I – How we went from natural monopoly to market
Energy, and especially energy prices, have been the subject of much debate recently. As not only our lives, but the entire economy is heavily influenced by what happens in this market, we decided it was time to have an informed and informed perspective on this topic. In 2021, we formed the Institute for Media Research and Human Rights precisely with the idea of critically investigating mainstream media narratives and providing a more reality-based perspective on what affects us all. About energy prices we hear from the highest political forums that they are solely the fault of the war, which would lead us to believe that if there was no war in Ukraine, these prices would have been much lower. However, as we will see from this series of discussions we had with Professor Andrei Mocearov, a graduate of the Faculty of Energetics and the Academy of Economic Studies, things are much more complicated and the roots of energy price increases are much deeper, the problems are systemic. Professor Andrei Mocearov worked in the Chamber of Deputies as a civil servant Parliament, successively holding several senior positions: Head of the Secretariat of the Committee on European Affairs, Director of the Directorate for EU Law and Head of the Department for Parliamentary Studies and EU Policies. From 2013 to 2017 he was the correspondent of the Chamber of Deputies at the European Centre for Parliamentary Research and Documentation (ECPRD). He was recently part of the documentary team of the show directed by David Schwartz, “Vital Energy” and made a presentation on the same theme of energy for the Socialist Vision Group. Continuing these efforts, I propose we have a more in-depth discussion about how energy prices have evolved. In the first part we will understand how it has worked for 100 years and how the transition from natural monopoly to the energy market took place.
Transcript:
Maria:
Welcome to a first edition, a first episode of what is intended to be a dialogue with Professor Andrei Mocearov about energy markets and the ever-increasing prices we have to pay. I’m Maria Cernat, the president of the Institute for Media Research and Human Rights, a university professor and at the same time an employee, an intellectual, and someone who has to pay the bills. As energy bills have been on everyone’s mind lately and the discussions are getting more and more heated, I think it is very important to have a clear point of view in the fight against an increasingly powerful media war that tries to impose narratives, stories that are very often completely parallel to reality. And what is even sadder is that these narratives come from the sphere of the political elites. If it were just a matter of irresponsible journalists, we would still have some understanding, but unfortunately, as we will see from our presentation, things are coming from the highest levels, even of the European forums.
Professor Andrei Mocearov graduated from the Faculty of Energetics before 1989, so he has the necessary technical knowledge and, more than that, knowledge of economics. He has taught at the Academy of Economic Sciences and Spiru Haret University and has held important positions in the Romanian administrative apparatus, having been an employee of the Romanian Parliament for a period. He has been in contact with the European Union on energy issues, if I am not mistaken, and has recently published numerous articles. One of them also appeared on the Baricada website, but he published in Libertatea on CriticAtac.
I think it is very important to have as rational a discussion as possible about how we got into this situation. Because it is not possible to deliver a parcel of information that the professor has accumulated over years of study in five minutes, I propose that we have a series, a soap opera, in which we discuss and tell the story of energy, how it got to the unpayable prices. We will try to promote these episodes on all channels to bring us closer to reality and give us the cognitive antibodies to help us better understand, at least, what is happening to us. The problem is partly solved, at least if you understand what the source of it is, which is why we invited the professor to explain what it is. Thanks for joining us!
Andrei:
Thank you very much for the invitation. It’s a very good initiative, especially. The context of a war, with so much on people’s minds, makes the mystery of unpayable prices very hard to uncover. It’s like a detective novel… That’s why the idea of the soap opera is great. Detective series are usually given in serial episodes. I opened my presentation and now I’m going to share the screen. We will talk about the road to market, how we got here. I titled the presentation “How the markets produced, energy travesty, unpayable prices”. The idea for this word unpayable came from the Prime Minister of Wallonia and former Prime Minister of Belgium. In an interview he gave on TV5 he pronounced this word “impayable” in French, meaning unpayable prices. And indeed, I had a revelation then, because these unpayable prices practically cannot be produced by markets. Markets mean transactions. If markets produce prices that cannot be paid, the transaction does not take place. Markets disappear. That’s why I concluded that these are not really genuine markets, they are parody markets. Functional markets cannot produce prices that cannot be paid. And that’s when I started this research, in an attempt to unravel these mysteries. And the story begins with the past.
Maria:
You mean what actually happened before? What was it like before?
Andrei:
Before, energy systems were vertically integrated on three levels: production, transmission and distribution. That was everywhere, under socialism and capitalism. There was no distinction between ideologies in energy. They were all the same. It worked like that for practically a hundred years. At the same time, the most efficient systems were the territorially extended ones, especially electricity, because it flattened the load curves, the load peaks. Load peaks are when you consume a lot. For example, now, when we are talking, we will consume a lot for one hour during the evening, when everybody turns on the light and consumption is high. At night consumption is lower. That’s why Angela Merkel used to put the washing machine on at night. These energy systems functioned as natural monopolies. Natural monopolies are called natural monopolies because they are natural, they occur naturally. In order to create maximum efficiency in the production of this service, which is electricity or gas supply, and I said it here, there are four reasons, I said, for the public natural monopoly. It can also be private. It does not necessarily have to be public, but there is an economic reason and here is a very important point that few people are emphasizing today.
Both electricity and gas need very large transmission and distribution networks in order to be transported and distributed. These are expensive. So to produce, transport and distribute electricity or gas to the end consumer involves very high fixed costs. When you have that kind of situation, when the fixed costs are very high, it’s good to have a big company. That distributes these fixed costs to all consumers; if there was competition instead of one company you would have 10. Each of these fixed costs would be distributed to only one tenth of the consumers, so the prices would be much higher. Therefore, in situations where fixed costs are very high, natural monopoly is required. Technically it’s called increasing returns to economies of scale. Here it is economies of scale, meaning that we are dealing with a very large enterprise. Of course, the enterprise can also be private, and this is the case in America or Germany. The energy systems were provided by private companies, but the state imposed the price and the quantity, so they functioned as natural public monopolies. In fact these monopolies were even in America, where all this electric power, as they call it, is privatized. While in competition with each other, internally they functioned as a natural monopoly. For electricity in particular, but partly also for gas, there is a technical reason. Electricity has a peculiarity. Everything that is produced is consumed at the same moment instantaneously, and then nothing can be stored. Of course, you can store energy using reservoirs. Perhaps in the future there will be batteries in which more energy can be stored. But storage is currently a neglected issue.
And then of course the dispatching of a national energy system is a purely technical thing, which can’t be thrown into the commercial area. In fact, even now, where they’ve moved to the market, they’ve created a commercial tier above physical energy transactions. So in addition to the physical energy system, there is also a commercial system. The national dispatcher solves a system of very complicated equations to take and distribute energy. So the technical side is still dominant. That’s why there is also the balancing market. I mean, no matter how well the markets work, they cannot produce perfect equality between production and consumption. Anyway, we are left with the national dispatcher carefully solving some mathematical equations. And there really is just that.
Maria:
Who’s in charge of it? That for me, as a layman, forgive me for asking now and for giving the public the opportunity to laugh at me. Yes, is anyone there? The national dispatcher: How does this stuff happen?
Andrei:
They’re very highly trained people. It’s extremely difficult work. Maybe they’re like air traffic controllers. They work in much shorter shifts, 4 or 6 hours, maximum hours and they follow there. Sure, now things are more sophisticated: there are computers, they have all kinds of programs that work, but essentially, behind these dispatchers are mathematical equations. The solving is done technically. Of course in these programs the data is entered. Now, it used to be called simple dispatching, now it’s called economic dispatching. “Economic dispatcher” in English, but the economic part is secondary to the technical part and that’s primarily in electricity. With gas, as we know, you can still store it. But the problem with gas is that the variations are much greater. If you use electricity in winter, you don’t use much more energy than in summer, especially if you use the air conditioner in summer. But with gas, gas consumption in winter is 2.5 times higher than in summer, so there are big variations, and then even these deposits are not enough. That’s why, if the gas supply is completely cut off in winter, even if we now have 90 percent storage, it’s not enough. You can’t do it and anyway it’s not efficient to keep making deposits. The important thing is to have continuous supply. That’s an aside.
So I said the technical issue is there. And sure, the social issue. Electricity and gas are basically public goods and you have to make them accessible to everyone. And they do exist. They fall under the label or domain of universal service. This is what universal service means: that you have to get electricity to everyone at reasonable prices, including the motes who are on the hill in the Apuseni.
And finally, there is a strategic factor. Energy is a strategic product that belongs to the sovereignty of the state. Of course, sovereignty is now a concept whose meaning has been greatly diluted given the globalization, the European integration processes that we are involved in, but sovereignty still exists. But beyond sovereignty, it’s about control over the market, over prices, in the sense that energy prices affect absolutely all prices. We now foresee that high energy prices have caused inflation everywhere, i.e. in food in the first place, but also in other goods.
I would like to open a very small parenthesis here and say that for the first time, the idea of placing these industries such as energy and gas on the market came at the last GATT round in Marrakesh, where the Americans, to everyone’s surprise, put the idea of creating these markets on the table. Very discreetly, not very insistently. There, first of all, they worked for financial markets, for financial services, but slowly energy was brought into the discussion. And now I will move on to part II.
Maria:
Yes, I’m going to ask you how it happens. Are we now moving on to the spot market?
Andrei:
No, we are not moving to the spot market yet. I would go to the history of the market switch. How did it happen? Why did we switch to the market when everything was going very well? One hundred years they were going very well as a natural monopoly. And suddenly someone said: let’s go to the market. Here is the ideological context. I wrote it in the presentation. The rise of neoliberal ideology in the late 70s, early 80s started a trend in the world that was framed in the so-called Washington consensus, Reagan’s and Thatcher’s policies. And in the European Union in the Single European Act. Look! When privatization, deregulation, liberalization and stability became watchwords. Stability, why publish stability? It means that monetary policy becomes independent to produce price stability which is a terrible macroeconomic trap. Energy and gas belong, like telecommunications or railways, to the category of network industries, i.e. those with very large networks and high fixed costs. This ideological option made the idea of moving these network industries to the market, i.e. to competition.
To go beyond the phase of natural monopolies in the European Union, I said here there would be a group of advisers called the Competitiveness Advisory Group which had a lot of influence on the European Commission. In their 1995 report they called for deregulation and privatization of the public sector, particularly in the fields of energy, transport and telecommunications. I would add here that there was also the European Roundtable, which was made up of the main heads of multinationals who were producing the same pressure to privatize and move to competition in areas that were not normally eligible, both technically and ideologically. Up to that point.
Let’s now look at the steps of liberalization in the EU. And here it is very interesting, because I was very much part of the process. Not in the first steps, because I was not in the EU, but my work as a civil servant was almost always linked to the EU. For 25 years my career as a civil servant was linked to the European Union. And I know that in the beginning the resistance was huge, at these steps of liberalization. It came primarily from the technical side, from the Ministry of Energy and Economy, not necessarily from Romania, from the member countries, but this has been softened. Now there is a terrible acceleration of liberalization, i.e. the latest directives have passed with much less resistance.
The first step was the interpretation of Article 106 of the Treaty on the Functioning of the European Union by the Court of Justice of the European Union. What is this article about? So it’s Article 106 and at the time I think it was 87. It’s an article that is part of the Competition Policy chapter of the European Union Treaties, and it allows that special or exclusive rights can be granted to some undertakings for legitimate national objectives. Of course energy goes to those legitimate national objectives. The European Court of Justice has made it so difficult for me to offer these special rights that it has made it almost impossible to access them. In fact, the European Court of Justice has blocked the provision of special rights for legitimate national targets. Until this interpretation gave the de jure green light to the liberalization process that followed.
There were 4 liberalization packages. The last one is not called a liberalization package. The first package was in 1996. They went in parallel. The gas and electricity directives and regulations were adopted in different years: some in ’98, some in 2003 and finally in 2009, the most important one.
Throughout this period the struggle has been with the dismantling of the vertical architecture, so-called ‘unbundling’ in English. This meant that the natural monopoly remained, essentially, only the transmission network, but production and distribution had to be separated. First there was accounting separation, then commercial separation and finally ownership separation, meaning that they were basically completely different companies. In 2009 this process was completed. An critical point was reached.
In Romania we did not go through these exactly like this. We did this process before, on the recommendation of the World Bank, when we broke up the energy system back in the 1990s. Then there was the creation of independent regulatory authorities. Here is the similarity with national banks, central banks. So basically, before, monetary policy was made by the government. There was a minister of currency and a minister of finance, so to speak. Or, in any case, the central bank was in coordination or somewhat subordinate to the government. The removal of the independence of the central bank actually removed the central banks from the sovereignty of the people, which meant Parliament. That is what happened to these independent authorities.
In our country, the authority is the A.N.R.E. I will perhaps come back to this story. There is also Acer, which is the European Regulatory Authority, but it is in fact an authority that integrates all the authorities. It is not in itself independent, autonomous. And here a terrible thing has happened. That’s it. In the fourth package that was developed from 2019, it was adopted in 2016 and came into force on 1 January 2021.
If you remember when the scandal started with the new liberalization. The de facto abolition of universal service was done with terrible hypocrisy. That is to say, in the directive or in the regulation the title “Universal service” appears. Only one word is changed there. That is all. One word. Universal service means ‘reasonable’, reasonable in translation. So universal service with reasonable prices has been changed here from the word ‘reasonable’ to the word ‘competitive’. There was a big dispute here. I was not directly involved in the negotiations. Yes, I watched closely. There was a great deal of opposition, but in the end, as so often happens, the northern countries insist, the southern countries resist and eventually give in. Not only in this case, in general. That’s how things happen. I mean France, Spain, Italy come, they agitate and eventually they give in. I mean many times, as Macron, Sanchez, Draghi are currently. Now it’s Melloni. They oppose it more for the internal message, but actually there is not a very strong opposition.
Finally, another terrible thing that doesn’t work even in America, which is considered the most liberal country: the elimination of maximum market pricing. In the UK there is a maximum price. Of course, it’s so high that it almost doesn’t matter, but in any case, the point is that the stock markets are going crazy, we have energy exchanges here, and elsewhere the market stops, it stops. Now energy has gone up fifteen times. There are very big fluctuations.
Maria:
But it can also be an increase of about 50 times– there’s no limit.
Andrei:
Yes, nothing. It can go on forever. I mean the removal of the maximum price in the market has made it possible to have these un-price prices. And, finally – and that was very, very important – there was again an uphill battle, because here energy was also being strategic, but also for business reasons, because you can’t make investments when the price is very fluctuating, I mean you need to invest because there are very big investments. You need stable markets, not volatile markets. But encouraging trading in export markets has created terrible volatility in these markets.
And last, but not least, the last package. This one in 2019: green transition with market-only instruments. There is this trading scheme that was put by George Bush in Kyoto on the table by Amerikc. Then he backed out, but he left this toxic idea on the table to fight climate change, and the Kyoto Protocol invented these emissions trading mechanisms. I remember flying, I don’t know from where to where, and it wasn’t Tarom, and I used to take the Financial Times, which was not to be found, and pick it up and read it. It was one of the fun things about flying. And the Financial Times was writing an article about it and they were surprised. It was a shock even to the columnists at the Financial Times. They wondered how it would work.
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