The dual role of the state as a regulator and participant in the energy market contributes to a complex understanding of Switzerland’s energy needs. Large electricity consumers can choose their electricity supplier, while private households are forced to buy from the local suppliers. In the ‘free’ part of the market, electricity prices are determined by competition. In the regulated market, electricity suppliers use the price to cover their operating costs and add a significant premium. In order to protect consumers trapped in this market division, the Swiss Electricity Commission (ElCom) monitors the prices and working costs, and can prohibit price increases. In a fully open market such monitoring would be unnecessary and only the antitrust rules would need to apply.
Politics is ripping off electricity consumers
ElCom’s activities often result in controversial decisions. Last summer, the Federal Supreme Court ruled against Central Switzerland’s Power Plants (German: Zentralschweizerischen Kraftwerke) for distorting the prices of electricity provided to the majority of its customers in the free market. Many other energy suppliers are likely to resort to similar discriminatory practices. The more expensive, usually self-produced electricity from Swiss water or nuclear power is sold to private households, while the large commercial users profit from cheaper European electricity. ElCom estimates that the costs of this price distortion are around CHF 90 per household and year. The electricity account for Swiss households in 2015 could have been reduced by as much as CHF 327 million. The Federal Supreme Court ruling provoked immediate parliamentary action. A commission wants to amend the power supply legislation in such a way that private households would have to accept higher costs. It is astonishing to what great length the state is prepared to go to maintain its dominance of the electricity market.
Similar scenarios are also experienced at the cantonal level. The canton of Zurich is also pursuing political goals with the Zurich Electricity Works (German: Elektrizitätswerken des Kantons Zürich). In order to rehabilitate the canton’s finances, the federal government wants to force the Zurich Electricity Works to hand over a total of CHF 90 million to the canton over the next three years. The company will then be forced to regularly share its profits with the canton. In principle, there should be no objection to the fact that company owners will receive the appropriate return on their invested capital. However, the fact that a state-owned monopoly uses households to generate considerable profits, and is still praised by local politicians, is highly controversial. This contradicts the popular notion that state enterprises offer cheaper and better services than private companies. The canton’s profit represents nothing more than a shadow tax, which is to be handed over to small electricity consumers.
A clear separation is necessary
Two small measures could be implemented quickly to deal with the current shortcomings in the electricity sector. First, the federal government’s promise to open up the electricity market for smallholders from 2013 needs to be fully implemented. This would also allow households to profit from lower European electricity prices. Second, electricity companies should be fully privatized. This would not deter foreign investors and would relieve taxpayers from the increasing financial risks.
The prevalent argument that the sale of electricity companies at the present time would be equivalent to the “nationalization of losses” is senseless. The capital value of a company does not depend strictly on its past performance, but reflects the prospects for the future. Technically speaking, the value corresponds to the potential future profit. The lower a company’s future profit expectations, the lower its ratings. The market capitalization of companies such as Alpiq, BKW Energie and Repower has fallen considerable in the last ten years, precisely as a result of this financial mechanism.
In today’s financial environment, to hope for an increase in the value of state-owned electricity companies ignores the expectations of the market. It is precisely because of such irrational market behaviour that speculative bubbles grow. The privatization of electricity companies would also reduce the conflicts of interest that hinder responsible governance.
This article was first published in the Handelszeitung on 19 January 2017.
