The liberalisation of Italy’s electricity retail markets is the last mile in a process that started more than 20 years ago. Unfortunately, the public support that accompanied the initial steps (the breakup and partial privatization of former monopolists as well as the transposition of EU directives on market opening) has disappeared. Electricity had been nationalized in 1963. Things only began to change in the late 1990s, when the sector was restructured via vertical disintegration, freedom of entry, and the divesture of assets from Enel, the state-controlled incumbent. While EU directives required that retail markets for small customers were opened since 2007, Italy maintained a regulated tariff – along with the “free market” offers – that works as a standard tariff for those customers who do not choose a supplier on their own. The regulated tariff is supplied by the incumbent. This results in market segregation and increases the customer inertia, also hindering the market’s ability to innovate and differentiate its products.
Under the current regulatory scheme, a majority of Italy’s electricity customers are supplied by the local incumbents at a regulated price. This is the case for 53.5% of residential customers and 40.9% of the small and medium enterprises. While all customers are formally free to switch to an alternative supplier, the flow of consumers towards the free price regime has been disappointingly slow in the past 12 years – not least because the name of the regulated tariff, “greater protection”, creates a false perception of safety as opposed to the “jungle” of the market. To make things even worse, the largest operator – the former monopolist, Enel, which is still state-controlled – has a market share of about 70% among small customers. Of these, about two thirds are due to the regulated tariff. Hence, Italy’s electricity retail market is strongly concentrated by design. Things may change in 2022, when regulated prices are supposed to be phased out.
How to move out? Carlo Stagnaro, Carlo Amenta, Giulia Croce and Luciano Lavecchia speculate that a mandatory, opt-out collective switching could help in solving problems related with low consumer engagement and high market concentration. Their paper is forthcoming in Energy Policy.
Alas, the full switch to a free market in electricity has been postponed a number of times by the Italian government – a policy which enjoys a broad bipartisan support, as it frequently is the case with postponing: the phase-out date was initially set in 2019, then 2020, now 2022. The rationale for delaying is typically that the market is too concentrated and consumers are not informed enough to choose competently. The paradox is that market concentration is not a market failure, but the inevitable outcome of regulatory design. Stagnaro and his coauthors aims to show that, even if this was true, is by no means a reason to keep with the status quo.
READER COMMENTS
Phil H
Feb 3 2020 at 1:05pm
Free market fails to solve issue? Major market effects as a result of something as trivial as the naming of a pricing policy? Market “design”?
Sounds as though markets are not the powerful force that some claim them to be. Rather, they are fragile, sensitive things, and their design and maintenance is an ongoing and challenging job.
Mark Z
Feb 3 2020 at 3:50pm
We must’ve read two different articles, because the one I read is about how the electricity market isn’t free and attempts to liberalize have been delayed for political reasons, and that the problem with the limited market that does exist is due to the state’s efforts to ‘design’ it, such as via price regulations favoring the state owned provider.
Phil H
Feb 4 2020 at 2:22am
I don’t know how old you are, but you may remember some of the hoary old arguments about why Russia failed. One that used to be put forward by the communists was that communism never really got a chance. Russia was stuck in the “war communism” phase, and that’s the reason its economy ultimately failed.
The kind of argument you’re putting forward there is very similar. “EU directives required that retail markets for small customers were opened since 2007”. That’s a free market. Perfectly free? No, I guess not. But then, few markets are. You can kvetch about how the nasty Italian government didn’t do it quite right, but the point is that if the “market” were really such a powerful lion as libertarians seem to make it out to be, then imperfections in starting conditions wouldn’t cause such problems.
But markets aren’t powerful lions. They’re delicate flowers. When they are given the proper conditions, they do amazing things. The rise of “ecosystems” in phone apps gives us a beautiful example of how this works: the Apple store and its competitors actually sell markets. They make and sell markets, and some of those markets are succeeding, while others simply aren’t. The reason is that “The Free Market” was never a thing. All markets are manufactured products. This one wasn’t manufactured well enough.
Jon Murphy
Feb 4 2020 at 9:03am
The work of Julian Simon, James Buchanan, Armen Alchian, Harold Demsetz, Ronald Coase, Elinor and Vincent Ostrom, Peter Boettke, FA Hayek, Donald J Boudreaux, myself, Adam Smith, Carl Dahlman, David R Henderson, Bryan Caplan, Chris Coyne, Virgin Storr, Daniel B Klein, Warren Nutter, David Ricardo, Vernon Smith, Adam Smith, Frederic Bastiat, Peter Leeson, Richard Wagner, Gordon Tullock, John VC Nye, Alex Tabarrok, Tyler Cowen, Greg Mankiw, Jack hirshleifer, Walter Williams, Roger Koppl, etc etc would all beg to disagree.
Markets are amazingly robust. As David R Henderson says “competition is a hardy weed, not a delicate flower.” There are extraordinarily few cases where market the market process is inferior to the political process in real life (no, externalities, public goods, and other “collective action problems” are not instances).
Like Mark, I simply do not see where you are drawing your conclusions from this article. You seem to be making a version of the “no true Scotsman” fallacy.
nobody.really
Feb 4 2020 at 2:02pm
Has he been blogging about legalizing pot again?
Mark Z
Feb 4 2020 at 10:18pm
Again, you’re conflating “suppressing” with “manufacturing/designing.” If the state declares that only certain people are allowed to sell a particular good or service (like electricity) and enforces that rule, it will tend to reduce the market for said good or service. No libertarian I know of has ever argued that markets are impervious to state throttling. If they believed that, they wouldn’t constantly be trying to stop the state from doing so. But no market is completely robust to state suppression. If the state wants to keep a good from being sold, it can do so, it has all the men with guns after all. Ironically, though you seem to trying to twist this into a case for state intervention in markets, to the extent that a market isn’t robust to state interference, that’s an argument against state interference. We might tolerate interference if the market is so robust that regulations have no effect, but a a’delicate flower’ of a market is particularly dangerous to try to regulate.
Generally, this characterization of markets as some curious political construct is plainly wrong. The tendency to trade with one another and specialize production is pretty natural, and doesn’t require a state to guide us. Sure, with many goods and services, there are transaction costs. What apps (and many innovations in general) do is lower the transaction costs, so that people can buy and sell things that it used to be too burdensome to try to buy or sell from one another.
Now, can governments lower transaction costs for a good, allowing the market to expand? Sure, but usually, where it can, so too can private entrepreneurs. For example, the classic Stiglitzian case of a failed market is the so-called ‘Lemon’ problem, where asymmetric information ‘kills’ the used car market. In theory, the government could set up a rating agency that rates people’s used cars for free (or rather, using tax money), and publishing the ratings for customers. Of course, the private sector has already solved this problem. And we should generally leave this type of problem to the private sector, as the state has little way to know, or incentive to care, if the cost of facilitating a transaction is worth it, and also crowds out potentially innovative competitors. The government could have invented Uber, for example, and ‘created’ the market for ridesharing. But wheread if Uber turned out to fail the cost-benefit test, private Uber would’ve gone out of business, government-Uber would likely still be around and in a permanent state of expansion. It also probably would’ve prevented the establishment of Lyft or other private alternatives and the competition-induced improvements that followed, since government-Uber, being subsidized by taxes, would have an unfair advantage with consumers.
In short, we should not want the government to be in the business of trying to create or expand markets beyond what they’d otherwise be. Usually, if people need a subsidy from the state to be willing to buy or sell something, then it isn’t worth it for them to be buying or selling it. Absent externalities, the government shouldn’t have much of a role to play, if any, in creating or expediting (or suppressing) markets.
Phil H
Feb 4 2020 at 11:18pm
Jon: Boy, do you like an argument from authority! I too find interacting with people who don’t know my subject (lingustics) but have boundless opinions on it (everyone) vaguely irritating. But seeing as this website is set up for precisely that purpose…
“Markets are amazingly robust…Extraordinarily few cases” Perhaps, but how about discussing the one that Mingardi actually writes about in the blog post? The Italian government opened retail electricity sector to competition, and it hasn’t worked as hoped.
Mark Z: I genuinely think you’re suffering from a terrible case of thinking that the way it is in your lifetime is the way things “just are”. I look at the the grand sweep of history, and these robust markets you talk about just aren’t there. Local markets, occasional successful long-distance routes (think the shipping disaster that sparks the action in the Merchant of Venice). But compared with the rich, intensive trading of today? There’s never been anything like it.
“The tendency to trade with one another…is pretty natural” I could agree with that. The tendency exists. But it doesn’t turn into real trade.
“doesn’t require a state to guide us” Apparently, it does! There aren’t examples of intensive trading without a state.
Because…
“there are transaction costs” Bingo! The most important of which is the trustworthiness of your trading partner. States impose law, which requires (certain kinds of) honesty, and that makes trade possible. Trade makes us richer. And wealth can actually substitute for the state – if you’re wealthy, you have more to lose, and loss of reputation is more of a threat. It’s *possible* (though not likely) that the role of government will diminish in the future because of wealth effects. But you need some kind of government/enforcement mechanism to kickstart the trade/wealth spiral. Apparently! So says history.
On this specific example described by Mingardi:
“If the state declares that only certain people are allowed to sell a particular good or service (like electricity)” But they don’t! That’s the whole point. The state stopped saying that 13 years ago.
On what I think about state intervention:
“Ironically, though you seem to trying to twist this into a case for state intervention in markets, to the extent that a market isn’t robust to state interference, that’s an argument against state interference.” I’m pro-market. I just think that being pro-market means you have to be pro-state. States can create markets; states can destroy markets. Once a state has got a successful market up and running, I’m with you: the state should stop intervening and let it run. But markets are like children: they always test the boundaries. Sometimes those boundaries have to be reinforced (think antitrust).
Both: neither of you seem to be able to engage clearly with the facts laid out by Mingardi above. A market was created. It hasn’t done what was hoped.
Jon Murphy
Feb 5 2020 at 3:00pm
Again, that’s not what the article actually says.
Nah. Just pointing out the vast empirical literature that disagrees with your assertion.
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