On pricing policy transmission mechanisms in electricity markets

Electricity market transformation is a process that in many western countries has been going on long enough to show economic effects on the society. On the contrary, in many transition economies, like e.g. the South-East Europe (SEE), it is something rather new. I will first compare "canonic" goals of the reform, using e.g., with what actually has happened in the SEE region (e.g.), which is a good way to begin with a study of how public policies in electricity industry transform into economic effects. I will identify the type of pricing policy that seems to be deeply rooted in the SEE region´s practical policies. Although many authors believe that there are large subsidies that keep electricity companies going on, I argue that this is not the truth. Rather, companies are frequently being politically influenced to keep their prices as low as possible for as long as possible, and in the long run they seem to be regulated almost perfectly, but only on the level of prices that can recover merely short-run costs. Finally, I will describe transmission mechanisms that connect pricing policies of the kind described above with virtually every market failure.