Empirical Effects of Policy Induced Competition in the Electricity Industry: The Case of District Heat Pricing in Finland 1996-2002

The household electricity markets in Finland were opened to the competition on the 1st of November 1998. At the same time, the electricity transmission and distribution networks were regulated by special legislation (Act on Electricity Markets) and by special regulator (Electricity Market Authority). The regulation was extended to limit the unreasonable pricing and to separate financially the different business units (production, distribution and sales). However, the district heating industry does not have industry specific regulation. It is regulated through general Competition Laws. The policy induced competition in the electricity industry is expected to affect the district heating industry since both industries compete in the household heating goods markets. In addition, the district heating industry in Finland has had a regional monopoly within its distribution network. The threat of extended regulation is evident in the industry, since most of the network industries are regulated in order to facilitate access to the network and to speed up the development of competition in the market. The hypothesis of regulatory threat is studied through pricing behaviour of firms by using panel data models. The data consists of 76 district heating companies in Finland in years 1996 - 2002. The results indicate that the district heat markets are non-competitive and some evidence which supports regulat01y threat hypothesis can also be found. The electricity market reform caused a slight decrease in district heating price. The results indicate also that the large and market dominant firms have been more responsive to the policy reform than small firms