Managing Uncertain Reform through “Flexible Institution”: Electricity Sector Liberalization in France

Thursday, 2 July 2015: 4:00 PM-5:30 PM
CLM.2.04 (Clement House)
Thomas Reverdy, PACTE, Grenoble, France; Grenoble Institut of Technology, Grenoble, France
Taking into account uncertainties in the governance of a liberal economic reform leads to a challenging paradox. In fact, economic reform requires institutional stability, which is guaranteed by the independence of the regulator from political influence and by a loyalty to initial institutional commitments and international standards. However, all economic reform includes a degree of uncertainty in its results, even if it is inspired by experiments from comparable countries (Dobbin, Simmons, and Garrett 2007). Uncertainties are related to national characteristics or political dynamic or economic conditions (Djelic and Quack 2007). The more the reform is liberal, the more the economic actors are free to develop their own strategy, and the more the effects are uncertain (Schneiberg and Bartley 2010). This uncertainty can be reduced during the implementation of the reform and learning from experience may lead governments or national regulation authorities to introduce adjustments to contain the most problematic effects (Carruthers 2007). Nevertheless, adjustments are limited by the initial institutional commitments and institutionalized standards. Institutional stability and coherence issues may prevent political intervention, especially when the country is committed to international trade agreements (Zelner, Henisz, and G. 2009).   

The liberalization of the electricity sector in France (implementation of a wholesale market, opening to competitors) is an interesting example of this paradox (Reverdy, 2014). This reform has met a strong contradiction between the demand coming from economic actors for political intervention on the market organization (to ensure economic continuity through price stability) and the constraint for institutional continuity and coherence.

This strong contradiction comes from the uncertainties associated with the electricity market price. The high sensitivity of the market price is due to the investment costs and implementation delays and the non-storable nature of electricity. The adoption of the spot market can have very significant effects on the margins of economic actors, producers and industrial customers, redistributing losses and incomes. In France, the wholesale price increased (200 % between 2004 and 2008) in the context of a relative stabilization of average production costs. The electricity market functioned as an amplifier of economic variations. Convergence towards an equilibrium price was not guaranteed. So, the price increase produced a political crisis and a contestation of the liberal reform by French industrial customers. The French government faced a dilemma between institutional stability (not changing the rules and the adopted market model) and economic stability (moratorium of the reform, political control of the price).