Price regulation and supplier margins in the Hungarian electricity markets

Abstract

It is highly debated whether residential electricity markets were mature enough for market liberalization. While most countries are unambiguously committed to the trend of liberalization, the Hungarian government decided to re-regulate the residential electricity prices after the liberalization reforms were completed. This situation provides a unique opportunity to study the price effects of a subsequent regulation process. The present paper examines the interaction between the universal service provider (USP) and free-market trader margins on the Hungarian electricity market. We distinguish three main regulatory periods: the transitional system between 2004 and 2008, the fully liberalized system between 2008 and 2010, and the post-liberalized regime from 2010 to date. A vector autoregression model is applied to assess the relationship between the different margins. The results show that in the transition period, margins were independent, while in the deregulated period, mutual dependence was evidenced between them, and in the third one, only traders' margins affected the margins of the universal service providers. This suggests that the public intervention, which was intended to focus on universal service and residential consumers, surprisingly did not have an indirect horizontal profit reallocation effect between USPs and traders. The findings can support countries that plan to modify the regulatory framework of the electricity market.