Changes in the regulation of the electricity sector as a factor in stimulating economic development in Poland in 2000-2014

Since the beginning of systemic and economic transformation in Poland in the 90s, there have been rapid institutional, restructuring and regulatory changes in the electricity sector. State monopoly has been replaced by a regulation for competition and the sub-sectors of manufacturing and trading have been subjected to liberalization processes. Due to the socio-economic importance of electricity, regulatory changes made in the electricity sector may be a stimulant or destimulant for Polish economic development. Th e article is an attempt at an assessment of the changes that have taken place in the electricity sector and of the impact of it on Polish economic growth. Th e analysis showed that regulatory changes had a negative eff ect on the level of prices for industrial customers and the level of economic growth, and has been benefi cial from the point of view of investment and environmental protection.


INTRODUCTION
Since the 80s in the EU a transformation in the utilities, including the electricity sector, the transformation process was taking place.In later years a similar transformation took place in Poland.With the start of the political changes in Poland, a major transformation of the electricity sector has taken place.Th is coincided at the same time with the change of approach to the role of the State in infrastructure sectors.It was found (Jordan 1972;Stigler 1971;Tullock 1967) that the State's role should be limited, because regulation instead of serving the public interest, gives an advantage to interest groups to a greater extent than the whole of society, resulting in low cost effi ciency of enterprises, high prices of goods and services off ered to consumers and businesses and a socio-economic loss for country.Th ese views were infl uenced and guided by changes that were being made to the infrastructures in the EU countries.Th e precursor of these changes was the United Kingdom, for which other countries began to follow, as well as Poland.Th e British reform package had four dimensions: privatisation, unbundling of the transmission network from generation and supply; price regulation by an independent offi ce and lifting of restrictions to market entry (see Newbery 2000, Newbery and Pollitt 1997, Pollitt, 2008).For this reason, since the early 90s in the electricity sector in the UK, and later in the Nordic countries, the liberalization processes began to be carried out consisting, on one hand the change in regulatory rules and on the other hand an increase in the level of competition.In 1997 by the directive 96/92/EC, the European Union decided to liberalise its electricity markets.A change in the type of regulation was to discontinue the general supervision of the sector by the State and is represented by the government, to create a specialized sectoral regulatory authority and includes the power industry in direct supervision by the regulator.Over time, such regulatory changes began to be implemented in all EU Member States, including Poland.Th e energy supply was opened up for competition.It was decided to enable all business consumers to freely choose their supplier by mid-2004, and private households since the end of 2007.Besides, at the end of 2007, it was achieved by unbundling (separation) of network activities from other electricity activities.Th us, from this moment the network activity operates in conditions of natural monopoly and is subject of ex ante regulation, and the sales and production of electricity operate within a competitive market.
It was similar in Poland.Before 1999, the electricity sector has acted as single company, which is national monopoly.Th en following the example of the UK it was decided in Poland to complete the restructuring for one company to control electricity transmission, 33 distribution companies and generation companies.It was also decided that the electricity sector will not be managed by the government and will be subject to sectoral regulation.Th e beginning of regulatory transformation in the electricity sector in Poland was the creation of a regulator, called the President of the Energy Regulatory Offi ce (ERO) in 1999 under the Energy Law Act.Since 2000, electricity prices have ceased to be offi cially set by the Minister of Finance, and began to be approved by the sectoral regulator.Initially, cost of service regulation method was used, allowing companies to cover all reasonable costs of operations, and a few years later it was replaced by incentive regulation method, the so-called price cap method RPI-X, designed to force the companies to care about minimizing costs.Th ese changes in the regulation of electricity prices were accompanied by slow changes in the functioning of the electricity sector.Four subsectors have been created, from which was created electricity market.In addition, the sales sub-sector was slowly opened to competition, by enabling the next groups of end-users buying electricity from alternative energy suppliers, the so-called third-party access (TPA).In mid-2007, retail electricity market in Poland has been fully opened to competition.In the same period, under Directive 2003/54/EC it has also been made unbundling of network from other activities in power companies, which resulted in the establishment of the incumbent suppliers and distribution system operators.From that moment we can say that electricity market began to exist in practice.In the meantime, the electricity prices for industrial consumers were exempted from the obligation to submit for approval by the regulator in 2008.
According to Hawdon (2003), the eff ects of regulatory reform have been critically important in many countries.Pearce (2006), for instance, insists that many governments worldwide have major concerns with the infl uence of regulation on competitiveness (Chang, Berdiev 2011, p. 816).As emphasised Pitlik (2007), government interventions may generate unfavorable outcomes for the society, however, also suggests that some regulations are "crucial for the functioning of a market economy" (Pitlik, 2007, p. 161).Due to the fact that such volatile regulatory changes have taken place in the electricity sector in Poland, there is a need to assess whether they had a positive or negative impact on the level of socio-economic development of the country.Estimation of this problem is the main purpose of the work.In order to achieve this objective, the author attempted to evaluate and compare the changes in the level of electricity prices and changes in the level of GDP in the period when the market was strongly regulated, ie.2000-2007, and at a time when electricity sector was signifi cantly liberalized, ie.2008-2014.In addition, the analysis of the level of investment measured by the level of newly installed capacity has been carried out.In the paper it was assumed a hypothesis that the liberalization of the electricity market in Poland had a positive impact on the level of economic development, both in terms of prices, the level of investment in generation capacity, as well as environmental protection.In empirical part of article was used data from the Central Statistical Offi ce of Poland (CSO), Eurostat and the Energy Market Agency of Poland.

LITERATURE REVIEW
Th e literature of the subject has a diff erent approach to the problem of regulation and assessment of its impact on the electricity markets.Economists who believe that regulation should be in the public interest recognize that in sectors such as the power industry, which "is vulnerable to monopolization, unfair competition, information asymmetry and the presence of externalities", the regulation is useful, because it "reduces market failures and in this way increases social welfare" (Nagaj 2014, p. 101).Quite a diff erent view is shown by representatives of the school of private interest.According to their representatives, the regulation is introduced for the benefi t of interest groups and only serves them.For this reason, public interest is not implemented or is carried out only in limited scope, ie.when it is not in opposition to the private interests of pressure groups.As pointed by Friedland and Stigler (1962), who studied the eff ects of regulation on the electricity markets in the US, the regulation does not deliver the expected results in the form of lower prices and bills for households and industry consumers (Friedland, Stigler, 1962, In: Nagaj 2013a, p. 46).Conway and Nicoletti (2006) argue that the regulation process reduces competition in the industry, generates ineffi ciency for the economy and social loss.But as Ogus wrote "both sets of theories are nevertheless helpful in focusing attention on how the diff erent institutions of regulatory decision-making can be used either to advance the ostensible goals of regulation or else to subvert those goals to private ends."(Ogus, 2004, p. 42).
Meanwhile Jamasb and Pollitt (2011) analysing changes in UK's electricity market noticed that liberalisation has had a marked eff ect on innovative activities in the electricity industry.In particular, electricity reforms have resulted in a reduction in R&D spending in the sector.But they emphasis that electricity related patents in non-nuclear and renewable technologies have increased in the post-liberalisation period.Th ey attribute this trend to the increased commercialisation of the sector.While this development is positive, they argue that a lasting decline in R&D will in the longer run reduce technological progress and innovation in the sector (Jamasb, Pollitt, 2011, p. 309).Generally, literature of the subject points out that deregulation contributed to the decline in investment in the electricity market.As noted by Kinnunen (2006) "the net investments were at a lower level after deregulation, even though the consumption of electricity had risen" (in Antonsen et al., 2010, p. 213).As pointed by Pompei (2013), deregulation is also not useful for the improvement of productivity.Th e analysis of the eff ect of the stringency of regulation on total factor productivity growth in the electricity sectors of 19 European Union countries for the period 1994-2007 was done by Pompei.Th e results of his studies showed that the stringency of regulation doesn't infl uence negatively on production eff ect in electricity sector."Only the stringency of entry regulation signifi cantly reduces technological change, whereas vertical integration exhibits a negative and signifi cant impact only on the catching up process (pure effi ciency change)".Th eir analysis showed that only public ownership "guarantee improvements in reaching the optimal scale of production" (Pompei, 2013, p. 569).
Lise and Kruseman (2008) note, however, that a liberalized electricity market is very benefi cial for the economy, but only if the competition will be very high.Th eir studies have provided evidence "that perfect competition leads to lower prices and benefi ts the environment in the form of lower acid and smog emissions.Continued exercise of market power leads to postponed investments and more diversity in the technology portfolio" (Lise, Kruseman, 2008, p. 230), whereas in a competitive market it is more likely that more environmentally friendly technologies will be implemented.
However, as Nagayama (2009) observed during his research "higher electricity prices are one of the driving forces for governments to adopt liberalization models.However, the development of liberalization models in the power sector does not necessarily reduce electricity prices.In fact, contrary to expectations, there was a tendency for the price to rise in every market modeled" (Nagayama, 2009, p. 463).Analysis of the impact of reform of the electricity market at a time when the markets were heavily regulated (Steiner 2001, Hattori andTsutsui 2004) indicated that "electricity market reforms generally induced a decline in the industrial price and an increase in the price diff erential between industrial customers and residential customers, indicating that industrial customers benefi t more from the reform" (Erdoglu 2011(Erdoglu , p. 1081)).Results of Nagaj's studies (2013b) showed that in the years 2000-2011 electricity prices increased in all EU countries, but in countries where prices were not regulated there was observed a higher amplitude of fl uctuations in electricity prices in the short term.In addition, in the long term electricity prices for households increased to a lesser extent in countries where prices were subject to ex ante regulation.Results of studies of Chester and Morris (2011) additionally show that the eff ects of reforms in the electricity markets were felt mainly by the poorest.As they underlined "some European prices rose by more than 100 percent between 2000 and 2010.(…) Growing numbers of low income and vulnerable households are spending higher proportions of disposable income on energy bills and suff er deprivation and social exclusion as a result" (Chester, Morris, 2011, p. 435).Meanwhile results of investigations of Moreno et al. (2012) suggest that in countries, where liberalization has led to a reduction of market concentration, prices for households were falling under the infl uence only of reforms in the electricity market.Th e observed increase in electricity prices was mainly caused by the deployment of RES-E.Th ese fi ndings were also underlined by Stankova et al. (2010).Th eir fi ndings also indicated that "the electricity prices become lower when cross-border electricity transmissions are allowed.Generally in perfect competition the producers tend to use cheaper and non-environmentally friendly means of electricity production, so the emission restrictions are needed to motivate the electricity producers to act more ecologically" (Stankova et al., 2010, p. 278).

METHODOLOGY
A literature review indicated that the primary eff ect of the reforms in the electricity markets are changes in electricity prices, the consolidation processes resulting in increased market power of business and declining investment in production capacity.Among them, the impact on socio-economic development within Poland have mainly aff ected prices for end-users, and investments in power capacity, which determine the level of energy security, environmental quality and level of economic prosperity.A relationship for electricity prices will be defi ned by comparing the level of the dynamics of changes in prices for end-users with dynamic of changes in GDP in the studied period.In the analysis was used prices measured by purchasing power standard.For this purpose, it will be examined the correlation between change in electricity prices and change in GDP by the Pearson correlation coeffi cient.Th e verifi cation of the statistical hypothesis about the signifi cance of the correlation coeffi cient of a set of hypotheses: H 0 : ϱ=0 (the correlation between variables is not statistically signifi cant), H 1 : ϱ≠0 (the correlation between variables is statistically signifi cant), will be made using t-Student test In addition the relationship between change in electricity prices and change in GDP will be tested using regression analysis, where the dependent variable is change in GDP and the independent variable is the change in electricity prices in studied period.Th is method will be used to examine the relationship both for the EU Member States (the change of the variables in the EU Member States is examined), and for Poland (the relationship between variables in studied period is examined).To statistical calculations was used Statistica 12.0 program.
Th e research process and the assessment whether the liberalization processes infl uenced positively or negatively on the economic growth will be carried out by comparing the level of changes in variables over the years 2008-2014 to the years 2000-2007.Th e adoption of such research periods is due to the fact that in mid-2007 was made a full opening of the market to competition and unbundling, which resulted in the fact that electricity market in Poland began in practice to operate in accordance with the mechanisms of competition.Meanwhile the period up to 2007 was a period of relatively strong regulation in the electricity sector and control prices for households and businesses.
Th e eff ect of infl uence of the investments on socio-economic development will be examined by analyzing changes in the level of new electricity capacity installed and the impact of it on the environment, measured by the level of renewable energy sources used for electricity production and the level of greenhouse gases emitted by the electricity sector.In this way, it will be examined whether investments in power industry increased or decreased as a result of regulatory transformation and how it aff ected on the quality of life of society.

RESULTS
Analysis of the literature indicated that the primary eff ect of the reforms in the electricity markets in the EU have been rising prices (Chester, Morris, 2011;Moreno et al. 2012;Stankova et al. 2010).Due to the fact that electricity prices represent a signifi cant portion of a businesses's costs it can be assumed that price developments should impact on economic growth.For this purpose, it was shown in Figure 1 the comparision of the changes in the level of electricity prices for industrial consumers in 2008-2014 with the change that has taken place in the level of GDP in the same period for the EU Member States.Data analysis showed that in most EU countries (21 of 28) the rate of increase in electricity prices for industrial consumers was higher than the rate of change in GDP.It is also worth noting that in countries where the largest increases in electricity prices was observed, ie.Greece, Portugal, Latvia, Estonia, there was a decline in GDP in the studied period.Th e analysis of correlation between change in GDP and change in electricity prices for industrial consumers showed that there is negative correlation of medium strength between the studied variables.Th e correlation measured by the Pearson correlation coeffi cient is -0.57.Statistical verifi cation (the t-statistic is -3.53 and the critical value t 0.05 ( 26) is 2.056) indicated that the null hypothesis about the lack of statistical signifi cance of the correlation coeffi cient should be rejected.So it can be concluded that the negative correlation between change in GDP and change in electricity prices for industrial consumers is statistically signifi cant and has moderate strength.Regression analysis (Table 1) showed that there was a negative relationship between changes in the electricity price for businesses and changes in GDP in the studied period.Th e rise in prices by 1 percentage point was accompanied by drop in GDP by 0.19 percentage point.However, it should be added that the changes in electricity prices for businesses explained the variability of change in GDP only in 32.4%.
Regulatory changes and reforms in the electricity market include not only the supply side of the economy, but also the demand side, because they are related to the evolution of electricity prices for households and thus their level of consumer spending.Figure 2 shows how electricity prices for households and the volume of GDP in the EU Member States have changed over the period 2008-2014.Data analysis showed that in most EU countries (23 of 28) electricity prices measured by purchasing power parity, increased during the studied period more than GDP, which means that the share of expenditure on electricity households in relation to income increased over the period 2008-2014.Th is means that households have less and less funds available to spend on consumption of non-energy goods and services.Correlation analysis indicates, however, that prices for households are poorly correlated with economic growth (-0.20) and correlation coeffi cient is statistically insignifi cant (the t-statistic is -1.0148 and the critical value t 0.05 ( 26) is 2.056).While in the case of industrial consumers correlation between prices and GDP was statistically signifi cant, negative and had a medium level of strength (-0.57), whereas in the case of households, the Pearson correlation coeffi cient was only -0.20.In addition the regression analysis (table 2) showed that there is no statistical dependence between the change in electricity prices for households and the level of change in GDP in the EU Member States.It should be noted, however, that if Malta, which for the whole studied period had a closed market to competition, had not been taken into account, the Pearson correlation coeffi cient would have been -0.61.Such level of coeffi cient would heve been statistically signifi cant (the t-statistic is -3.86 and the critical value t 0.05 ( 25) is 2.060) and would have implied the existence of a negative correlation at medium intensity between change in electricity prices for households and the change in GDP.Leaving aside the case of Malta, the regression analysis (Table 2) showed that there was a negative relationship between changes in electricity prices for households and changes in GDP in the EU in the studied period.Th e rise in prices by 1 percentage point was accompanied by decline in GDP by 0.2 percentage point.In this case, changes in electricity prices for households would have explained the variability of change in GDP in 37.3%.It is worth noting that Poland is not in line with the European trend, because it is one of the few countries where prices for households have increased much less than GDP.A possible explanation of this phenomenon is the regulation of these prices (throughout the studied period prices for households, unlike the prices for businesses, were controlled and approved by the regulator).
Analysis of changes in electricity prices and GDP for the EU Member States indicated that higher and higher price increase was accompanied by less and less the change in GDP.Th is applies to both businesses (industrial consumers) and households.Meanwhile, in Poland the such relationships occurred only in [2000][2001][2002][2003][2004][2005][2006][2007].Th e results of analysis of the relationship between these variables in Poland in the years 2000-2014 are presented in Table 3.
Statistical analysis of the data indicated (Table 3) that in Poland there was relatively strong negative correlation between GDP and end-users electricity prices only in 200-2007.However, it is worth noting that statistically signifi cant correlation concerned only households and Intensive Industry, but not business users (t-statistics for households is -2.68, for business users is -0.67 and for industry is -2.68, at the critical value t 0.05 (5) equal to 2,571).Regression analysis confi rmed that there were relationships between these variables only in 2000-2007.However, the volatility of changes in GDP was explained by changes in the price of electricity only in about 50%.Statistical analysis also showed that in the later period, there was no such relationships (neither correlation nor impact of prices on GDP).
However, did the liberalization of the electricity market in Poland have a negative impact on the level of economic growth by increasing electricity prices?Th e answer to this question seeks to provide analysis, the results of which are shown in Figure 3.Here was presented the change in GDP and electricity prices for end-users in Poland in the years 2000-2007, when the market was subject to strong regulation and in the years 2008-2014 when the electricity market in Poland was opened up to competition and was after the unbundling of network activities from sales and manufacturing.Analysis of the data indicated that, with the exception of households, liberalization processes negatively aff ected the situation of end-users.Th e increase in electricity prices for Intensive Industry and for small and medium businesses in years 2008-2014 was higher than in years 2000-2007 respectively by 11.3 percentage points and 6.3 percentage points.Meanwhile, the increase in prices for households over the period 2008-2014 amounted to 18.8% and was lower by 24.4 percentage points than in 2000-2007.Th is may mean that electricity companies have applied cross-subsidization and compensated in such a way (by the higher growth of prices on the liberalized market -for industry) no possibility to increase prices on the regulated market (households).
It is worth noting that in 2008-2014, ie. a high increase in electricity prices for the industry, the growth of production was lower than the change in prices (unlike in 2000-2007).Th e result was a loss of competitiveness of the Polish economy, because the production costs associated with the expenditure for electricity increased signifi cantly, overtaking the dynamics of the production eff ect.
Referring to the prices for households which were regulated throughout whole studied period, it should be emphasized that the decline in the growth of prices was due to the change in the method of regulation.Referring to the prices for households throughout the research period were regulated, it is worth noting that the decline in the dynamics of the increase in prices was caused by the change in the method of regulation.For fi rst two years the cost of service regulation method was used, which caused marketization of electricity prices.Moreover, until 2007 it was gradually increased the proportion of assets from which the remuneration is included in the tariff s.Due to the fact that the whole electricity market was opened to competition in 2007, the sector regulator using RPI-X regulation method tried to protect households and strongly reduced the scale of price changes.
As a result of reforms to the electricity market, the eff ects were evident also in the level of investment.Figure 4 shows the level of new electricity capacity installed in Poland in 2000-2013.MW Th e data indicate that the liberalization processes had a positive impact on the propensity to invest, which resulted in an increase in the volume of new electricity capacity installed in Poland.It should be emphasized that after liberalization of the electricity market in Poland, new electricity capacity was increased each year than in any year between 2000-2007.Th e probable result of such behavior by companies were rapidly growing electricity prices, which increased return on investment.Th ese phenomena are benefi cial from the point of view of economic development, which is due to two reasons.Firstly, the level of energy security increases, which provides greater assurance of continuity of electricity supply to consumers and businesses.Secondly, investments, by the multiplier process, ensure the income eff ect and production eff ect in the economy, which translate into higher economic growth.
More new power capacity installed also results in greater energy effi ciency of power companies, which translates into lower negative impact on the environment.It is worth noting that a signifi cant portion of investments in power capacity related to renewable energy sources.Figure 5 shows the share of renewable energy sources in electricity in Poland.
Th e data analysis shows that capacity of power plants using renewable sources for electricity generation was higher year by year, what results in higher share of renewable energy (RES) in electricity in Poland.It is worth noting that the opening of the electricity market to competition greatly accelerated these trends.Th e achievable capacity of power plants from renewables in 2000-2007 increased by 471 MW, whereas in years 2008-2013 the increase was eight times (by 3815 MW).It is true that it was signifi cantly aff ected by regulations concerning climate policies and actions to support the RES, however, it does not change the fact that the processes of liberalization really supported these trends.Th ese climate changes have an infl uence on improving the quality of the environment, which improves the level of socio-economic development.Table 4 shows what was the total emission of greenhouse gases to the power industry in Poland in 2003-2013.Th e data clearly show that carbon dioxide emissions in the whole studied period was falling, but in 2008-2013 the drop in emissions was greater than in 2003-2007. While in 2003-2007, the total emission of carbon dioxide dropped by 0.03% a year, in 2008-2013 by 1.21% a year.Th is means that the reforms that have taken place in electricity sector, which included also the liberalization, had a positive impact on the quality of the environment.

CONCLUSIONS
In this paper the analysis of the eff ects of reforms and regulatory changes in the electricity market in Poland in relation to the level of Polish economic development in 2000-2014 was carried out.Th ese reforms consisted of privatization and restructuring of enterprises, liberalization of sales and production of electricity and the change in the rules of regulation.In order to analyze, within the period of the study a comparison was made of the eff ects of changes in the electricity sector in the years 2000-2007, when the market was subject to strong sectoral regulation and in the years 2008-2014, when the electricity market was opened to competition and was largely a liberalized market.Th e subject literature is not entirely unanimous in assessing the impact of these changes in electricity markets in the EU Member States.However, the dominant view is the view that the main eff ects are an increase in electricity prices for end-users and decrease in the propensity to invest.Analysis carried out for the electricity market in Poland has indicated that liberalization has led to rapid increase in prices for the industry, faster than economic growth and an increase in propensity among power companies to invest in new electricity capacity.Th e tangible result of regulatory changes is also the increase in the share of renewable energy sources in electricity production.So if two of the three eff ects of changes in the electricity sector had a positive impact on the socio-economic, changes in the electricity sector must therefore be positively verifi ed.Problems presented in the article, however, still require further in-depth research.

Figure 1 .
Figure 1.GDP change and change in electricity prices for industrial consumers* in 2008-2014 Source: own calculations based on Eurostat data.

Figure 2 .
Figure 2. GDP change and change in electricity prices for households* in 2008-2014 Source: own calculations based on Eurostat data.

Figure 3 .
Figure 3. Change in GDP and electricity prices* for end-users** in Poland in 2000-2014 Source: own calculations based on Eurostat data.

Figure 5 .
Figure 5. Share of renewable energy in gross electricity consumption in 2004-2013 in Poland (in %) and achievable capacity of power plants using renewable sources for electricity generation (in MW) in Poland in 2000-2013 Source: Energy from renewable sources in 2006, the Central Statistical Offi ce of Poland, Warszawa 2007, p. 42; Energy from renewable sources in 2013, the Central Statistical Offi ce of Poland, Warszawa 2014, p. 66.

Table 1
Results of regression analysis between change in GDP (Y) and change in electricity pricesfor industrial consumers (X 1 ) in 2008-2014 for EU Member States Source: own calculations based on Eurostat data.

Table 2 Results
of regression analysis between change in GDP (Y) and change in electricity prices for households (X 2 ) in 2008-2014 for EU Member States

Table 3
Results of regression analysis between change in GDP (Y) and change in end-users electricity pricesin Poland (X 1 , X 2 , X 3 ) in 2000-2014