Deregulation of the Swiss Electricity Industry: Short-Run Implications for the Hydropower Sector Despite fears to the contrary, an analysis of the cost structure of hydropower plants suggests that only a few Swiss hydropower plants will encounter ®nancial dif®culties in the short run if the Electricity Market Law (EML) is signed into law. Silvia Ban®, Massimo Filippini, and Cornelia Luchsinger Silvia Banfi is Senior Energy Economist at the Center for Energy Policy and Economics (CEPE) at the Federal Institute of Technology in Zurich (ETHZ), Switzerland. Massimo Filippini is Full Professor in Economics at ETHZ and the University of Lugano, as well as Co-Director of CEPE, where he is responsible for the Energy Economics Group. Cornelia Luchsinger is a research assistant at CEPE. The authors, all members of the Energy Economics Group, concentrate on analyzing and offering policy recommendations on the deregulation of electricity markets, competitiveness of hydropower plants under the conflicting demands of deregulation, non-appropriated stream water and water taxes, optimal regulation on access to transmission and distribution networks, and econometric analysis of the efficiency of public utilities. The authors thanks the Swiss Federal Office of Energy for its financial support of the project, Perspektiven fuÈr die Wasserkraftwerke in der Schweiz, and the Laboratoire de SysteÁmes EnergeÂtiques (LASEN) at the Swiss Federal Institute of Technology in Lausanne for research support. I. Introduction In the last two decades many EU-member countries have implemented a full or at least a gradual opening of their markets via national legislation. This pro- cess has been stimulated by the obligation of the member coun- tries to implement the European Electricity Directive (96/92/EC) by February 1998. Although Switzerland is not an EU-member country, the Swiss Parliament adopted the new Swiss Electricity Market Law (EML) in December 1999. However, this law has been submitted to a referendum. 1 The Swiss population will vote on this issue in September 2002 and, if EML is approved, the nation's electricity market will be deregulated on January 2003. Of course, one of the most important arguments for the Swiss Parliament to adopt the EML was to make Switzerland compatible with the EU-member countries which are, due to the geographical location of Switzer- land, very important commercial partners in the electricity sector. In fact, Switzerland has always been a relevant partner in the European exchange of electric power. June 2002 # 2002, Elsevier Science Inc., 1040-6190/02/$±see front matter PII S1040-6190(02)00327-5 69