The Electricity Act, No. 65/2003, based on EU Directive No. 96/92 and Directive 2003/54/EC concerning common rules for the internal market in electricity was enacted in mid-2003. The objective of the Electricity Act is to encourage an economical electricity system, thereby strengthening Icelandic industry and regional development. In addition, the Act is intended to: create a competitive environment for the generation and sale of electricity; foster efficiency and cost-effective transmission and distribution of electricity; ensure the security of the electricity system and the interests of its consumers; and promote utilization of renewable energy sources.
In accordance with the Electricity Act, Landsnet (Icegrid), a private enterprise, was established to provide the electrical transmission and system operations services. The company commenced operation in early 2005, and is responsible for the transmission and system operation services of its predecessor, Landsvirkjun, is the biggest shareholder (64,73%). Other owners of Landsnet include the Icelandic State Electricity (22,51%), Reykjavik Energy (6,78%) and the Westfjord Power Company (5,98%). The aforementioned companies released their transmission system lines and equipment to Landsnet as equity. The transmission company may operate an electricity market if it maintains separate accounts.
Orkustofnun is responsible for supervising the transmission and distribution enterprises, and is expected to establish an income cap for the enterprises' tariffs. The Act specifies what can be included as operating expense, and Orkustofnun will establish a cap in correspondence with this while simultaneously making demands for increased rationalization and cost efficiency.
The Act also regulates the potential return on capital invested in the operations. Electricity distribution starts where the transmission system ends. Distribution utilities operating at the time the Act is decreed will retain their previous rights to construct and operate distribution systems. The same tariff shall apply for distribution of electricity in each predefined tariff area. With permission, distribution utilities can apply to Orkustofnun for higher tariffs in rural areas, where the distribution costs are higher than in densely populated areas.