1GAMMELGARD SE Session 5 – Block 2 – Paper 39

Barcelona 12-15 May 2003

The challenge of regulating natural monopolies in electrical

distribution – experices from Sweden

Magnus GammelgardRoyal Institute of Technology / KTH

Stockholm, Swedenmagnusg@ics.kth.se

2GAMMELGARD SE Session 5 – Block 2 – Paper 39

Barcelona 12-15 May 2003

Agenda

• Regulation of Swedish Distribution Utilities

• Network Performance Assessment Model

• The model and the regulatory authority

• Implications on utilities

• Conclusion

3GAMMELGARD SE Session 5 – Block 2 – Paper 39

Barcelona 12-15 May 2003

The regulation of Swedish local distribution utilities

• Swedish market deregulated in 1996– Including ~ 5 million domestic customers– ~ 200-250 local distribution utilities

• Ex post regulation• New electricity act in 2002• A regulatory authority with limited

resources• Looking at the utilities from the outside

4GAMMELGARD SE Session 5 – Block 2 – Paper 39

Barcelona 12-15 May 2003

Objectives and goals of the regulation

Market situation resembling acompetitive market

Self-regulating utilities

Reasonablenetwork tariffs

Efficientreliability

levels

Long termsolution forregulation

Efficientutilities,

regarding totalperformance

Objectives

Goals

5GAMMELGARD SE Session 5 – Block 2 – Paper 39

Barcelona 12-15 May 2003

A shift for utilities

• What used to be:

Profit

TariffCosts

Resulted in

Tariff = Costs + Profit

6GAMMELGARD SE Session 5 – Block 2 – Paper 39

Barcelona 12-15 May 2003

A shift for utilities

• Has become:

Profit ?

TariffCosts

Limits

Profit = Tariff - Costs

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Barcelona 12-15 May 2003

The Network Performance Assessment Model

• A regulatory tool – legal regulation not dependant of the model

• History– Developed since 1998– Pilot tests in 2001, 2002 and 2003– In operational use 2004

• Developed on commission of the regulatory authority

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Input data

• For every customer– Geographical position, actual energy consumption and

revenues

• For connections to other networks– Geographical position, energy delivered and voltage

level

• Outage duration and frequencies (averages) for announced and unannounced outages

• Local generation– Revenues, voltage level and energy delivered

9GAMMELGARD SE Session 5 – Block 2 – Paper 39

Barcelona 12-15 May 2003

Two main steps in the model

1. Creation of a fictitious network

2. Valuation of the network

Cost of delivering electricity to customers

Reliability level

(Based on the fictitious network) (Outage data from actual network)

10GAMMELGARD SE Session 5 – Block 2 – Paper 39

Barcelona 12-15 May 2003

Creation of fictitious network

Voltage level 1

Voltage level 2

Voltage level 3

Voltage level 4

Boundary Point

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Barcelona 12-15 May 2003

NetworkPerformance

Network Utility

Transport Labor

Network UtilityDelivery Quality

Supplement

Losses

Customer SpecificUtility

Quality Factor

Valuation of the networkCost of delivering electricity to customers

Valuation of reliability level

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Barcelona 12-15 May 2003

The model and the regulatory authority

• Intended use of the model– Instrument for selecting utilities

• Actual revenues compared to the model’s result (Network Performance)

• Majority of utilities will not be closer reviewed

– Establishing a climate for self-regulation• Code of conduct

• Support communication

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Barcelona 12-15 May 2003

Implications on utilities – three dimensions

• Requirements in order to use the model

• Changed fundamental principles

• Implications on the businesses

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Barcelona 12-15 May 2003

Requirements in order to use the model – input data

• Input data availability– Several parameters for every customer in

Sweden! (~5 million customers in total)

• Integrating input data– Separate (IT-)systems for positions, revenues

and energy consumption

• Input data quality

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Barcelona 12-15 May 2003

Changed fundamental principles

• No guaranteed return– Managing costs according to the allowed revenues –

not covering costs

• Regulation from the outside– Managing cost efficiently should make a good (and

approved) profit

• History not considered– Historical investments does not justify higher tariffs

– Actual capital costs could be lower

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Barcelona 12-15 May 2003

Implications on the businesses

• Possibilities to increase incomes

NetworkPerformance

Network Utility

Transport Labor

Network UtilityDelivery Quality

Supplement

Losses

Customer SpecificUtility

Quality Factor

Limited possibility to influence

Possible to influence through outages

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Barcelona 12-15 May 2003

• Evaluating investments– If possible to assess changes in input data

– The changed Network Performance is a valuation of the investment

Implications on the businesses

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Barcelona 12-15 May 2003

Implications on the businesses

• Decrease costs– External to model

– Evaluate savings compared to effects on the Network Performance

Networkefficient

Cost andnetworkefficient

NeitherCost

efficient

High Low

Cost of operating andmaintaining the network

Small

Large

Network sizecompared to

NPAM

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Barcelona 12-15 May 2003

Conclusions

• Model not possible to implement without widespread availability of input data– Coordinated IT-systems

• For the regulatory authority:– Decide on the exact use of the model– Identify incentives created

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Conclusions

• For the utility:– Fundamentally altered regulation environment– Possible to influence allowed income through

outages – Actual costs external to model– Managing costs – a challenge