GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona 12-15 May 2003 1 The challenge of...

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, [email protected]



Agenda

• Regulation of Swedish Distribution Utilities

• Network Performance Assessment Model

• The model and the regulatory authority

• Implications on utilities

• Conclusion



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



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



A shift for utilities

• What used to be:

Profit

TariffCosts

Resulted in

Tariff = Costs + Profit



A shift for utilities

• Has become:

Profit ?

TariffCosts

Limits

Profit = Tariff - Costs



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



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



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)



Creation of fictitious network

Voltage level 1

Voltage level 2

Voltage level 3

Voltage level 4

Boundary Point



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



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



Implications on utilities – three dimensions

• Requirements in order to use the model

• Changed fundamental principles

• Implications on the businesses



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



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



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



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

– The changed Network Performance is a valuation of the investment





• 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



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



Conclusions

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

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

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