autorità per lenergia elettrica e il gas 1 incentive-based regulation of electricity distribution...

Autorità per l’energia elettrica e il gas

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Incentive-based regulation of Incentive-based regulation of electricity distribution in Italyelectricity distribution in Italy

FSR WorkshopImproving and extending Incentive-based regulation

Clara PolettiItalian Regulatory Authority for Electricity and Gas

24 November 2006


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Outline

• Legal Framework for tariff regulation

• Distribution tariff regulation: necessary steps

• Conclusions


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Legal Framework for tariff regulation (1)

•1995 (Law 481): an independent regulator, Autorità per l’energia

elettrica e il gas (AEEG) is established; the law delegates the regulator to implement an

price cap type of regulation.

• 1997:AEEG starts its operations;

• 1999: transposition of the 96/92/EC directive into national

law (Legislative decree 79/99)a new incentive-based regulation for electricity

distribution is approved by AEEG, starting from 2000


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Legal framework for tariff regulation (2)

General principles (Law 481/95 and 290/03):

• price cap regulation;

• price discrimination on geographic ground not allowed;

• Price-cap applied only to opex;

• Revaluation of invested capital;

• Allowed return on invested capital based on long term risk-free rate;

• profit sharing set at 50%;


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Legal framework for tariff regulation (3)• Regulatory period at least 3 years (2000-2003; 2004-2007)

• Adjustment rule within the regulatory period:

Pt = Pt-1 * (infl –x + y + DSM)

Pt is a share of the distribution tariff equal to operational costs;

Inf is inflation; X is the productivity rate; Y is a measure of unexpected increase in costs due to

exogenous factors; DSM is an adjustment factor to recover costs related to

demand side management regulation.


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Distribution tariff regulation: necessary steps

• un-bundle the existing “all inclusive” tariff;

• decide how much price flexibility to leave to the distributor;

• set the “price level” for the base period equal to average distribution costs;

• define a compensation mechanism to take care of differences in costs among distributors;

• define an adjustment rule for the following years of the regulatory period;

• define the productivity parameter “X”


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• set the “price level” for the base period (year 2000) equal to average distribution costs;





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First step: new tariffs structure for non-residential customers

Transmission

Distribution

Commercial costs of distribution

Commercial costs of supply

Metering

Fuel costs

Transmission

Distribution

+

Commercial costs of distribution

Metering

Supply

+ commercial cost of supply

1999 2006

Distribution


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• set the “price level” for the base period (year 2000) equal to average distribution costs;





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Second step: how much flexibility (1)

• given that information asymmetry is mainly on costs, distributors are allowed to price discriminate:

Multipart tariff structures;

Menu of different tariffs that each customer can choose.

• price discrimination is allowed only among customers of the same “Type” (i.e. customers with similar demand elasticity)

• price cap is made of two constraints:

One on total revenue

One on the tariff each customer is asked to pay


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• Customers’ categories:

Residential customers;

Low voltage public lightening;

Other low voltage customers;

Medium voltage public lightening;

Other medium voltage customers;

High voltage customers.


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• cap on total revenue (V1): cap on the annual revenue which can be obtained by the distributor from each customer category (verified ex-post).

Total revenue <= 1*N + 3*kWh

Where:

1 is euro cent per withdrawal point (N)

3 is euro cent/kWh


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• Cap on tariffs (V2): the total amount paid by each customer to the distribution company must be less or equal to the amount that she would have paid if the reference tariff TV2 were applied.

• The TV2 tariff, determined by the regulator, is a three part tariff:

TV2=f(1,2,3)

1 is euro cent;

is euro cent per KW;

is euro cent per KWh;


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Annual expenditure for the distribution service 2006 (€/year) customer low voltage 3 KW

40

50

60

70

80

90

100

110

120

130

1401 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96 101

106

111

116

121

126

131

136

141

146

151

KWh

Enel

Acea

TV2


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Average unit costs incurred by the major Italian companies, covering about 98% of the electricity transported in Italy.

Data extracted from 2001 companies unbundled accounts .

operational costs +

depreciation(life span relevant for infrastructures depreciation is set by the Authority, in line with the average life

span used in other European countries)

+a fair return on net invested capital

(invested capital * WACC)

Third step: set the “price level” for the base period (1)


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Third step: set the “price level” for the base period (2) 1 components:

1(disMT), distribution costs on medium voltage level;

• 1(disBT), distribution costs on low voltage level;

• 1(cot), commercial distribution costs;

3 components:

3(disAT), distribution costs on high voltage level;

3(disMT), distribution costs on medium voltage level;

3(disBT), distribution costs on low voltage level;

(cot), commercial distribution costs.


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TV2=f(1,2,3)

With:1 = 1 (cot)*1

(euro cent per withdrawal point)

2 = [1 (disMT)+ 1 (disBT)]* 2+

[3 (disMT)+ 3 (disBT)+ 3 (cot)]* 4

(euro cent per kW)

3 = 3 (disAT)* 3

(euro cent per kWh)


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Operational costs - profit sharing

Any operating cost reduction achieved in the first regulatory period, as a result of productivity gain over the 4% per-year target, has been shared between electricity companies and customers.

The companies’ share of the extra-gains was set at 50% as required by law no. 290/03.


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Price level for the base 1st and 2nd regulatory periods

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

price components

% r

ed

uc

tio

n b

etw

ee

n 1

st

an

d 2

nd

pe

rio

d


21









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Fourth step: define a compensation mechanism (1)

• Uniform price constraint: the revenue cap must be the same for all

distributors; but costs may be different;

• Compensation mechanism: necessary to allow distributors to recover

their costs; but can distort incentives


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• General compensation mechanism: based on cost factors outside the distributor’s

control (e.g. climate factors; customers’ density, etc.)

factor identified by econometric analysis: customer density

Compensation (€)=

(1*N + 3*kWh) * f(customers’ density)


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• Specific compensation mechanism: distributors can apply for a specific

compensation if they are not able to recover costs;

cost of service regulationamong 167 distributors around 20 applied


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Conclusions

• Next regulatory period starting on 2008

• Some questions to be faced: is the hybrid mechanism working? is V1 a good approximation of the

distribution cost function? is price flexibility to be confirmed?


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Thank you

www.autorita.energia.it

autorità per lenergia elettrica e il gas 1 incentive-based regulation of electricity distribution...

Documents

distribution slide

distribution tariff

average distribution

price flexibility

price cap type of regulation

inclusive tariff

price level

management regulation