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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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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 (year 2000) 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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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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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 (year 2000) 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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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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Second step: how much flexibility (2)
• 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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Second step: how much flexibility (3)
• 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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Second step: how much flexibility (4)
• 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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Second step: how much flexibility (6)
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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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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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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Third step: set the “price level” for the base period (3)
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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Third step: set the “price level” for the base period (4)
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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Third step: set the “price level” for the base period (5)
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
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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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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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Fourth step: define a compensation mechanism (2)
• 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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Fourth step: define a compensation mechanism (3)
• 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
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