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Presentation of the paper "Regulatory Benchmarking in Central Europe: Actual Practice and Possibilities of Development for the Energy Sector" ah the conference “European Integration – New Challenges”, 7th Edition in Oradea, Romania, 2011.
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Regulatory Benchmarking in Central Europe
Ondřej MACHEKDepartment of Business EconomicsFaculty of Business AdministrationUniversity of Economics in PragueCzech Republic
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How to regulate energy prices?
• Allow to cover eligible costs and earn a return on invested capital
Revenue requirements
RR = O&M + A&G + T + D + (WACC RB)
RR revenue requirements
O&M operation&maintenance costs
A&G administration&general costs
T taxes
D depreciation and amortization
WACC weighted average cost of capital (the rate of return)
RB rate base (total assets – accumulated depreciation)
Ondřej MACHEK 28th May 2011
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Regulatory benchmarking
Tariff regulation methods:
• Cost-of-service regulation (COS)
• Simple and straightforward
• Incentive to overinvest and to invest imprudently
• Performance-based regulation (PBR)
• Price cap
• Incentive to reduce costs in order to earn profits
• Idea of benchmarking: base RR not on a firm‘s own costs, but on a relative efficiency measurement
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Regulatory benchmarking methods• Frontier methods most widely used
• Cost frontiers define minimum cost level of producing a given output
• Inefficiency = distance of a company from the frontier
Deterministic methods Stochastic methods Data envelopment analysis
N(0,σ2)
SFA
Ondřej MACHEK 28th May 2011
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Central Europe Energy Distribution Markets
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Czech Republic
• Energy market is concentrated
• Incentive regulation
• Several parameters determined using very simple benchmarking methods
• RR set based on a firm‘s own costs
• No true benchmarking
Ondřej MACHEK 28th May 2011
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Slovakia
• Energy market is concentrated
• Incentive regulation
• Gas transportation and storage – comparing Slovak and EU tariffs
• No true benchmarking
Ondřej MACHEK 28th May 2011
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Hungary
• Incentive regulation
• Complicated benchmarking in electricity&gas distribution and transmission
• Non-frontier method
• Correction of costs in order to mitigate regional differences
• Average (benchmark) operational costs incorporated into revenue requirements
• International and domestic data
Ondřej MACHEK 28th May 2011
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Poland
• Incentive regulation
• Large energy market -> possibilities for improvement
• But still concentrated and largely state-owned
• Benchmarking only in electricity distribution
• Stochastic (SFA) method
• DEA or COLS in consideration for the next regulatory period
Ondřej MACHEK 28th May 2011
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Germany
• Large energy market
• Large number of incumbent firms
• Incentive regulation
• DEA and SFA methods for energy distribution&transmission
• Two cost bases
• „Best-of-four“ scheme: out of four results, the efficiency score that is the most favourable to a company is taken to calculate its RR
Ondřej MACHEK 28th May 2011
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Austria
• Low market concentration
• DEA and MOLS methods for energy distribution&transmission
• „Weak-of-method“: the better result gets weighted by 60%, the worse result by 40%
• Domestic and international data
Ondřej MACHEK 28th May 2011
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Switzerland
• Low experience in modern regulation
• Multliple institutions
• Tariffs in the gas sector not regulated
• Cost-of-service regulation for electricity distribution
• Methodology co-prepared by the regulated firms
• Possibilities for incentive regulation and benchmarking are considerable
Ondřej MACHEK 28th May 2011
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Conclusion
• Regulatory methods vary across the region
• Except for Switzerland, all countries are using incentive regulation
• Most sophisticated methods of benchmarking are used in Germany and Austria
• Polish regulator is using a SFA method in cost efficiency analysis
• In Hungary, a non-frontier method of benchmarking is used
• In Switzerland, Czech Republic and Slovakia no benchmarking is used at present
• Possibilities for development:
• Reduce market concentration
• Separate regulated and non-regulated activities
• Cooperate with the private sector to establish an acceptance of the benchmarking results
• Harmonize regulatory frameworks to reduce the disparity of companies and data
Ondřej MACHEK 28th May 2011
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Thank you for your attention
Ondřej MACHEK 28th May 2011