PAN-EUROPEAN BENCHMARKING OF ELECTRICITY DISTRIBUTION COMPANIES

- The EURELECTRIC experience

Mr. Otso KUUSISTO

Chairman of EURELECTRIC WG “Distribution Benchmarking”

Representing the European Electricity Industry at Expert, Strategic and Policy-making Level

Our technical partners:

48 companies from 22 countries were benchmarked

MAIN PARTIES INVOLVED:

– EURELECTRIC WG Distribution Benchmarking

– EURELECTRIC NE Finance & Economics

– PA Consulting Group 5

1

2

1

8

3 4

1

21

1

1

1

1 6

1

3

1

1

2

1

1

Why benchmarking?

• Benchmarking already used by many regulators in assessing companies’ efficiencies

• Learning about benchmarking methods• Disseminating knowledge

– various degrees of understanding and experience in the participants

• Experimenting on European-level– Anticipating regulators’ actions– first truly pan-European benchmarking

• Indicative benchmark of overall performance

Interest in International Benchmarking

Method used

“Grid Volume model” developed by PA Consulting Group

• Cost driversCost drivers: physical parts of grid infrastructure

• Cost equivalentCost equivalent: average costs of operating a cost driver / year

• Grid volumeGrid volume = cost drivers • cost equivalents

• Only OPEX benchmarked• Companies compensated for 1) labour cost level

and 2) customer density

Method used (2)

voltage(0,24-1 kV)

Mediumvoltage(2-29 kV)

Highvoltage(30-70 kV)

Subtrans

-mission(71-150 kV)

Custo

-mers

Lowvoltage(0,24-1 kV)

Mediumvoltage(2-29 kV)

Highvoltage(30-70 kV)

Subtrans

-mission(71-150 kV)

Custo

-mers

Transformer and contact bays

Cables

Overhead lines ST

Sub-transmission

Transformer and contact bays

Cables

Overhead lines HV

High voltage

Transformer and contact bays

Cables

Overhead lines MV

Medium voltage

Cables

Overhead lines

Low voltage

Customers

Cost driver

1Cost / customer

CostUnit

2.735Cost / transformer

333

78

346Cost / transformer

84

93

27Cost / transformer

50

36

40

45Cost / km of line

Transformer and contact bays

Cables

Overhead lines ST

Sub-transmission

Transformer and contact bays

Cables

Overhead lines HV

High voltage

Transformer and contact bays

Cables

Overhead lines MV

Medium voltage

Cables

Overhead lines

Low voltage

Customers

Cost driver CostUnit

Cost / km of line

Cost / km of line

Cost / km of line

Cost / km of line

Cost / km of line

Cost / km of line

Cost / km of line

Cost drivers (indexed):

Method used (3)

Participating companies grouped by

1) Region1) Region: – North - South - East - Central

2) Size2) Size: (number of customers)

– Large: > 300 000– Medium: 300 000 - 100 000– Small: < 100 000

3) Level of urbanisation3) Level of urbanisation:Nr of customers / km of low voltage line– “City”: > 80– “Mixed”: 80 - 20– “Rural”: < 20

Main results (1)Baseline Benchmark

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48

Company

Co

st

an

d c

ity

co

rre

cte

d e

ffic

ien

cy

Main results (2)Baseline Efficiency in Regions

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

1 2 3 4 5 6 7 8 9 10 11 12 14 15 16 17 18 19 20 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 38 39 40 41 42 43 44 45 46 47 48 49 50 51

Co

st

an

d C

ity

Co

rre

cte

d E

ffic

ien

cy

Eastern Southern Central Northern

Main results (3)Efficiency and Level of Urbanisation

City - Mixed - NonCity

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48

Eff

icie

nc

y

Main results (4)Baseline Efficiency and Size

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49

Small Medium Large

Main results (summary)

– Performance from 100% to 45% * – Efficient companies in all regions of Europe– Efficient companies in all size categories

– Sensitivity: robust model, but data uncertain– High satisfaction by participants (survey)

* 3 low-end companies considered as outliers; at the top-end 2 companies outliers; 20% error margin

Troubles & uncertainties

– 22 different accounting legislations, 48 different internal accounting systems…

– Guidelines & manual created for the project, to help report the various operating costs

– Separating OPEX and CAPEX not always self-evident: ratio of CAPEX to OPEX: from 28% to 72%…

– Allocation of overhead costs to operations also added to uncertainty

– Different degree of unbundling complicates allocation– Labour costs: 10-fold difference between highest and

lowest salaries

CONCLUSIONS (1)

• THE MAIN UNCERTAINTY IN THE BENCHMARKING STEMS FROM THE USE OF DIFFERENT ACCOUNTING PRINCIPLES

• WELL DEFINED DATA IS A BASIC PREREQUISITE FOR ANY BENCHMARKING EXERCISE

CONCLUSIONS (2)

• THE CORRECTION FOR DIFFERENT LABOUR COST LEVELS IS PRAGMATIC – AND AN “EXACT” CORRECTION CANNOT BE DEFINED

• The effect of labour cost level on the total performance is influenced by:• Average labour costs (wage level)• Productivity• Level of automation

CONCLUSIONS (3)

• THE DENSITY CORRECTION IS AN APPROXIMATION MADE TO COMPENSATE CITY COMPANIES

• THE MODEL CAN BE IMPROVED – IN ORDER TO IMPROVE THE BENCHMARK AND TO INCREASE LEARNING

What we got…

– INDICATIVE benchmark of overall efficiency– Results NOT suitable to draw regulatory conclusions– Sharing of experience among participants– Improved understanding of benchmarking as a process

• within participants• inside EURELECTRIC

“BENCHMARKING IS FAR FROM BEING EXACT SCIENCE”

CONCLUSIONSAims of Benchmarking are Important:

Incentivesfor Companies

High quality of supply

LowestPossible costs

Appropriatelevel ofinvestments

Project timing:

February – September 2002

1

Project start-up

2

Adaptation of model to national conditions (questionnaire)

3

First work-shop

4

Data collection phase

5

Calcu-lations

6

Final work-shop

March April JuneMayFebruary July

7

Last data adjust-ments

8

Final reports

September

Two recent EURELECTRIC reports:– “Pan-European Benchmarking of Electricity

Distribution Companies - Final Report”– “Business Trends in the European Power Industry

- the Financial Situation of Distribution Business”BOTH REPORTS AVAILABLE AT OUR CONFERENCE STAND!

Distribution issues in EURELECTRIC

– Networks Committee– WG “Distribution Issues”, chaired by Peter

BIRKNER (Lech-Elektrizitätswerke AG)MORE INFORMATION AVAILABLE AT OUR CONFERENCE STAND!

THANK YOU FOR YOUR ATTENTION!

Contacts:

Mr. Otso KUUSISTO

otso.kuusisto@otsokuusistoconsulting.fi

Mr. Mihai PAUN

The Union of the Electricity Industry – EURELECTRIC

MPaun@eurelectric.org