Presentation on theme: "Electricity network tariff regulation The Italian experience"— Presentation transcript:
1 Electricity network tariff regulation The Italian experience Electricity network tariff regulationThe Italian experienceClaudia Malandra - Emma PutzuTariffs departmentMilan, 4th march 2010Autorità per l’energia elettrica e il gasAutorità per l’energia elettrica e il gas – Tariffs Department
2 Summary Introductory notes Electricity network industry in ItalyTransmissionDistributionMeteringTariffs department main tasksGeneral questions related to network tariffs regulationCriteria for tariffs regulation: the Italian legal frameworkCriteria for tariffs regulation: the AEEG objectivesTariffs setting processDetermination of the allowed costsCost allocation to customers groupsTariffs settingDomestic tariffs and vulnerable customers protection scheme
3 Transmission – From vertical integration to ownership unbundling 1962: nationalization of electricity industry: ENEL owns more than 90% of National Electricity Transmission Network1993: beginning of privatization process (ENEL Spa)1999: reorganization of electricity sector - a separated company is constituted as independent system operator (ISO)under National Decree n. 79/99: property and management of National Transmission Network have to been separated2004: from ISO to TSO – re-unification of ISO and ownership into a new independent electricity grid company (TERNA Spa) independent from ENEL – full ownership unbundlingTransmission assets are owned by: Terna Spa ( 98%), companies owned by municipalities, Railroad and other private companiesProgressive acquisition of assets from other ownersCompany (belongs to ENEL S.p.A.) that owns more than 90% of National Electricity Transmission Network (high voltage and extra-high voltage);Established under National Decree n. 79/99: property and management of National Transmission Network have to been separated;But:Law n. 290/2003 provides that:Property and management of the Network have to been unified;Any company that has activities in electricity or gas production, import, distribution and sale sectors, cannot own more than 20% of stockholders’ equity of companies that own and manage national electricity or gas network;.P.C.M. 11 May 2004:Not later than 31 October 2005 property and management of the network are unified;Any company that has activities in electricity production, import, distribution and sale sector, doesn’t own more than 5% of the TERNA stockholders’ equity;ENEL reduces its equity interests in TERNA stockholders’ equity: since the 1st July 2004 ENEL doesn’t own more than 20% of the stockholders’ equity, but it can exercise its right to vote (to elect administrators) only for 5% of the TERNA stockholders’ equity;June 2004: 50% of TERNA has been placed in Pool
4 Transmission – Key Figures Length of the lines:380 kV about km220 kV about kmkV about kmTrafo station:380 kV N. 131220 kV N. 148150/132 kV N. 100Number of transporters:7 but … 98,23% of the network is owned by TERNARegulatory asset value or Rate Asset Base (RAB) (2008):million EuroAllowed operating costs (2008):340 million EuroAllowed capital costs (2008):710 million Euro Remuneration of net invested capitalTotal installed capacity:119 GVA
6 Distribution – From vertical integration to legal and functional unbundling 1962: nationalization of electricity industry (ENEL)Beside ENEL survived local distribution companies, owned by municipalities, small distribution companies operating in small non interconnected islands and a few other small companies (mutual companies)In general all the companies were vertical integrated1993: beginning of privatization process (ENEL Spa)1999: reorganization of electricity sector – ENEL and companies serving more than final customers have to create a separate company for distribution and supply (legal unbundling)ENEL Distribuzione Spa is constituted2007: legal and functional unbundling of distribution and supply for companies serving more than final customerscompanies serving less than final customers have to guarantee accounting unbundling of distribution and supplydistribution companies are also responsible for metering activities
7 Distribution – Key Figures Length of the lines (31 December 2008):High and very high voltage (km) 20,061Medium Voltage (km) 372,239Low Voltage (km) 815,041Numbers of distributors:143Regulatory Asset Base (RAB) (2008):21,000 million EuroAllowed operating costs (2008):2,000 million EuroAllowed capital costs (2008): 2,500 million EuroCommercial costs of distribution 630 million Euro
8 Metering – Key FiguresRegulatory asset value or Rate Asset Base (RAB) (2008): 3,200 million EuroAllowed operating costs (2008): 260 million EuroAllowed capital costs (2008): 520 million Euro
9 Tariff department main tasks Criteria for regulating tariffs of regulated infrastructures (electricity and gas)Focus on non-competitive activities:Electricity: transmission (HV), distribution (MV, LV) and meteringTariffs setting and periodical revisionsUnbundling criteria and monitoring unbundling implementationFunctional unbundling (focus on infrastructural companies governance)Transparency of accountsTariffs setting for levies (system charges) applied in order to finance activities of general interest (financing of R&D, decommissioning of old nuclear power plants, incentives to renewable energy)
10 Transport Tariff (TRAS c€/kWh) Metering tariff (MIS1 MIS3) Prices and electricity tariffs in the III regulatory periodPrice/TariffCostsGenerationPriceFuel and dispatching costsDispatchingFOCUS ONTransmissionTransport Tariff (TRAS c€/kWh)Transmission costsDistributionDistribution TariffDistribution costsMetering costsMeteringMetering tariff (MIS1 MIS3)SupplySupply costsPrice
11 Infrastructures cost and metering Incidence of regulated activities on the final average customer bill (first quarter 2010)(A) Production costs63,8%Taxes14,0%(B) System charges8%Infrastructures cost and metering15,4 %Regulated infrastructure tariffs represent:about 15% of the electricity total price for household customers(A) Production costs are inclusive of fuel costs, fixed generation costs dispaching costs. Production-capacity and interruptibility service, service remunerations and UC1 UC6 and PPE components(B) System charges are inclusive of all components, plus component Uc4 and component MCT
12 Criteria for tariffs regulation: legal framework Law no. 481/95TransparencyUse of pre-determined criteriaSafeguard the interest of users and consumersReconcile the economic and financial objectives of electricity companies with general social objectives, environmental protection and efficient use of resourcesSingle tariff, by class of customers, at national levelUse of price-cap formula to increase efficiencyby establishing a transparent and reliable tariff system based on pre-defined criteria and by promoting the interests of users and consumers". The tariff system is required "to reconcile the economic and financial goals of electricity and gas operators with general social goals, and with environmental protection and the efficient use of resources".
13 Criteria for tariffs regulation: AEEG objectives Incentive to efficiency: price-cap & profit-sharingTransparency: separated transparent tariffs for different activities (transmission, distribution etc.), set in advance in order to avoid cross-subsidies between regulated and non-regulated activitiesSimplicity: clear and simple tariffs for regulated activities facilitate the possibility to compare the non-regulated part of the final price (supply) and, therefore, competition in liberalised segmentsStability of regulation: reduce regulatory risks and, as a consequence, cost of capital
14 Efficiency incentives The allowed costsEfficiency incentivesOPERATING COSTSProfit sharingPrice cap+DEPRECIATIONStandard life+CAPITAL REMUNERATIONRegulatory asset base
15 The operating costsOperating costs or costs of external resources (personnel, procurement of materials and services) have to be reported in separate accounts and have to be documentedAnnual revision by price cap mechanism + Profit sharingAny 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% in the last price control review.
16 Historical revalued cost CAPEXRAB =+ net asset value+ circulating capital- Trust fund recoveryHistorical revalued costThe historical costs are revalue using the gross fixed investment deflator measured by the National Statistics OfficeRate of returnWACCCAPITAL REMUNERATION
17 Capital remuneration (WACC) Equity cost:CAPMDebt cost:Risk free rate(*) + spread over (depending from real cost of regulated companiesWACCRisk free rate is calculate using the 12 month average of gross returns on the 10 years Treasury bond (BTP)Capital remuneration is calculated as weighted average of cost of equity and debt cost Weighted Average Cost of Capital (WACC)(*) Risk free rate is calculated using the 12 month average of gross returns on the 10-years Treasury bond (BTP) benchmark taken by Bank of Italy
18 The WACC formula (1) Where: Ke is the return allowed on equity T is the tax rateE is the equityD is the debtKd is the debt ratetc is the tax shieldrpi is the expected average inflation rate
19 The WACC formula (2) Ke = rf + i (rm – rf) Where : rf risk free rate The allowed return on equity has been calculated according to the CAPM methodology. CAPM is a model describing the relationship between risk and expected return that is used in the pricing of risky securities. CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. Ke = rf + i (rm – rf)Where :rf risk free rate systematic risk of the activityrm expected market return
20 The WACC formula (3)Parameters and rates used to fix WACC for period
21 Capital remuneration: more incentives for new investments Adequate incentives for new strategic investmentsPrice-cap regulation needs quality regulation in order to avoid risks of lack of investments and bad technical performanceQuality regulation may not be sufficient: specific incentives for new investments (extra remuneration for some strategic investments crucial to facilitate competition)
22 From the allowed costs …to the cost allocation matrix LV - CustomersMV - CustomersHV - CustomersTransmission GridHV – Distribution GridThe allowed costs are allocated to differents customers following voltage connection.MV - Distribution GridLV - Distribution GridMeteringBilling & Co.
23 Cost allocation to different customer groups LV - CustomersMV - CustomersHV - CustomersStreet lightingStreet lightingHouseholdOther usesOther uses
24 Cost allocation criteria 1/1 Network featuresTransmission GridMeshed network – shared resourcePeak demand of customer groupsHV – Distribution GridCost allocation criteriaFix costs of transmission and distribution are allocated to different type of users on the basis of the load profile (in different hours of the day there is a different congestion so different costs)Tariff component is calculated as energy consumption in each price period of each customer group weighted by prices per unit where prices are set following a peak load pricing approach
25 Cost allocation criteria 2/2 Network featuresCosts allocation criteriaMostly radial network – only partially shared resourceCosts are independent from the peak demandMaximum subscribed demand of power (MV) customers/Maximum subscribed demand of power corrected by a contemporary factor for LV customersMV - Distribution GridRadial network/Mostly dedicated resourceCosts are independent from the peak demand;Effective demand of powerLV - Distribution GridMeteringPartially dedicated/Partially shared resourcesContractual average complexity of customer groups/Costs of dedicated equipmentSubscribed demandBilling & Co.
26 Balancing stability and cost reflectivity The allocation criteria are the same from 1999In order to balance the two potentially conflicting objectives of tariff stability and cost reflectivity, for the second and third regulatory periods the Italian Regulator, has decided only to adjust the vector of tariff constraints at the beginning of each regulatory period in function of the total allowed cost variations, keeping steady the cost allocation weights
27 Transmission and Distribution Services: Tariffs by Customer Types (€c/kWh) The average national tariff covering transmission, distribution and metering costs for 2009 increased – as a whole – by 1.7% in comparison with 2008, i.e. from €c/kWh to €c/kWh. Increases were chiefly due to the high inflation rate (+2.4%). recorded in the months preceding the annual update, which rate is used in the formula applied for updating operating costs in accordance with the price-cap method. This implied a nominal increase of the portion of transmission and distribution charges covering operating costs, despite the annual recovery of efficiency on such costs as imposed by the applicable regulation.The increase of tariffs further reflects a rise in gross and net invested capital, as a consequence of the investments made by operators and the effect of the revaluation of such investments, which revaluation is obtained by applying the gross fixed investment deflator measured by the Italian Statistical Institute (ISTAT).
28 The tariff system evolution 1997 – First tariff reform (del. 70/97)First code of tariff regulation (2001)2000 – 2003:First regulatory period2004 – 2007: del. n.5/04Second regulatory periodPool (1/4/2004)Supply full opening(1/7/2007)Social protection for vulnerable clients ( )2008 – 2011: del. n. 348/07Third regulatory period
29 Relevant features of the tariff structure before the regulatory intervention Tariffs did not reflect cost structure by customer classTariffs were higher than costs for non-residential low- voltage customersTariffs were lower than costs for high-voltage customersSpecial tariff regime for State Railways, aluminium smelters and energy-intensive industriesTariffs did not reflect cost of services (No unbundling between generation, transmission and distribution costs)
30 Relevant features of the tariff structure in the first and in the second regulatory period Four yearly revision of tariff criteria (duration of regulatory period)Tariffs were more cost reflective for different class of consumersUnbundling of different costs of transmission, distribution and generationThe Regulator set the constraint on revenues and companies set tariffsDistributors propose and the regulator approves tariffs options. Tariff options have to comply with constraints V1 and V2 set by the Regulator
31 Transmission and distribution tariff (not for domestic users) (del. no Transmission tariffSingle tariff, by class of customers, at national level (energy tariff expressed in euro cent per kWh, flat without variation according to consumption level), yearly revisionDistribution tariffSingle tariff, by class of customers, at national levelCompulsory tariff for all distributors joint with a compensation mechanism in order to guarantee costs recoverYearly revisionThree parts tariffFlat component expressed in euro cent per customer per yearPower component expressed in euro cent per kW per yearEnergy component expressed in euro cent per kWh
32 Metering tariff (not for domestic users) (del. no. 348/07) Metering serviceMeter installation, maintenance, meter riding and billing.Metering tariffSingle tariff, by class of customers, at national levelYearly revisionFlat tariffMIS1: Power component expressed in euro cent per customer per yearMIS3: Energy component expressed in euro cent per kWh (only for street lighting)
33 The tariffs revision method Tariffs component are fixed at the beginning of the regulatory period (four years) and yearly revised:Capex component (non subjected to price cap):The tariff components covering the allowed costs for the return on invested capital are adjusted annually by reviewing the capital itself using the average annual change in the gross fixed investment deflator measured by the National Statistics Office, and taking into account: any net investments carried out by companies the previous year; the incremental remuneration for new strategic investments, and the energy variationOperating cost are subjected to price cap and revised yearly :In the third regulatory period has been set a target productivity gain (X- factor) of 2.3% for transmission, 1.9% for distribution and 5% for metering.
34 Domestic tariffs Three domestic tariffs: D1, D2 and D3 D1 tariff is a reference tariff for domestic customers.It is a cost reflective tariff but it is not applied to the customersD2 tariff is for domestic customers in their place of residence, with contractual power till 3.3 kW (about 80% of domestic customers).D3 tariffs is for:domestic customers in their place of residence with contractual power over 3.3 kW anddomestic consumers in their spare homes (about 20% of domestic customers).Tariffs D2 and D3 are set on the basis of the level of D1 tariff.
35 D1 structure D1 is a three parts tariff: Flat component: expressed in euro cent per customer per year;Power component: expressed in euro cent per kW per year;Energy component: expressed in euro cent per kWh, (flat, without variations according to consumption level)
36 D2 and D3 structure D2 and D3 are three parts tariffs: Flat component Power componentEnergy component: increasing when the consumption level increases
37 D2 and D3 as transitory tariffs D2 and D3 cross-subsidies are relevantlow-consuming customers with D2 pay less than high-consuming ones with D2 and customers with D3For example, single men could pay less than low income families with a lot of childrenTariffs D2 and D3 are considered transitory tariffs moving towards D1 tariff.Subsidies removal have to be gradual and linked to the implementation of a special tariff for vulnerable customers (the so-called “social tariff”)..
38 D2 convergence towards D1 Total Expenditure for residential customers (taxes not included)Autorità per l’energia elettrica e il gas
39 D3 convergence towards D1 Total Expenditure for non-residential customers (taxes not included)Autorità per l’energia elettrica e il gas
40 Social tariff and vulnerable customers Social tariff is based on a political decision from the Parliament and GovernmentVulnerability is defined according to economic or health conditions:People with economic disadvantagesCustomers in weak health conditions, requiring specific electrical appliances in order to surviveAdditionality of benefits for customers in both conditionsAutorità per l’energia elettrica e il gas
41 Social tariff Aim Compensation Burden recovery To guarantee an average saving of 20% in electricity expenditureThe system is fully compatible with competitive energy marketsCompensationLump sum varying with the number of family membersApplied as a discount in the billingBurden recovery“Ad hoc” tariff component charged to all final users of the electric system, based on electricity consumptionAutorità per l’energia elettrica e il gas
42 Access to social tariff Based on existing indicators of family’s economic conditions (ISEE), already in use for TLC, schools, etcISEE is an indicator of poverty, not of “fuel poverty”Application form ahs to be processed by local authorities (Municipalities)Local authorities send relevant information to distributors through a computer systemLocal authorities and distributors make controlsActivation of the discount in the billingYearly renovation required with new ISEEAutorità per l’energia elettrica e il gas
43 Figures Social tariff system has been working since 2009 Families which apply before February 2009 received the compensation for 2008 too.More than 1 million people were admitted to the compensation in 2009 (about 90% for economic disadvantages; less than 10% for weak health conditions)Autorità per l’energia elettrica e il gas
44 Estimated annual consumption Customers’ savingsEconomic disadvantagesFamily membersEstimated annual consumption(kWh)2008 bonus(euro)2009 bonus2010 bonus1-2 members22006058563-4 members2700787572More than 4 members4000135130124Yearly revision according to D2 trendAutorità per l’energia elettrica e il gas
45 Customers’ savings Weak health conditions 150 144 138 2008 bonus(euro)2009 bonus2010 bonus150144138Yearly revision according to D2 trendAutorità per l’energia elettrica e il gas
46 Characteristics of the regulated pricing system for domestic consumers Convergence towards cost-reflective tariffProtection more focused on really vulnerable customersNeutrality with respect to the liberalisation processPromotion of efficient use of resourcesCoherence with EU DirectiveAutorità per l’energia elettrica e il gas
49 THE WACC FORMULA (4)Parameters and rates used to fix WACC for period
50 X factorPlanned productivity gains (X-factor) for the annual updating of operating costsActivityRegulatory periodTransmissionDistributionMetering4.0%2.5%3.5%2.3%1.9%5.0%
51 CONSTRAINTS V1 AND V2 & TARIFF OPTIONS II REGULATORY PERIOD - DISTRIBUTION TARIFF OPTIONS FOR FINAL NON-RESIDENTIAL CUSTOMERSCONSTRAINTS V1 AND V2 & TARIFF OPTIONSCONSTRAINT V1Maximum total annual revenue which can be obtained by the distributor from a single customer category (verified ex-post). It is calculated on the basis of TV1 option.CONSTRAINT V2Maximum price, related to a standard quality service, which determines the maximum expense for each customer (verified ex-ante). It is calculated on the basis of TV2 option.TARIFF OPTIONSDistributors propose and the regulator approves tariffs options. Tariff options have to comply with constraints V1 and V2.
52 Protected –Tariff Service - Reference Prices for Average Consumers (with an annual Consumption of 2,700 kWh and a Power Capacity of 3 kW)taxes general system charges (components A, UC4 and MCT) supply costs (including components UC1, UC5 and PPE) network costs (including components UC3 and UC6)
53 The equalization mechanism – del. no. 348/07 Law no. 481/95 fix single tariff at nation level and the introduction of equalization mechanisms between operators that have different costs of service.Single tariff at national level imply that tariff components are set on the basis of average costs of users network but costs of services depend on users served and land featuresThe equalization mechanism guarantee the operators to recover allowed costs