1. Per AGRELL Peter BOGETOFT KVL, Economics Denmark THE SWEDISH REGULATORY MODEL : Efficiency and Network Utility

2. (c) AGRELL, KVL2 OUTLINE YARD-STICK COMPETITION REGULATORY FRAMEWORK DEA –Examples, TE, SE, CE –Modelling principles NETWORK UTILITY DEA MODELS (SR, LR) INCENTIVE SYSTEM

3. (c) AGRELL, KVL3 VALUE OF YARD-STICK COMPETITION ENTERPRISE LEVEL –Improved technical- and cost efficiency INDUSTRY LEVEL –Detect and follow up technology development REGULATOR –Incentive systems –Control of tariffs, etc. –Structural development

4. (c) AGRELL, KVL4 STEM SWEDISH NATIONAL ENERGY ADMINISTRATION CONCESSION GRANTING MONITORINGDISSEMINATING

5. (c) AGRELL, KVL5 REGULATORY FRAMEWORK ELECTRICITY ACT (1992) –Ch 4, § 1 Fair and objective tariffs Reasonable rate of return –Ch 4, § 3 Differentiation between concessions No differentiation within concession REGULATIONS [e.g., Prop 1993/94:162) –Comparative evaluation of tariffs

6. (c) AGRELL, KVL6 SWEDISH ELECTRICITY DISTRIBUTION CONCESSIONS –400 V - 20kV distribution –Distribution obligation –250 areas –Max 25 years –May be merged or changed (non-exclusive!) OPERATORS –Vertical separation –No restriction on ownership or technology –Annual reports, public tariffs

7. (c) AGRELL, KVL7 OWNERSHIP

8. (c) AGRELL, KVL8 REGULATORY REQUIREMENTS ECONOMICAL –Ability to identify and estimate excess costs –Sound and fair basis of comparison JUDICIAL –Authoritative in court appeals ADMINISTRATIVE –Manageable administrative workload –Unambiguous interpretation of results

9. (c) AGRELL, KVL9 Why DEA? DATA ENVELOPMENT ANALYSIS Charnes, Cooper och Rhodes (1978) Established method to estimate optimal production and lowest cost by best-practice observations. –PRODUCTIVE EFFICIENCY –OBSERVED DATA

10. (c) AGRELL, KVL10 DEA PROJECT GROUP Per AGRELLassociate professor Peter BOGETOFTprofessor Birgitta SJÖBERGSTEM Roger HUSBLADSTEM Lars ERIKSSONSTEM Reference groupSVEL, et al.

11. (c) AGRELL, KVL11 EXAMPLE 1 Is k an inefficient utility? Who is efficient? Who are the peers to k?

12. (c) AGRELL, KVL12 OBSERVATIONS INPUT, MSEK, Operating costs OUTPUT, MWh, Delivered energy A B C k 120 1 400 1 200

13. (c) AGRELL, KVL13 EFFICIENCY FRONTIER A B C k 12 0 75 1 200 1 400 OUTPUT, MWh, Delivered energy INPUT, MSEK, Operating costs

14. (c) AGRELL, KVL14 DECOMPOSING EFFICIENCY TECHNICAL EFFICIENCY –To avoid waste and slack SCALE EFFICIENCY –To operate at the right scale COST EFFICIENCY –To apply least cost technology

15. (c) AGRELL, KVL15 TECHNICAL EFFICIENCY A B C k 12 0 75 1 200 1 400 62,5% TE-IN = 75/120 = 62,5% OUTPUT, MWh, Delivered energy INPUT, MSEK, Operating costs

16. (c) AGRELL, KVL16 SCALE EFFICIENCY A B C k 12 0 70 1 200 75 SE-IN = 70/75 = 93% OUTPUT, MWh, Delivered energy INPUT, MSEK, Operating costs

17. (c) AGRELL, KVL17 INFORMATION TE/SE TECHNICAL EFFICIENCY62,5% SCALE EFFICIENCY93% INPUT TARGET(S) –Operating costs 75 MSEK (-45) ROLE MODELS –A (66%) and B (33%)

18. (c) AGRELL, KVL18 EXAMPLE 2

19. (c) AGRELL, KVL19 COST EFFICIENCY Operating cost, MSEK Labor, kh AX BX CX k 135 120 BUDGET = 63 MSEK 84 75 CE = min Budget/Budget k = 63/187,5 = 33,6% BUDGET = 187 MSEK 35 140

20. (c) AGRELL, KVL20 DEA COST EFFICIENCY

21. (c) AGRELL, KVL21 INFORMATION CE TEKNISK EFFEKTIVITET62,5% KOSTNADSEFFEKTIVITET33,6% COST TARGETS –Operating costsStaff (TE)75 MSEK (-45)(TE)84 kh(-51) (CE)35 MSEK (-85)(CE)140 kh (+5) –Total cost 63 MSEK (-124,5 MSEK) ROLE MODELS:

22. (c) AGRELL, KVL22 NETWORK UTILITY STEM internal project 1999 Econometric cost model with optimal network as input –Launched as Network utility –Average values –Claims scale economies –One possible cost function

23. (c) AGRELL, KVL23 USE OF NETWORK UTILITY? ADVANTAGES –Exogenous inputs –Strong structural assumptions (nationalization!) DRAWBACKS –No use of best-practice –Low informative value –Weak judicial power, arbitrary –Simplistic, risk for excessive exemptions –Sensitive for price-changes, frontier shifts –Expensive data processing (GIS-data)

24. (c) AGRELL, KVL24 1. Concession granting

25. (c) AGRELL, KVL25 2. Monitoring

26. (c) AGRELL, KVL26 3. Dissemination

27. (c) AGRELL, KVL27 REGULATORY OBJECTIVES TRANSPARENCY Dissemination CONSISTENCY Modelbased STABILITY Historical physical data FAIRNESSE xogenous factors Annual frontiers

28. (c) AGRELL, KVL28 Ex post REGULATION 199920002001 Prel. tariffs REVENUES ANNUAL REPORTS Monitoring period 1999

29. (c) AGRELL, KVL29 MODELLING PRINCIPLE: controllability! SHORT RUN VARIABLE INPUT LONG RUN EXOGENOUS INPUT OUTPUT FIXED INPUT

30. (c) AGRELL, KVL30 ACTUAL COSTS 18,5 GSEK 8,1 GSEK

31. (c) AGRELL, KVL31 MODELL (SR) DISTRIBUTOR [SHORT RUN] DISTRIBUTOR [SHORT RUN] OP. COST EX LOSS COST ENERGY LC ENERGY HC CUSTOMERS LC CUSTOMERS HC DEL. POWER (MW) NET LENGTH (TOTAL) INSTALLED TRANSFORMERS (MVA) MVA per DISTRIBUTION STATION CLIMATE ZONE

32. (c) AGRELL, KVL32 MODELL (LR) DISTRIBUTOR [LONG RUN] DISTRIBUTOR [LONG RUN] OP. COST TR. LOSSES OPTIMAL NETLENGTH(TOTAL) CLIMATE ZONE OTHER CAPITAL ENERGY LC ENERGY HC CUSTOMERS LC CUSTOMERS HC DEL. POWER (MW) TR CAPITAL

33. (c) AGRELL, KVL33 INCENTIVE SYSTEM Reasonable profit –135% of risk-free rate (Edin-Svahn) Participation –No net operative losses Non-controllable costs –Passed on to consumers Tariff structure –Light-handed regulation, no regulation

34. (c) AGRELL, KVL34 POTENTIAL INCENTIVE SYSTEM Green operator –Full reasonable profit (ROE) Yellow operator –ROE = (riskfree rate)CE Red operator –Potential audit by STEM –ROE = 0%

35. (c) AGRELL, KVL35 ANNUAL ECONOMIC NET-INSPECTION Green = OK Yellow = Remark Red = Audit?

36. (c) AGRELL, KVL36 CONCLUSION Light-handed regulation DEA operational in STEM monitoring –Self-regulation –Incentive system –Auditing priorities Legal considerations Political considerations