GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona May The challenge of regulating natural monopolies in electrical distribution – experices from Sweden Magnus Gammelgard Royal Institute of Technology / KTH Stockholm, Sweden

GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona May Agenda Regulation of Swedish Distribution Utilities Network Performance Assessment Model The model and the regulatory authority Implications on utilities Conclusion

GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona May The regulation of Swedish local distribution utilities Swedish market deregulated in 1996 –Including ~ 5 million domestic customers –~ local distribution utilities Ex post regulation New electricity act in 2002 A regulatory authority with limited resources Looking at the utilities from the outside

GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona May Objectives and goals of the regulation

GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona May A shift for utilities What used to be: Profit Tariff Costs Resulted in Tariff = Costs + Profit

GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona May A shift for utilities Has become: Profit ? Tariff Costs Limits Profit = Tariff - Costs

GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona May The Network Performance Assessment Model A regulatory tool – legal regulation not dependant of the model History –Developed since 1998 –Pilot tests in 2001, 2002 and 2003 –In operational use 2004 Developed on commission of the regulatory authority

GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona May Input data For every customer –Geographical position, actual energy consumption and revenues For connections to other networks –Geographical position, energy delivered and voltage level Outage duration and frequencies (averages) for announced and unannounced outages Local generation –Revenues, voltage level and energy delivered

GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona May Two main steps in the model 1. Creation of a fictitious network 2. Valuation of the network Cost of delivering electricity to customers Reliability level (Based on the fictitious network)(Outage data from actual network)

GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona May Creation of fictitious network Voltage level 1 Voltage level 2 Voltage level 3 Voltage level 4 Boundary Point

GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona May Valuation of the network Cost of delivering electricity to customers Valuation of reliability level

GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona May The model and the regulatory authority Intended use of the model –Instrument for selecting utilities Actual revenues compared to the model’s result (Network Performance) Majority of utilities will not be closer reviewed –Establishing a climate for self-regulation Code of conduct Support communication

GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona May Implications on utilities – three dimensions Requirements in order to use the model Changed fundamental principles Implications on the businesses

GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona May Requirements in order to use the model – input data Input data availability –Several parameters for every customer in Sweden! (~5 million customers in total) Integrating input data –Separate (IT-)systems for positions, revenues and energy consumption Input data quality

GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona May Changed fundamental principles No guaranteed return –Managing costs according to the allowed revenues – not covering costs Regulation from the outside –Managing cost efficiently should make a good (and approved) profit History not considered –Historical investments does not justify higher tariffs –Actual capital costs could be lower

GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona May Implications on the businesses Possibilities to increase incomes Limited possibility to influence Possible to influence through outages

GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona May Evaluating investments –If possible to assess changes in input data –The changed Network Performance is a valuation of the investment Implications on the businesses

GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona May Implications on the businesses Decrease costs –External to model –Evaluate savings compared to effects on the Network Performance

GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona May Conclusions Model not possible to implement without widespread availability of input data –Coordinated IT-systems For the regulatory authority: –Decide on the exact use of the model –Identify incentives created

GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona May Conclusions For the utility: –Fundamentally altered regulation environment –Possible to influence allowed income through outages –Actual costs external to model –Managing costs – a challenge