Incorporating Quality of Service into Incentive-based Regulation Juan Rivier Florence School of Regulation Workshop Improving and Extending Incentive-based Regulation in the Energy Sector Florence, 24 November 2006

FSR – Incentive based regulation – Incorporating Quality of Service - 1 Contents Introduction Interruptions EVC functions Continuity of supply regulation

FSR – Incentive based regulation – Incorporating Quality of Service - 2 Introduction Interruptions EVC functions Continuity of supply regulation Contents

FSR – Incentive based regulation – Incorporating Quality of Service - 3 Introduction: quality of service Quality of service Commercial quality Supply technical quality –Power quality –Continuity of supply

FSR – Incentive based regulation – Incorporating Quality of Service - 4 Introduction: continuity of supply Continuity = Reliability Limit of 3 minutes –To isolate permanent faults (that need some repair) from the rest 95% of total interruptions have their origin within the distribution network –Rest in Generation + Transmission Highly linked to the investments and operation and maintenance of the distribution network

FSR – Incentive based regulation – Incorporating Quality of Service - 5 Introduction: new regulatory framework Changes in the regulatory framework of power systems Distribution: natural monopoly New regulatory framework centered in costs reduction and efficiency increase –Price or revenue cap type of regulation –Negative perspective for quality of service evolution

FSR – Incentive based regulation – Incorporating Quality of Service - 6 Introduction Interruptions EVC functions Continuity of supply regulation Contents

FSR – Incentive based regulation – Incorporating Quality of Service - 7 Networks are formed by elements –lines, transformers, isolators, etc. Each element has a fault rate –An element can fail due to several reasons The failure of one element implies: –Fault isolation –Fault repair –Supply reconnection  Supply interruption Interruptions: distribution networks

FSR – Incentive based regulation – Incorporating Quality of Service - 8 individuals  Number, average duration, ENS –Advantage: measures the quality level offered to each individual client –Disadvantage: necessary means to measure them system  TIEPI, NIEPI, SAIDI, SAIFI, IKR, ENS –Advantage: capacity to represent the system quality level in a compact way –Disadvantages: can hide low quality areas Interruptions: reliability indexes Two main type of reliability indexes

FSR – Incentive based regulation – Incorporating Quality of Service - 9 –Continuity depends on the fault rate of each element of the network (quality of each element) –Operation and maintenance does affect the fault rate –There are investment in quality improvement Interruptions: investments Continuity  Investments Distribution company as the main responsible for quality of supply:  Investment and operation and maintenance policy

FSR – Incentive based regulation – Incorporating Quality of Service - 10 Interruptions: Improvement measures Planning stage Operation & maintenance Investments for quality improvement 1)Increase number of substations and reduce distances 2)Reliability improvement of the network elements 3)To mesh the network 4)Increase operation & maintenance crew and the available tools 5)Signalization equipment installation 6)Isolating & switching equipment installation 7)Distribution network automation

FSR – Incentive based regulation – Incorporating Quality of Service - 11 Investment optimization Cost curve versus continuity level Multi-attribute optimization problem Continuity € Distribution investment costs

FSR – Incentive based regulation – Incorporating Quality of Service - 12 Investment optimization and Network Reference Models Network Reference Models can be used to determine such curve Regulator can know –what should be the quality of service attainable with a specific network –Or, what network is needed to provide a pre- specified quality of service

FSR – Incentive based regulation – Incorporating Quality of Service - 13 Índice Introduction Interruptions EVC functions Continuity of supply regulation

FSR – Incentive based regulation – Incorporating Quality of Service - 14 Interruptions: EVC functions Most common one: ENS Costs of the Distribution Company (DISCO) + Costs of the customer –Only takes into account duration and consumption Complex EVC: duration + number of int. The continuity of supply has an economic value:  Customers interruptions costs  EVC Functions (Economic Value of Continuity of supply)

FSR – Incentive based regulation – Incorporating Quality of Service - 15 Introduction Interruptions EVC functions Continuity of supply regulation Contents

FSR – Incentive based regulation – Incorporating Quality of Service - 16 Distribution: natural monopoly Regulation has to replace competition –Offered quality of service should be related to the remuneration –Offered quality of service = socio-economic optimum –Mimimum guaranteed level to all customers It is necessary to have –Transparent, objective and clear rules –Integrated within the DISCOs remuneration Distribution: objectives

FSR – Incentive based regulation – Incorporating Quality of Service - 17 Distribution: Optimum Quality Level

FSR – Incentive based regulation – Incorporating Quality of Service - 18 Revenue cap regulatory scheme Basic remuneration  Basic continuity level Adapt remuneration to the offered quality level –Incentives/penalizations scheme Guaranteed individual level of continuity –Penalizations in case of non-compliance Market zonification –Each market has its own OQL Distribution: regulatory proposal

FSR – Incentive based regulation – Incorporating Quality of Service - 19 To adapt remuneration to the offered quality level Linear incentives/penalizations with offered continuity of supply Incentives/penalizations coefficients should be equal to slope at the OQL = K  Guarantees the Net Social Cost  Assign equitably the benefits between all the agents Distribution: incentives/penalizations

FSR – Incentive based regulation – Incorporating Quality of Service - 20 Distribution: incentives/penalizations

FSR – Incentive based regulation – Incorporating Quality of Service - 21 Incentives/penalizations does not guarantee a minimum level to all customers Individual indexes –Direct Compensations to customers that did not have the minimum guaranteed levels –Differentiation between voltage levels and supply zone –Should be at least equal to immunization costs of the customer Distribution: minimum levels

FSR – Incentive based regulation – Incorporating Quality of Service - 22 Distribution: schemes combination (i)

FSR – Incentive based regulation – Incorporating Quality of Service - 23 Distribution: schemes combination (ii)

FSR – Incentive based regulation – Incorporating Quality of Service - 24 Distribution: zonification Market division into areas defined by objective criteria based on the market Urban (municipalities: customers>10.000) Semi-urban (municipalities: 1.000>customers>10.000) Rural (municipalities: customers<1.000) Each zone has its own OQL –DISCO investment costs –Customers lack of quality costs