1. GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona 12-15 May 2003 1 The challenge of regulating natural monopolies in electrical distribution – experices from Sweden Magnus Gammelgard Royal Institute of Technology / KTH Stockholm, Sweden magnusg@ics.kth.se

2. GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona 12-15 May 2003 2 Agenda Regulation of Swedish Distribution Utilities Network Performance Assessment Model The model and the regulatory authority Implications on utilities Conclusion

3. GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona 12-15 May 2003 3 The regulation of Swedish local distribution utilities Swedish market deregulated in 1996 –Including ~ 5 million domestic customers –~ 200-250 local distribution utilities Ex post regulation New electricity act in 2002 A regulatory authority with limited resources Looking at the utilities from the outside

4. GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona 12-15 May 2003 4 Objectives and goals of the regulation

5. GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona 12-15 May 2003 5 A shift for utilities What used to be: Profit Tariff Costs Resulted in Tariff = Costs + Profit

6. GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona 12-15 May 2003 6 A shift for utilities Has become: Profit ? Tariff Costs Limits Profit = Tariff - Costs

7. GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona 12-15 May 2003 7 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

8. GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona 12-15 May 2003 8 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

9. GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona 12-15 May 2003 9 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)

10. GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona 12-15 May 2003 10 Creation of fictitious network Voltage level 1 Voltage level 2 Voltage level 3 Voltage level 4 Boundary Point

11. GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona 12-15 May 2003 11 Valuation of the network Cost of delivering electricity to customers Valuation of reliability level

12. GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona 12-15 May 2003 12 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

13. GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona 12-15 May 2003 13 Implications on utilities – three dimensions Requirements in order to use the model Changed fundamental principles Implications on the businesses

14. GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona 12-15 May 2003 14 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

15. GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona 12-15 May 2003 15 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

16. GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona 12-15 May 2003 16 Implications on the businesses Possibilities to increase incomes Limited possibility to influence Possible to influence through outages

17. GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona 12-15 May 2003 17 Evaluating investments –If possible to assess changes in input data –The changed Network Performance is a valuation of the investment Implications on the businesses

18. GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona 12-15 May 2003 18 Implications on the businesses Decrease costs –External to model –Evaluate savings compared to effects on the Network Performance

19. GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona 12-15 May 2003 19 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

20. GAMMELGARD SE Session 5 – Block 2 – Paper 39 Barcelona 12-15 May 2003 20 Conclusions For the utility: –Fundamentally altered regulation environment –Possible to influence allowed income through outages –Actual costs external to model –Managing costs – a challenge