Per AGRELLPeter BOGETOFTKVL, EconomicsDenmark

THE SWEDISH REGULATORY MODEL: Efficiency and Network Utility

(c) AGRELL, KVL 2

OUTLINE

YARD-STICK COMPETITION REGULATORY FRAMEWORKDEA

– Examples, TE, SE, CE– Modelling principles

NETWORK UTILITYDEA MODELS (SR, LR)INCENTIVE SYSTEM

(c) AGRELL, KVL 3

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

(c) AGRELL, KVL 4

STEMSWEDISH NATIONAL ENERGY ADMINISTRATION

CONCESSION GRANTING

MONITORINGDISSEMINATING

(c) AGRELL, KVL 5

REGULATORY FRAMEWORK

ELECTRICITY ACT (1992)– Ch 4, § 1

“Fair and objective tariffs”“Reasonable rate of return”

– Ch 4, § 3Differentiation between concessionsNo differentiation within concession

REGULATIONS [e.g., Prop 1993/94:162)– Comparative evaluation of tariffs

(c) AGRELL, KVL 6

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

(c) AGRELL, KVL 7

OWNERSHIP

Public Profit49%

Public Non-Profit11%

Private24%

Cooperatives11%

Other5%

(c) AGRELL, KVL 8

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

(c) AGRELL, KVL 9

Why DEA?

DATA ENVELOPMENT ANALYSISCharnes, Cooper och Rhodes (1978)

Established method to estimate optimal production and lowest cost by best-practice observations.

– PRODUCTIVE EFFICIENCY– OBSERVED DATA

(c) AGRELL, KVL 10

DEA PROJECT GROUP

Per AGRELL associate professorPeter BOGETOFT professor

Birgitta SJÖBERG STEMRoger HUSBLAD STEMLars ERIKSSON STEM

Reference group SVEL, et al.

(c) AGRELL, KVL 11

EXAMPLE 1

Distributor A B C k

Operating cost (Mkr) 72.5 80 140 120

Deliv power (MWh) 1114.5 1379 1500 1200

Benchmark

Cost/MWh 65 58 93 100

Is k an inefficient utility?Who is efficient?Who are the peers to k?

(c) AGRELL, KVL 12

OBSERVATIONS

INPUT, MSEK, Operating costs

OUTPUT, MWh, Delivered energy

A

B

C

k

120

1 400

1 200

(c) AGRELL, KVL 13

EFFICIENCY FRONTIER

A

B

C

k

120

75

1 200

1 400

OUTPUT, MWh, Delivered energy

INPUT, MSEK, Operating costs

(c) AGRELL, KVL 14

DECOMPOSING EFFICIENCY

TECHNICAL EFFICIENCY– To avoid waste and slack

SCALE EFFICIENCY– To operate at the right scale

COST EFFICIENCY– To apply least cost technology

(c) AGRELL, KVL 15

TECHNICAL EFFICIENCY

A

B

C

k

120

75

1 200

1 400

62,5%

TE-IN = 75/120 = 62,5%

OUTPUT, MWh, Delivered energy

INPUT, MSEK, Operating costs

(c) AGRELL, KVL 16

SCALE EFFICIENCY

A

B

C

k

120

70

1 200

75

SE-IN = 70/75 = 93%

OUTPUT, MWh, Delivered energy

INPUT, MSEK, Operating costs

(c) AGRELL, KVL 17

INFORMATION TE/SE

TECHNICAL EFFICIENCY 62,5%SCALE EFFICIENCY 93%

INPUT TARGET(S)– Operating costs

75 MSEK (-45)

ROLE MODELS– A (66%) and B (33%)

(c) AGRELL, KVL 18

EXAMPLE 2

Distributor AX BX CX k

Operating cost (Mkr) 72.5 80 140 120

Labor (kh) 87 77 70 135

Deliv energy (MWh) 1200 1200 1200 1200

Total cost (Mkr) 90 95.4 175 187.5

Partial measures

Labor/MWh 73 64 58 113

Op.cost/MWh 60 66 117 100

Cost/MWh 75 80 146 156

(c) AGRELL, KVL 19

COST EFFICIENCY

Operating cost, MSEK

Labor, kh

AX

BX

CX

k135

120

BUDGET = 63 MSEK

84

75

CE = min Budget/Budget k = 63/187,5 = 33,6%

BUDGET = 187 MSEK

35

140

(c) AGRELL, KVL 20

DEA COST EFFICIENCY

r

yy

nizz

xx

wxwzyC

n

i

ii

iii

n

i

ii

x

DEA

,

,...,1

s.t.

min,

1

1

,

(c) AGRELL, KVL 21

INFORMATION CE

TEKNISK EFFEKTIVITET 62,5%KOSTNADSEFFEKTIVITET 33,6%COST TARGETS

– Operating costs Staff(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:

(c) AGRELL, KVL 22

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

642

531kk

High

k

Lowi InstPowerkNetkNetkC

(c) AGRELL, KVL 23

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)

(c) AGRELL, KVL 24

1. Concession granting

“Eligibility” according to EAch 2

DEA offers

Concession area (9 §) Merger gains, costnorms

Operator: gernerally (10 §) Panel data

Operator: specifically (10 §) Verifiable technology,inputmix

(c) AGRELL, KVL 25

2. Monitoring

Monitoring (EA ch 4 §1 ) DEA offers

“Fair” costs Cost norms, lowinformation rents

“Objective” tariffs -

“Reasonable” profit Observed technologies,participation

(c) AGRELL, KVL 26

3. Dissemination

Activity DEA offers

Learning Real targets, norms,peers

Structural development Scale econ, mergergains

Self-regulation Public efficiency nroms,benchmarks, politicalreaction

(c) AGRELL, KVL 27

REGULATORY OBJECTIVES

TRANSPARENCY Dissemination

CONSISTENCY Modelbased

STABILITY Historical physical data

FAIRNESS Exogenous factorsAnnual frontiers

(c) AGRELL, KVL 28

Ex post REGULATION

1999 2000 2001

Prel. tariffs

REVENUES

ANNUAL REPORTS

Monitoring period 1999

(c) AGRELL, KVL 29

MODELLING PRINCIPLE: controllability!

SHORT RUNSHORT RUN

VARIABLE INPUTVARIABLE INPUT LONG RUNLONG RUN

EXOGENOUS INPUTEXOGENOUS INPUT

OUTPUTOUTPUT

FIXED INPUTFIXED INPUT

(c) AGRELL, KVL 30

ACTUAL COSTS

Transmission

23%

Losses5%

O&M19%

Metering4%

Adm8%

Depr14%

Interest8%

Profit19%

O&M39%

Metering8%Adm

15%

Profit38%

18,5 GSEK 8,1 GSEK

(c) AGRELL, KVL 31

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

(c) AGRELL, KVL 32

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

(c) AGRELL, KVL 33

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

(c) AGRELL, KVL 34

POTENTIAL INCENTIVE SYSTEM

“Green” operator– Full “reasonable” profit (ROE)

“Yellow” operator– ROE = (riskfree rate)CE

“Red” operator– Potential audit by STEM– ROE = 0%

(c) AGRELL, KVL 35

“ANNUAL ECONOMIC NET-INSPECTION”

Kort sikt Besparingsmål Reduktion Nyckeltal Lång siktNätbolag CE-SR Förebilder DriftK RKA DriftK RKA DK/LEV RKA/LEV CE-LREnköping elnät ELNÄT AB 100.0% Förebild för 23 lev 20.30 8617.00 0.00 0.00 0.12 49.10 98%Sandhult-Sandareds Elektriska ek100.0% Förebild för 34 lev 7.79 3585.00 0.00 0.00 0.15 70.65 85%Uppsala Elnät AB 100.0% Förebild för 28 lev 101.97 49445.00 0.00 0.00 0.09 45.58 100%…..Degerfors Energinät AB 95.4% Lessebo (0.26) Kungsbacka (0.62) 70 (0.11) 9.32 5030.29 0.45 810.71 0.12 73.55 80%Fagersta Elkraft AB 95.1% Smedjebacken (0.77) Enköping (0.12) 198 (0.07) 216 (0.03) 16.60 6607.54 0.86 1373.46 0.13 59.83 87%…..Vattenfall Bohus-Dal Elnät AB, V46.8% Luleå (0.34) Västerås (0.44) 223 (0.17) 227 (0.05) 104.49 57904.76 119.02 87480.24 0.19 126.19 36%Vattenfall Norrnät AB (Västerbot45.6% Luleå (0.68) Västerås (0.21) 223 (0.10) 227 (0.02) 71.97 59157.37 86.00 112655.63 0.16 171.47 43%

Green = OK

Yellow = Remark

Red = Audit?

(c) AGRELL, KVL 36

CONCLUSION

“Light-handed regulation”DEA operational in STEM monitoring

– Self-regulation– Incentive system– Auditing priorities

Legal considerationsPolitical considerations