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Performance-based regulation of energy utilities in Central Europe and Baltic states

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Presentation of the paper "Performance-based regulation of energy utilities in Central Europe and Baltic states" at the International Conference on Applied Business and Economic, Piraeus, 2011.

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Performance-based regulation of energy utilities in Central Europe and Baltic states

  1. 1. Performance-based regulation of energy utilities in Central Europe and Baltic states Ondřej MACHEK Department of Business Economics Faculty of Business Administration University of Economics in Prague Czech Republic
  2. 2. How to regulate energy prices? • Allow a company to cover eligible expenses and earn a reasonable return on capital Revenue requirements RR = O&M + T + D + (RB × RoR) RR O&M T D RB RoR revenue requirements operation&maintenance costs taxes depreciation and amortization rate base (total assets – accumulated depreciation) rate of return (usually WACC) 2 Ondřej MACHEK 28th May 2011
  3. 3. Cost-of-service regulation (COS) • • Classical method Simple and straightforward • Principle: sum up the expenses, add the rate of return and calculate the tariffs • • • Does not simulate competitive pressures Incentive to overinvest and to invest imprudently Tariffs must be reviewed frequently 3
  4. 4. Performance-based regulation • • • Reduce the negative impact of information asymmetries Incentive to reduce costs in order to earn profits Price cap or revenue cap • • Price cap: P(t) = (1 + RPI – X) . P(t-1) Revenue cap: R(t) = (1 + RPI – X) . R(t-1) - RPI -X • inflation rate industry productivity growth If the price or revenue cap is based on a company’s own costs, then the negative effects of COS regulation (overinvestment, gold plating etc.) are not fully eliminated 4
  5. 5. Regulatory benchmarking Idea of benchmarking: base RR not on a firm‘s own costs, but on a relative efficiency measurement Deterministic methods Stochastic methods Data envelopment analysis N(0,σ 2) 5 Ondřej MACHEK 28th May 2011
  6. 6. Yardstick competition • • • Set the cap only with respect to the performance of other companies „Pure benchmarking“ Difficult to implement 6
  7. 7. Summary of regulatory methods 7
  8. 8. Performance-based Regulation in Central Europe and Baltic States • • • Former member states of the Eastern Bloc Short history and a low experience Regulatory methods vary 8
  9. 9. Czech Republic • • • • The first regulatory period started in 2001 and lasted three years The second and the third regulatory period had five years Revenue-cap No benchmarking has been used in tariff setting 9 Ondřej MACHEK 28th May 2011
  10. 10. Slovakia • • • • • The first regulatory period started in 2003 (revenue-cap) Three years long regulatory periods The fourth regulatory period (2012-2016) will be five-year long In the third regulatory period (20092011), the methodology changed to a price-cap scheme No benchmarking has been used in tariff setting 10 Ondřej MACHEK 28th May 2011
  11. 11. Hungary • • • • First regulatory period in 1997 Four-year long regulatory periods Price-cap MEH is using a special non-frontier method of benchmarking 11 Ondřej MACHEK 28th May 2011
  12. 12. Poland • • • • • • First regulatory period in 2001 Three-year long regulatory periods Revenue-cap Benchmarking only in electricity distribution Gas transportation and distribution – no benchmarking Bayesian random effect model (a SFA method) has been used 12 Ondřej MACHEK 28th May 2011
  13. 13. Slovenia • • • • • • First regulatory period in 2003 Before, tariffs had been set by the government below the cost level Price-cap For electricity distribution and transmission, the regulatory period lasts three years and modern benchmarking is used For gas distribution and transportation, the period lasts only one year and no benchmarking is used The methodology used for benchmarking has is a crosscheck of both COLS and DEA 13 Ondřej MACHEK 28th May 2011
  14. 14. Estonia • • • Three-year regulatory periods both for electricity and gas sectors (from 2006) Price-cap The methodology used for benchmarking has been the COLS method 14 Ondřej MACHEK 28th May 2011
  15. 15. Lithuania • • • The regulatory periods last three years (from 2002) A hybrid cap method • 50/50 price and revenue cap As there are only two distribution companies, no benchmarking has been used, due to a lack of data 15 Ondřej MACHEK 28th May 2011
  16. 16. Latvia • The regulatory period beginning years differ for electricity and gas sectors. • • Price-cap method The Latvian regulator has been applying a non-frontier TFP method (Tornquist TFP indices) for benchmarking 16 Ondřej MACHEK 28th May 2011
  17. 17. Summary Country Czech Republic Regulatory period length (years) 3, 5, 5 Slovakia 3, 3, 3, 5 Poland 3, 3, 3, 3 Hungary 4, 4, 4, 4 Slovenia 3, 3, 3 Estonia 3, 3 Lithuania Latvia 17 3, 3, 3, 3 3, 3, 3
  18. 18. Conclusion • • • • • All countries apply some form of performance-based regulation Price-cap is the most widely used method Except of the Czech Republic, Slovakia and Lithuania, all countries use benchmarking methods in tariff setting Most surveyed countries use three-year regulatory periods Possibilities of development: • • • • Reduce market concentration to obtain a larger sample of firms Unbundle large vertically integrated companies Cooperate with the private sector in order to establish an acceptance of the regulation results Harmonize regulatory frameworks to reduce the disparity of companies 18 Ondřej MACHEK 28th May 2011
  19. 19. Thank you for your attention 19 Ondřej MACHEK 28th May 2011

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