per agrell peter bogetoft kvl, economics denmark the swedish regulatory model : efficiency and...
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Per AGRELLPeter BOGETOFTKVL, EconomicsDenmark
THE SWEDISH REGULATORY MODEL: Efficiency and Network Utility
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(c) AGRELL, KVL 2
OUTLINE
YARD-STICK COMPETITION REGULATORY FRAMEWORKDEA
– Examples, TE, SE, CE– Modelling principles
NETWORK UTILITYDEA MODELS (SR, LR)INCENTIVE SYSTEM
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(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
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(c) AGRELL, KVL 4
STEMSWEDISH NATIONAL ENERGY ADMINISTRATION
CONCESSION GRANTING
MONITORINGDISSEMINATING
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(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
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(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
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(c) AGRELL, KVL 7
OWNERSHIP
Public Profit49%
Public Non-Profit11%
Private24%
Cooperatives11%
Other5%
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(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
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(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
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(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.
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(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?
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(c) AGRELL, KVL 12
OBSERVATIONS
INPUT, MSEK, Operating costs
OUTPUT, MWh, Delivered energy
A
B
C
k
120
1 400
1 200
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(c) AGRELL, KVL 13
EFFICIENCY FRONTIER
A
B
C
k
120
75
1 200
1 400
OUTPUT, MWh, Delivered energy
INPUT, MSEK, Operating costs
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(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
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(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
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(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
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(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%)
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(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
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(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
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(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
,
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(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:
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(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
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(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)
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(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
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(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
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(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
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(c) AGRELL, KVL 27
REGULATORY OBJECTIVES
TRANSPARENCY Dissemination
CONSISTENCY Modelbased
STABILITY Historical physical data
FAIRNESS Exogenous factorsAnnual frontiers
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(c) AGRELL, KVL 28
Ex post REGULATION
1999 2000 2001
Prel. tariffs
REVENUES
ANNUAL REPORTS
Monitoring period 1999
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(c) AGRELL, KVL 29
MODELLING PRINCIPLE: controllability!
SHORT RUNSHORT RUN
VARIABLE INPUTVARIABLE INPUT LONG RUNLONG RUN
EXOGENOUS INPUTEXOGENOUS INPUT
OUTPUTOUTPUT
FIXED INPUTFIXED INPUT
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(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
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(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
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(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
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(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
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(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%
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(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?
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(c) AGRELL, KVL 36
CONCLUSION
“Light-handed regulation”DEA operational in STEM monitoring
– Self-regulation– Incentive system– Auditing priorities
Legal considerationsPolitical considerations