PROPOSAL OF PAPER

Main author information
Surname / Last name: / Company Name and address for correspondance
Jordi Dolader i Clara / Comisión Nacional de Energía
C\ Marqués del Duero, 4
28001 MADRID
SPAIN
Tel. : / 91 432 96 40
Fax : / 91 577 48 36
E-mail : /

TITLE:

reMUNERATING DISTRIBUTION IN SPAIN

Supporting text

The prime objectives of any remuneration procedure for electricity distribution are: to set an appropriate revenue level for companies carrying out that activity; to implement a remuneration evolution mechanism that provides suitable medium and long-term incentives and regulatory stability for the companies so that they can effectively manage their business.

From the regulatory agency point of view, it is needed to take into accounts the main characteristics of the electric energy distribution activity.

Economies of scale, cost subaditivity and network economies should be common concepts kept in mind by the regulatory agency, when any change in the normative is being considered for the next future.

Regulatory agencies should consider and pondering correctly, the equilibrium between customer and firm interests, caring always about efficiency and benefits derived from the activity. Any new rule in the activity will cause a distortion in the activity and will have regulatory costs, which should be compared with savings from the efficiency gains and from gains obtained by the diminishing of the possibility of natural monopoly abuses.

The new regulatory scheme, which we are proposing to the Spanish Electrical Sector and will be implemented in the activity it is base primarily on an Incentive Regulation or Performance Based Regulation scheme.

Main characteristic of this regulatory scheme, is that the remuneration is used as a tool by the regulatory agency in order to give right incentives to the firms in the development of the activity. It decouples profits from firm´s costs •fixing the firms remuneration for a period, and it´s update by a performance procedure.

This procedurement gives to the firm, incentives to reduce and control its costs because every cut down in its cost, will automatically be transferred as an increased in profits during the regulatory period. On the other side, the main disadvantages are problems for the Quality of Supply derived from the more costs control and the ratched effect to the firms.

The amount of revenue due to a company that distributes electricity should be worked out in line with the prudently costs incurred by that company, which are unknown by the regulator.

Consequently, if the remuneration procedure is to remunerate and send out the right signals to the distribution companies, it needs to take into account the greatest possible volume of auditable sources of information for the activity.

The possible sources of information are: cost accounting, an inventory of the installations making up the network, information on the location and characterisation of demand and a tool to analyse the technical efficiency of the evolution of the network.

Regulatory accounts will enable a distinction to be made by company and geographical area between the items making up the cost of carrying out the activity following a scheme like the one shown the sixth slide of my presentation. This sixth slide shows an approximation of the regulatory account elaboration procedurement.

About the reference network model, this technical tool chosen must deal with all the distribution companies objectively so that the network and its evolution can be analysed under different distribution scenarios: location of customers, orographic characteristics, appearance of cascade distribution, etc.

Once the results obtained for each one of the companies have been analysed with the new regulatory tools available, the remuneration base can be adjusted. Thus, an initial remuneration is set for each company for the first year and that amount becomes the base year for the following four years.

The remuneration evolution parameters shown in figure bellow will be set permanently for years following on from the base year. If no pre-defined significant changes take place in the business environment, these remuneration and update will become permanent.

As far as increased activity is concerned, the remuneration due will be worked out on the basis of the expansion plans announced by the companies for forthcoming years which should be duly verified by the regulator, considering activity costs inductors, identified using all the information available of the activity by the regulatory agency.

In the case of service quality incentives, bonuses/penalties are envisaged for when the companies achieve/fail to achieve the service quality standards set by the regulator. Their exact amount will depend on the volume of remuneration obtained during the previous period.

Actual level of losses of each distribution company and the requirements set for their reduction will be taken into account and bonuses / penalties attached to company remuneration in line with fulfilment / non-fulfilment of the requirements set for it will be established.

The formula is completed with the specific consideration of the possible variations there may be in those parameters that must be estimated to establish individualised remuneration for each company.

As a result of this regulation, a company knows what its remuneration is for the starting or base year and can forecast the evolution of that remuneration for following years (taking into account efficiency requirements) on the basis of the key indicators directly affecting its business and that the distribution company knows best.

Once the remuneration procedurement has been ended, it will be set for the following period by making the full calculation of the base revenue and starting the whole remuneration procedure off again.

Co-Author(s) Name / Company / E-mail
Luis Maqueda Hernando / Comisión Nacional de Energía /
Antonio Candela Martínez / Comisión Nacional de Energía /