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[en] The deregulation of the electricity sector in the NordPool area has largely been a success story in terms of market organization and responsiveness. The joint market and the tight cooperation among the TSOs serve as an international benchmark in terms of transparency and market efficiency. However, the regulation models for the residual distribution network monopolies are surprisingly heterogeneous in terms of character, instruments and application. For primarily historical and institutional reasons, the Nordic countries have chosen different methods to regulate the sector, with interesting differences also in industrial structure. Whereas Finland and Sweden long maintained a 'light-handed' ex post approach based on enforced self-regulation, Norway adopted an ex ante increasingly high-powered revenue cap regime based on frontier analysis methods (DEA). Denmark, where the sector is dominated by cooperatively owned distributors, opted for high-powered model based on simple regression tools (COLS). In this paper, we present findings from a joint Nordic study on the challenges to the heterogeneous regulation models in the presence of increasing consolidation and supra-national regulatory convergence from the IEM directives. Based on an analysis based on surveys among stakeholders in the four countries, we investigate the feasibility and potential properties of a common Nordic regulation model. The paper is illustrated with a new Nordic operating efficiency analysis for the area, based on frontier analysis, showing the relative and absolute cost differences in the current decentralized regime. (Author)
[en] Recently, several articles (Cullmann, 2012; Agrell et al., 2014; Filippini and Orea, 2014; Llorca et al., 2014) address the issue of benchmarking decision making units with different technologies by using latent class models. This method groups units that have similar technology for better comparison. Under this scheme, there are two implicit assumptions: First, that each class reflects a unique technology where its elements are not outliers. Second, classes are assumed to be stationary and fixed. If this assumption is violated, the classification is transient and time-dependent, inadequate for the regulatory use suggested in the seminal papers. We apply latent class models to classify Swedish electricity distributors under different specifications. In most of the models, we identify one large class with approximately 78.4% of the DMU's and two small classes with 7.4% and 14.2% respectively. Moreover, most of small classes elements switch between categories. We contrast our parametric results with nonparametric outlier detector methods and find a relationship between identified outliers and the elements of smaller residual classes. We believe that our work is an important caveat to the adoption of latent class modelling as an alternative or remedy for conventional models, relying on a homogeneous reference set. - Highlights: • Yardstick regulation of energy networks needs robust cost models. • Benchmarking models can be used only if heterogeneity among operators is controlled. • In regulation, rules for partitions must be stationary, unique and endogenous. • Latent class models are applied to Swedish electricity distribution data. • Latent class models are not stationary or unique from outliers.
[en] Grid infrastructure managers worldwide are facing demands for reinvestments in new assets with higher on-grid and off-grid functionality in order to meet new environmental targets. The roles of the current actors will change as the vertical interfaces between regulated and unregulated tasks become blurred. In this paper, we characterize some of the effects of new asset investments policy on the network tasks, assets and costs and contrast this with the assumptions of the current economic network regulation. To provide structure, we present a model of investment provision under regulation between a distribution system operator and a potential investor–generator. The results from the model confirm the hypothesis that network regulation should find a focal point, should integrate externalities in the performance assessment and should avoid wide delegation of contracting-billing for smart-grid investments. - Highlights: ► We review regulatory solutions for smart-grid and DER investments. ► What matters more than upfront incentives is organization and delegation. ► We model regulated investment under private information by a generator or a DSO. ► Highest welfare for high-powered incentives and centralized information. ► Market approaches likely to give poor outcomes for this case.
[en] Economic network regulation increasingly use quantitative performance models (from econometrics and engineering) to set revenues. In theory, high-powered incentive regulation, such as revenue-caps, induces firms to cost-efficient behavior independent of underlying model. However, anecdotal evidence shows regulated firms occasionally maintaining cost-inefficiency under incentive regulation even under slumping profitability. We present a model for firm-level efficiency under a regime with a probability of failure explaining this phenomenon. The model is based on the hypothesis that the regulatory choice of method can be associated with intrinsic flaws leading to judicial repeal and replacement of it by a low-powered regime. The results show that the cost efficiency policy is proportional to the type of firm (cost of effort), value of time (discount factor) and the credibility of the method (risk of failure). A panel data set for 2000–2006 for 128 electricity distributors in Sweden is used to validate the model predictions (radical productivity slowdown, failing profitability and efficiency) at the launch and demise of a non-credible regulation method. The work highlights the fallacy of viewing incentive regulation as a method-independent instrument, a result applicable in any infrastructure regulation. - Highlights: • Incentive regulation relies on fixed revenue for operators. • In existing theory the efficiency-inducing effect is model-independent. • A dynamic game exposes the firm to a regulation that may fail. • One optimal policy is to pad cost and wait for the failure. • The Swedish DSOs show this policy 2003–2006, when the regime failed.