study on tariff design for distribution systems

StudyontariffdesignfordistributionsystemsFinalReport

Preparedfor:

DIRECTORATEGENERALFORENERGY

DIRECTORATEBInternalEnergyMarket

28January2015

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Tableofcontents

1. EXECUTIVESUMMARYANDMAINRESULTS.................................................................1

2. TASK 1 INDICATORS OF THE COSTEFFECTIVENESS OF THE DSOS AND THEIROPERATIONALEFFICIENCY..........................................................................................7

2.1. Introduction.........................................................................................................72.2. Criteriaforidentifyingandselectingindicators..................................................102.3. Proposedrelevantinputs...................................................................................112.4. Proposedindicators...........................................................................................22

3. TASK2EUWIDEPRINCIPLESFORTARIFFREGULATION............................................333.1. PolicyobjectivesandtheroleofDSOs................................................................333.2. Policyobjectiveslinkedtodistributiontariffs.....................................................343.3. Principlesoftariffregulation..............................................................................343.4. EUwideprinciples..............................................................................................38

4. TASK3 ANALYSISOFTHEDISTRIBUTIONTARIFFSANDTHEIRMETHODOLOGIESORTERMSANDCONDITIONSAPPROVEDBYREGULATORYAUTHORITIES...........40

4.1. Introduction.......................................................................................................404.2. Industrystructure..............................................................................................404.3. Revenuesettingmechanism...............................................................................424.4. Tariffs.................................................................................................................614.5. Networkdevelopment.......................................................................................774.6. Embeddedgeneration........................................................................................824.7. Metering............................................................................................................85

5. TASK 4 IDENTIFICATION OF BEST PRACTICES TO CALCULATE AND DESIGNDISTRIBUTIONTARIFFS.......................................................................................91

5.1. Introduction.......................................................................................................915.2. Industrystructure..............................................................................................915.3. Revenuesettingmechanism...............................................................................915.4. Tariffs.................................................................................................................995.5. Networkdevelopment.....................................................................................1025.6. Otherrolesofdistributors................................................................................1045.7. Metering..........................................................................................................105

6. TASK5ANALYSISOFTARIFFSTRUCTURESOFDIFFERENTUSERGROUPS...............1066.1. Introduction.....................................................................................................1066.2. Roleofsettingthedistributiontariff................................................................1066.3. AnalysisoftheElectricityDistributionTariff.....................................................1076.4. AnalysisofGASDistributionTariff....................................................................128

7. TASK6RECOMMENDATIONSTOTHECOMMISSION...............................................178

APPENDIX1:COUNTRYREPORTS............................................................................................183

1. Executivesummaryandmainresults

ThisreportpresentstheresultsoftheStudyonTariffDesignforDistributionSystemscommissionedbyDGEnergytotheconsortiumofAFMercados,REFEandIndra.

The objective of the project is collecting information about regulatory schemes applied in theMember States to electricity and gas distribution, identifying best practices and developingrecommendation for theCommissionondesirable featuresofdistribution tariff regulation, in thelightoftheforeseeablechangesinthedistributionbusiness.

Inparticular,theconsortiumsmandateincludedthefollowingpiecesofwork.First,theconsortiumwas required to develop a set of indicators allowing to compare multiple aspects of gas andelectricitydistributionbusinessesacrossMemberStates,withtheultimatepurposeofassessingcosteffectiveness, quality of service and operational efficiency. We have developed indicators of:productsandservicessuppliedbythedistributors,qualityofservice,networktopologyandcost.WerefertheinterestedreadertoSection2ofthereportforthepresentationoftheseindicators.

Second,we were required to review and discuss principles driving the design of effective tariffregulationschemes.Wegroupedtheseprinciplesunderthreeheadings:systemsustainability,whichreferstotheabilityoftheregulatorysystemtoattractcapital inthe industry;economicefficiency,whichreferstotheabilityoftheregulatorysystemto inducecostminimization intheshortand inthelongterm;protection,whichreferstotheachievementofafairsplitofthesurplusgeneratedintheindustryamongthestakeholders,includinginparticularregulatedfirmsandconsumers.

Third,wewererequiredtocharacterizetheregulatoryschemesimplementedinallMemberStates,analyse theiroutcome in termsof tariff structures and levels, identifybestpracticesanddeveloprecommendationsfortheCommission.TothispurposeweadministeredaquestionnaireandadatarequesttoallEuropeannationalregulators.

Whiletheprojectfocusedonmethodological issues,wewereaskedtocollectdatafromregulatorson tariff levels for standard consumers and on distribution costs.We would like to stress thatassessingtherelativemeritsofregulatoryschemesimplementedindifferentcountriesbasedonthetariffandcostcomparisonspresented in this reportwouldbe inappropriate,as itwasbeyondourmandate to perform an empirical analysis of the factors affecting distribution cost and theirallocation among consumer types in theMember States. Such factors include, for example, thestructureofdistributionand transmissionnetworks, thedegreeofgaspenetration,costallocationmethodologies,distributorsresponsibilitiesandcompositionofthecustomerbase.

In the remainingof thissectionwehighlight thegeneral findingsofouranalysis, focusingon theirpolicy implications. The existing regulation of electricity and gas distribution tariffs is in mostMember States consistent with the traditional features of the distribution business, which weidentifyasthefollowing:

Little generation connected to distribution networks and inflexible demand, so that theprimaryroleofdistributionconsistsintransferringabasicallyunidirectionalpowerfromthetransmissionnetworktotheconsumerspremises,troughrelativelypassivenetworks;

Ensuring universal access to the service or a target network coverage, respectively forelectricityandgas,andcontinuityofsupplyarethemaindistributionoutput;

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Technology and network planning methodologies are consolidated, implying limiteduncertaintyoptimalinvestmentdecisionsandeaseofauditingbyregulators;

Very diverse industry structures amongMember States,with high fragmentation in somecountries.

The traditional features of the distribution business appear to be reflected in the structure andoutcomesofregulatorysystemscurrentlyimplementedinmostEuropeancountries.Inparticular:

WiththeexceptionofGreatBritain,current incentivebasedregulatoryschemesplace littleemphasisoncharacterizingtheoutputsdeliveredbythedistributor,butforqualityofserviceschemesinsomecountries;

Typicallydistributorsarenotexposed tovolume riskand to the risk that their investmentturnout tobe lessuseful thanexpectedwhen theyweredecided, forexamplebecauseoflowerthanexpecteddemand;

Revenuesettingmechanismsbasedonbenchmarkingare implemented incountrieswherethedistributionsectorishighlyfragmented;

Regulatorsand stakeholdersaregenerally less involved in thedecisionmakingprocessondistributionnetworkdevelopment,comparedtotransmission;

Traditional tariff structures reflecta situationof limitedavailabilityof informationoneachconsumersresponsibility incausingdistributioncostsandarealsoaffectedbyaffordabilityandfairnessconsiderations.

Asregardstheoutcomeofthetraditionalregulatorymodelstheanalysisofavailabledataonallowedrevenuesanddistributiontariffsshowsthat:

Distributiontariffstructuresbyusergroupsareverydifferentamongcountries.Forexample,theshareofdistributioncostpaidbyresidentialusersrangesfrom33%to69%forelectricityandfrom32%to86%forgas.

In most countries, the share of distribution revenues from tariff components based onenergy is large, resulting in an asymmetry between the structure of distribution costs(mostlyfixed)andthewaytheyarechargedtoconsumers;

Intheelectricitysectortheenergycomponentapplied tohouseholds isonaverage69%ofthetotalnetworkcharge.Thissituationiscommoninmostcountriesapartfromthree(TheNetherlands,SpainandSweden)wheretheenergychargeweightsbetween21%and0%.Inthecaseof industrialclientstheweightoftheenergycomponent isstilldominant (around60%forbothsmallandlargeindustrialclients)butthereismorevariabilityamongcountriesandthecorrespondingweightrangesbetween13%and100%;

Inthegassectortheenergycomponentappliedtohouseholdsisonaverage74%ofthetotalnetwork chargeand inall the countrieswithavailabledata itsweight ishigher than fixedcomponents. For large consumers the weight of energy component is lower than forhousehold consumer,while still accounting around 61%on average.As ithappens in theelectricitysector, in thecaseof largeconsumers there ismorevariabilityamongcountriesandthecorrespondingweightofenergycomponentsrangesbetween15%and100%;

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Unitdistributioncostsarevariableamongcountriesbothforelectricityandgas.Westress,however, that distribution cost differences are the result ofmultiple factors, which theregulatory scheme is justoneofand that investigating thecausesof suchdifferenceswasbeyondthepurposeofthisproject.DifferentDSOsare,infact,requiredtoprovidedifferentqualities of service; they serve different loads, accommodate different proportions ofdistributed generation and do not operate under comparable conditions in terms of, forexample,densityofpopulationconnected,andgeographicalconstraints,withan impactonnetworkdesignandoperations;

Unit distribution costs in almost all countries fallwithin the range 2035 EUR/MWh. Thevariability in termsofunit costper connectionpoint ishigher than theperMWhand thedifferentrelativepositionofcountriesconfirmsthedifferentcompositionofusertypologies,inparticularintermsofconsumptionlevels.

Inthegassectorthevariabilityofaveragecostshowsarangebetween2.17EUR/MWhand14.61EUR/MWh.

Thedistributionactivityiscurrentlygoingthroughmajorchanges,whichmayaffectthestructureofoptimalregulatoryschemes.First,an investmentcycle isbeingspurredbytheneedto increasethedistribution networks capacity to host an expanding fleet of renewable generators. Futureinvestmentsappeartodepartfromtraditionaldistributionupgradesinseveralrespects:

They involve innovativetechnologieswhosecostandperformancesaremoreuncertainandonwhichinformationasymmetriesbetweenregulatorsandfirmsmightbegreater;

Multipleoptions toachieve the same resultsareavailable, suchasdeploymentof storagecapacityor increasingdemandresponse,deployingsmart technologiesasanalternative toupgradinglinesandsubstations,distributingorcentralisingnetworkintelligence,developingnewtelecommunicationinfrastructuresorexploitingexistingones;

Distributioninvestmentdecisionsinteractwiththeoutcomeofdecisionsinareasbeyondthedistributorscontrol,suchasrenewableproductiontargetsornationaldeploymentstrategiesofITinfrastructures.

Second,thecontentofthedistributionbusiness isenriching,asdistributorstakeonresponsibilitiesrelated to dispatch of embedded generation and flexible loads, facilitation of retail competition,energyefficiency.

Suchchangesareaffectingthetermsofthetradeoffbetweenefficiencyandprotectionobjectivesindistributiontariffregulation.Regulatoryframeworksthat,inourview,aremosteffectiveinthenewenvironmentsharethefollowingfeatures,whichwepresentnextintheformofrecommendations.

Recommendation1:Distributorsshouldnotbeexposedtorisksrelatedtoeventsthatarenotundertheircontrol.Thisimplies,inparticular,thatdistributorsshouldnotbeexposedto:

Volume riskgiven their limitedcontrolonpowerandgasconsumption; this isa featureofregulatoryschemesalreadydeployedinmostMemberStateseitherbyadjustingtherevenueallowanceinthefollowingyearstooffsetvolumeeffectsorvialargelycapacitybasedtariffs.

Theriskofcostunderrecovery incase investmentsturnouttobeexpost lessusefulthanexpected.

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Recommendation 2: major distribution network investment decisions should be subject to astructuredandopenexantescrutinybystakeholdersandregulators.Theoutcomeofsuchscrutinywouldbe a thoroughly audited investment strategywhich consumers couldbe safely required toundertaketheriskof.Wenoteincidentallythatanopenandinclusivedecisionmakingprocesswouldeasecoordinationofdistributioninvestmentdecisionsandtheoutcomesofrelateddecisionmakingstreams.

Complex investmentapprovalproceedingsmayplaceanunjustifiedadministrativeburdenonsmalldistributorsand, if thedistribution sector ishighly fragmented,on the regulator; such costwouldultimatelybepassedontoconsumersviadistributiontariffs.Streamlinedscrutinyprocesses,possiblyboilingdown just to transparency requirements,couldbeenvisaged for investmentplansmeetingcertainpredefinedconditions,setbytheregulatorforexampleviabenchmarking.However,wearenot aware of countrieswith highly fragmented distribution industries inwhich extensive exantescrutiny is implemented. The relative merits of alternative mechanisms to govern networkdevelopmentinthatcontextarethereforelargelyuntested.

Recommendation 3: Financial incentives have proved very effective in aligning the distributorsobjectiveswiththeregulatorsand,ultimately,theconsumersonmatterssuchasqualityofserviceandcostminimisation.Thefollowingfeatures increasethepowerorreducethecostforconsumersofincentivebasedregulatoryschemes:

Use of all available information on the efficient costs of distributors. In this respect werecommend that the Commission promote regular publication of information and dataabout technical features, revenue setting methodologies, output targets and allowedrevenuessetfordistributorsinallMemberStates.Costunbundlingofactivitiesforwhichalargepartofcostscanbeassessedinisolationsuchasmeteringshouldbepromoted,asthisimprovesthequalityoftheinformationwhichincentiveschemescanbebasedon.

Focusonoutputs:multipleperformancedimensions,oroutputs,have tobeaddressedbyincentivebased regulatory schemes as distributors acquire increasing responsibilities.Effective financial incentives in this context canbeprovided viapremiums andpenaltiesrelated to theachievementofpredeterminedoutput targets.Targets shouldbe selectedsuch that theydirectly impacton thevalueof the servicedeliveredby thedistributor fornetwork users and, ultimately, consumers. We note incidentally that output basedmechanisms can be implemented on top of a baseline tariff and investment scenarioapprovedbytheregulatoralongthelinesofRecommendation2.

Focuson totalcostand long regulatoryperiods:settingallowed revenues in termsof totalcostsprovidesincentivestodistributorstoselecttheefficientcombinationofoperatingandcapitalcostsand toexploitanyopportunitiestocreatesynergieswithothersectors.Longregulatoryperiodsincreasethepowerofsuchincentives.

Incentives to innovation and intersectorial synergies: incentives fordistributors todeployinnovative technologies should bemainly a byproduct of regulatory schemes targetingoutputs, rather than being pursued through schemes targeting specific technologies orsolutions. Thiswould ensure that only innovation directly impacting on the value of theservice for network users be implemented and, more generally, that regulation betechnology neutral. The same recommendation holds for incentives to exploit synergiesbetweendistributioninvestmentsandthesupplyofnonenergylocalservices;

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Reopeningsandallowedrevenueindexation:allowedrevenueupdatesduringtheregulatoryperiodshouldbetriggeredonlybyverymajorevents,whoseoccurrenceandimpactoncostareclearlybeyondthedistributorscontrol.Somemajorcostitemsbeyondthedistributorscontrolareknowntobevariable intime.Whenrobust indexesofsuchcostsareavailable,thedistributorsallowedrevenuesshouldbeparametrized,inordertoreducetheriskbornebydistributors.

Recommendation4: efficientdistributiontariffsshouldbedesignedtosend longterm incrementalcostsignalstoconsumers.Ingeneral,thisrequiresthat:

Costs for consumer specific infrastructures be covered through standing charges orconnectioncharges;

Costs for shared infrastructures be split among network users based on each onescontributiontotheinfrastructurespeakload.

This recommendation isbasedon theassumptionwhichshouldbe investigatedempiricallyonacasebycasebasis thatdistributioncapacity shortagesareoptimallyaddressed throughnetworkupgrades and that therefore scarcity conditions indistribution are typically transitory. If, instead,congestions turnedout tobeapermanent featureofoptimallydimensioneddistribution systems,experience intransmissionandeconomictheorysuggestthatdynamicpricingsystemsarefarmoreeffectiveinrationingavailablecapacitythantimeofusetariffssetlongbeforerealtime.

Wearenotawareofanyapplicationsofdynamic charging todistribution services; therefore,anyassessment of the relative merits of alternative models is speculative. However, experience intransmissionpricingsuggeststhatschemesaddressingtransportationcapacityscarcityvialocationalenergypricedifferentiationaremoreeffectivethanschemesbasedondynamicnetworkcharges.

Thereportisorganisedasfollows.Section2presentsasetofindicatorsallowingthecharacterisationand comparison of the activities and performance of European electricity and gas distributors.Section3 contains thediscussionof theeconomicprinciplesgoverning tariff regulation.Section4containsouranalysisofthedistributiontariffsandtheirmethodologiesortermsandconditionsinEUMember States. In Section 5,we identify and discuss best practices on distribution tariff design.Section6 reports the resultsofouranalysisof the tariff structuresbynetworkusergroups inEUMemberStates.InSection7wedeveloprecommendationsfortheCommission.

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Aknowledgments

The authors acknowledge active involvement in the project of the European regulators, whosecontributionwentfarbeyondreplyingtothequestionnaires.

WearealsogratefulforcrucialinputsreceivedfrommembersoftheprojectssteeringCommittee:

ManuelSanchezJimenez,DGENERGY

KonstantinosStamatis,DGENERGY

NatalieMcCoy,CEER

IainMorgan,Ofgem

WernerFriedl,EControl

ValentineRoux,CRE

LuisManuelSchultz,Bundesnetzagentur

StefanoCaruggi,AEEGSI.

Finally, participants in a stakeholdermeeting, held in Brussels on November 18, 2014 providedvaluablecontributionstotheprojectbycommentingadraftversionofthisreport.

Disclaimer

ThisdocumenthasbeenpreparedfortheEuropeanCommission,howeveritreflectstheviewsoftheauthorsonlyandtheCommissioncannotbeheldresponsibleforanyusewhichmaybemadeoftheinformationcontainedtherein.

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2. Task1IndicatorsofthecosteffectivenessoftheDSOsandtheiroperationalefficiency

2.1. IntroductionThemeritsofassessingDSOcosteffectivenessandoperativeefficiency

ThistaskisbeingundertakenwiththeaimofsupportingtheEuropeanCommissioninanalysingDSOperformance and identifying policy options concerning electricity and natural gas distribution inEurope.

Thedevelopmentandapplicationofwelldesigned indicatorsofDSO inputs,outputsandcostshasseveralimportantmerits.

Firstly,indicatorscanrevealspecificandimportantdetailsofthestructureofadistributionnetwork.Given the substantial differences in distribution network structures between European countries,indicators can play a role in helping the Commission to gain a detailed understanding of thevariationsinnetworkstructuresthroughoutEurope.

Beyondhelpingtounderstandthedifferencesinphysicalnetworkstructure,welldesignedindicatorscanalsoshedlightonvariousdifficulttomeasurecharacteristicsofdistributionnetworks,including:the types of services offered and the quality of those services; the degree towhich distributedgenerationcapacity(includingrenewablegeneration)isintegratedintothenetworksystem;andtheuseandeffectivenessofflexibilitymeasuresbyDSOs.

Thirdly,understandingtherelationshipbetweentheinputsandoutputsofdistributionactivitiesanddistributioncosts isnot straightforward.This ispartlyaconsequenceof themultipleobjectivesofDSOs, while the numerous inputs and outputs of distribution activities can make it difficult tounderstand theexact costsassociatedwitheachandeverydistribution inputandoutputwithoutundertakingadetailedanalysis.

Welldesignedindicatorsshouldalsobereplicable,meaningthattheycanbeemployedrepeatedlyinfutureyears,therebyallowingtheCommissiontomonitortheevolutionofDSOsperformancesovertime.Thisisimportantforseveralreasons.Forinstance,indicatorsthatprovideanaccuratemeansofmonitoring performance change over time can help the Commission and DSOs to evaluate theeffectivenessofmeasures (bestpracticeorotherwise) implementedbyDSOswith the intentionofaddressing issues that were previously identified as requiring attention. In the event thatimplementedmeasuresarenotdeliveringtheanticipatedperformance improvements,theycanbeadjusted,discontinuedorreplaced.

Lastly,performanceindicatorscanbeusedwithintheCommissionsoverallanalysisoftheelectricityandnaturalgasdistributionsectorsthroughouttheEU.Thatis,indicatorscanbeusedtobuildupanoverallpictureof sectorperformance,andalso to focus inon specificaspectsof serviceprovisionperformancethatmaybeofparticularinterest.ThiscanthenplayacrucialroleintheCommissionsdevelopmentofpolicy.

TheassessmentofDSOsperformances,andareaswhere improvementsareneeded, is central toensuringthatoptimalpolicydecisionscanbemade.Thatis,policiescanbeshapedtoaddressthoseareasidentifiedasneedingimprovementaswellasaddressingkeysectorobjectives.Moreover,theeffectivenessofDSOsunderimplementedpoliciescanbeanalysedatvariouspointsoverthepolicyslifetimeusingwelldesignedassessmenttechniques.Thiscanallowtheeffectivenessofpoliciestobe

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critiqued,andongoingadjustmentsandmodifications to thepolicy can consequentlybemade ifrequired.

The usefulness of streamlined indicators at EU level is remarkable for national and lower levelgovernmentsaswell.A reliable internationalbenchmarkingofefficiencyandqualityperformancescandecisivelyhelpthemtoaddressthemainchallengesandgoalsfacingthe industry,andtotakeaction ifnecessaryon itsstructureandregulatoryprinciples, includingwithaviewtopursuesocialandenvironmentalobjectives.

DifferencesbetweenMemberStatesregulatoryapproaches

TherearetwomainDirectivesrelatingtocommonrulesfortheinternalenergymarketsinEuropeforelectricity (2009/72/EC)andnaturalgas (2009/73/EC).BothDirectivesoffersignificant flexibility toNRAs in theirdevelopmentof regulations forelectricityandnaturalgasdistributionpricing.TheseDirectives specify thatNRAs should take on the duty of fixing or approving, in accordancewithtransparentcriteria,transmissionordistributiontariffsandtheirmethodologies.1

Inrelationtoeffortsto improvethecosteffectivenessofdistributionactivities,thesameDirectivesmake requirements on NRAs to ensure that transmission and distribution system operators aregranted appropriate incentive, over both the short and long term, to increase efficiencies, fostermarketintegrationandsecurityofsupplyandsupporttherelatedresearchactivities.2

GiventheflexibilityprovidedbytheelectricityandnaturalgasDirectivesforeachcountrytopursueitspreferredapproachtodistributionpricingandgeneralregulationofthesector,itisthecasethatimportant differences exist between the regulatory approaches to electricity and natural gasdistributioninindividualMemberStates.Whilstontheonehandthisallowsnationalpreferencestobe pursued by each country (allowing countries to theoretically adopt the approach which itperceives tobethemostefficientorcomfortable for its individualsituation), italsoseverely limitsthe potential to use inference benchmarking techniques to analyse and compare overall DSOperformance between countries, already hindered by legislative, fiscal and other country specificcontexts.3This isan importantaspect inrelationtotheCommissionsperspective, inrelationto itsanalysisandthedevelopmentofoptimalpolicies.4

Therearevariousreasonswhyitisproblematictousestatisticalandotherbenchmarkingtechniquesto compare performance between countries. For example, the use of diverse definitions of keyvariables acrossMember Statesmeans that attempts to compare certain aspectsofperformancemaybecompromisedduetodifferentcountries interpretationsofwhatexactly istobemeasured.Thisproblem isparticularlypronounced inrelationtocostcomparisonsacrosscountriesduetotheroleofnational factors inthedefinitionofcosts,whichmayberelated, forexample, toregulatory

1Article37(1)(a)ofDirective2009/72/ECandArticle41(1)(a)ofDirective2009/73/EC2Article37(8)ofDirective2009/72/ECandArticle41(8)ofDirective2009/73/EC3Itisworthnoting,however,thatmeasuresarecurrentlybeingtakenwithaviewtoaddressingthischallenge.CEERhasawork stream ongoingwhich is looking at the issue of benchmarkingDSOs and TSOs acrossMember States in order todevelopitsunderstandingofbestpractice.4SuchinformationwillbevaluabletotheCommissioninseveralrespects.Forinstance,adetailedunderstandingofspecificbestpracticesinregulatorymeasuresforpromotingandfacilitatingtheadoptionoftechnologiesandpracticesforsmarterdistribution systemswill help the Commission to offer guidance and recommendations toMember Stateswhilst alsorespectingindividualcountriescharacteristicsandpreferredapproaches.

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regimes for labour and countryspecific taxation approaches.Moreover, it is also the case thatsignificantvariationsexistinthearchitecture,sizeandconditionsofcountriesdistributionsystems.

Giventhesecomplexitiesandchallenges,theuseofindicatorsthatcanprovideacomprehensiveanddetailedpictureoftheinputsandoutputsofdistributionactivitiesanddistributioncostscouldbeamore sensible and effective way of analysing DSO performance. Performance indicators haveexcellentpotentialforidentifyingtherelevantissuestobeanalysedbytheCommissionandothers,andcanplayanimportantroleinhelpingtheCommissioninitsdevelopment(andongoingreview)ofpolicies.

Thenewneedsthatassessmentsandbenchmarkinghavetotakeintoaccount

Theassessmentandbenchmarking techniques inuseatany given timearegenerallydesigned tomeasure(andallowcomparisonstobemadeof)thefactorsconsideredtobemostsignificant.Thesefactorsaregenerallylinkedto,andreflectiveof,thestrategicaimsandobjectivesofthesector.

ThepriorityobjectivesoftheelectricityandnaturalgasdistributionsectorsintheEUhaveshiftedincomparisontowhatweretraditionallyconsideredtobethecentralobjectivesofthesectors.Thisisperhapsmost clearly reflected by a then and now comparison of the responsibilities falling onDSOs.

The traditional roleofDSOscanbegenerally summarisedas theirbeing transportersofelectricityandnaturalgas fromtransmissionnetworkstoendconsumers.Thismeantthatthesectorspolicyobjectives(andhencetheregulatoryregimes)focusedonthreecentraltopics,namely:

1. Ensuring that the population had a very high level of (overall) access to services,mainlythroughensuringahighrateofconnections;

2. Promotingimprovementsintheproductivityofserviceprovision,andsharingthebenefitsofthoseimprovementsamongelectricityandnaturalgasconsumers;and

3. Ensuringthatelectricityandnaturalgassupplywasofanoverallhighqualityofservice.

DSOsnowadayshave certain specific responsibilities (andnew technologieswhichallow them) todeliversmarterandmore integrateddistributionnetworks inatimelyandmoreefficientway.Thatis,whilstDSOsshouldcontinuetoensurehighqualityofserviceprovision,highlevelsofaccessandefficiency improvements, there is also a clear drive to create the conditions necessary formoreintegratedandintelligentdistributionnetworkstobecreatedandtooperate.Specifically,anumberof tools to fulfil the general sector objectives (stated above) are emerging or increasing inimportance,including:

Developing financialmeasureswhich encouragemore efficient consumption of electricityandnaturalgasbyconsumers;

Removing obstacles to DSOs implementation of innovative (nontraditional) investmentoptions;

DesigningfinancialmeasureswhichincentiviseDSOstomakeinvestmentswhichprovidethemostcosteffectivesolutionsforallnetworkusersasawhole;

Ensuring that adequate (technical and other) standards are implemented, particularly fornewtechnologiesandmodesofoperatingdistributionsystems;

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Addressing data privacy and security issues which arise from the use of innovativetechnologiesandtechniques;

RemovingobstaclestoDSOsimplementationofinnovativenetworktariffstoincentivisethemoreefficientuseofthenetwork;

ImprovingDSOsabilitiestoidentifyandaddressanypotentialemergingissueswithsmarter,advancedtechnologiesandapplicationssuchasinnovativestorageapplications;and

Incorporating(potentially)largescalerenewableandembeddedgenerationintodistributionnetworks;and

Incorporatingdemandandsupplysideflexibilityresourcesintodistributionnetworks.

Itisclearthattheshiftsintheoverallobjectivesoftheelectricityandnaturalgassectors,andDSOsrolesandresponsibilities,meansthatnewmeasurementscalesarecalledfor,inordertoensurethatassessmentsdoindeedmeasurethecurrentperformancefactorsofimportance.

2.2. CriteriaforidentifyingandselectingindicatorsTheidentificationandselectionofindicatorsofDSOscosteffectivenessandoperativeefficienciesisofcentralimportancetobeingabletoadequatelyassessandbenchmarkDSOsperformance.Awidevarietyofperformance indicatorscouldbepotentiallychosenforuse,but it iscriticaltotheoverallsuccessof theperformance evaluationprocess to ensure that thebestones are selected. In thiscontext, theoptimal indicatorsare those thatwillallowmeaningfulandobjective comparisonsofDSOperformance,withineachcountry,aswellasfacilitatingcrosscountrycomparisons.

Forpracticalreasonsitisnecessarytoselectarelativelysmallnumberofvariablesthatarecapableof explaining performance and a large share of incurred distribution costs in ameaningfulway.Consequently,criteriashouldbedevisedtoselectthemostusefulindicators.

It is essential that indicators are relevant. That is, an indicatormustbe able to answer a specificresearchquestionofinterest.Inotherwords,theyshouldbecomprehensibleandtheirpotentialtoassessacertainclearlydefinedaspectofperformanceshouldbebeyondquestion.

An important characteristic of indicators is also that they should bemeasurable. In practice thismeans thatan indicator shouldmeasureandassessa specificaspectofdistribution forwhich therequired information is available. A certain degree of variation in data availability of differentcountriesisinevitable,henceindicatorsthataremorewidelyavailableacrosscountriesshouldhavepriorityoverthose indicatorswhoseavailability,andpracticalapplicability, is likelytobepatchyorinexistent.

Intheselectionofindicatorstobeused,priorityshouldalsobegiventothosethatfacilitateobjectiveassessments. For example, indicators that use a calculationmethodology that does not eliminatebackgroundorother countryspecific factors that arenot related to the aspect beingmeasuredshouldbeavoided.

Finally, indicators should facilitate comparisons between the distribution systems and DSOs ofdifferentcountries,notablytoallowbenchmarkingofperformanceevolutionovertime.

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2.3. ProposedrelevantinputsBeforedescribing thedifferent indicatorswhich couldbeused toassessandbenchmark the costeffectivenessoftheDSOsandtheiroperationalefficiencies, it is importanttoclearlydefineeachoftherelevantkeyinputvariables(i.e.theinputswhichareusedinthecalculationsofindicatorvalues).Theseareconsideredbelow,firstlyforelectricitydistribution,andthenfornaturalgasdistribution.

Furthermore,someadditionalelementsmustbetakenintoaccountwhenemployingandevaluatingtheindicators,suchas:

Theunbundlingstatusineachcase(ownership,legal,etc.);

Typeofregulatorexistinginthecountry;

Typeofexistingregime(concession,itsduration,orlicense,licensingauthority,etc.);and

OtherservicesprovidedbytheDSO(e.g.gas,water,wastecollection,localtransport,etc.).

Electricity:inputvariables

Electricitysectorrelatedinputvariablesaregroupedintofourdistinctareas,namely:

Variablesoftheelectricityfirmsproductsandservices(Table1);

Variablesoftheelectricityfirmsqualityofservice(Table2);

Variablesoftheelectricitydistributionnetworktypology(Table3);and

Variablesofcost(Table4).

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Table1:Variablesoftheelectricityfirmsproductsandservices

Variable Description Unitofmeasurement Data/informationsource

Connectedendconsumers(residential)

Numberofcustomersdefinedasresidentialcustomers Count DSOAnnualReports

Connectedendconsumers(nonresidential)

Numberofcustomersdefinedasindustrialorcommercialcustomers Count DSOAnnualReports

Meteredconsumers Totalnumberofconsumersthathaveameterinstalledandproperlyworking,byvoltage,inthelast3years,includingtypeofmeter

Count DSOAnnualReports

Systemconnectedembeddedgeneration

Numberandpeakpowerofembeddedgenerationconnectedbyvoltage CountandMW DSOAnnualReports

Storagecapacityofthedistributiongrid

Theelectricitystoragecapacityofthedistributiongridunderconsideration MW DSOAnnualReports

Storedenergyondistributiongrid Theamountofelectricitystoredonthedistributiongrid MWh DSOAnnualReports

Peakdemand Demandlevelduringpeakhour MW DSOAnnualReports

Demandflexibility Quantityofcontrollableelectricityload(flexibility) MW DSOAnnualReports

Electricitysupplied Amountofelectricitydeliveredinayearpereachtypologyofcustomers MWh DSOAnnualReports

Balancingduties DSOsdutiesrelatedtosystembalancing Nospecificunits(qualitativeinformation)

NetworkRegulations/GridCodes

Electriccarchargingpoints Numberofcarchargingpointsprovidedwithinthenetwork Count DSOAnnualReport;MunicipalAuthorityReports

DSOElectriccarchargingpoints Theshare(%)oftotalelectriccarchargingpointswhichareownedbyDSOs % DSOAnnualReportsMunicipalAuthorityReports

EVdemand EVchargerstotalratedpower MW DSOAnnualReports

EVinjection TheamountofelectricitywhichcanbeobtainedbythedistributionnetworkfromEvs

MWh DSOAnnualReports

Smartmeters Numberandtypeofsmartmetersinstalled Count DSOAnnualReports

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MWofdistributedgeneration Thetotalelectricalgenerationcapacityofalldistributedgenerationconnectedtothenetwork

MW DSOAnnualReports

Numberofcustomersontimeofuse/criticalpeak/realtimedynamic

pricing

ThetotalnumberofcustomerswithsupplyagreementswithaspecificDSOwhichhavepricingcontractsbasedontimeofuse/criticalpeak/realtime

dynamicpricing


Table2:Variablesoftheelectricityfirmsqualityofservice


Interruptions Numberanddurationofrelevantinterruptionsoccurredinayear,basedonSAIFI,SAIDIorsimilar

Count,MWhandminutes/year

DSOAnnualReport;NRAReports

Technicallosses Amountofenergyaccountedastechnicallosses MWh DSOAnnualReports

Commerciallosses Amountofenergyaccountedascommerciallosses MWh DSOAnnualReports

Numberofdistributionforcedoutageevents

Numberofeventsinwhichthereisaforcedoutageinthedistributionnetwork


Outputbasedregulation Incentives,revenueortariffcomponentsthatarerelatedtoqualityofserviceparameters

Qualitativedescription NRAPublications;DSOReports

Smartmetersincentivesframework Adescriptionofanyrelevantmechanismsinplaceintheeventthatincentivestoinstallnewsmartmetersareinoperation

Qualitativedescription GovernmentMinistryReports;NRAPublications;

DSOReports

14

Table3:Variablesoftheelectricitydistributionnetworktypology


Overheadlines Numberofkilometresoflinescontrolledandoperatedbythedistributorsbyvoltage,inthelast3years

Km DSOAnnualReports

Undergroundlines Kmofundergroundlinescontrolledandoperatedbythedistributorsbyvoltage,inthelast3years

Km DSOAnnualReports

Distributionpowertransformers Numberandpoweroftotalpowertransformersinstalled CountandMW DSOAnnualReports

Smartgridprojects Numberandvalue(inbothcostandNPV)ofprojects Count,numberofmeteringpointsinvolved,(costand

NPV)

DSOAnnualReports;DirectconsultationwithDSO

Newtechnologiesincentivesframework

Anyschemefortheconnectionorimplementationofnewinfrastructure(electricvehicles,localenergystorage,etc.)thatisoperatedorunder

development

Qualitativedescription DSOAnnualReports;NRApublications

Areasize Totalsurfaceareaofsuppliedmunicipalities Km2 DSOwebsitesandpublications

Areapopulation TotalNumber ofinhabitantsof the servedarea Count DSOpublicationornationalofficialstatistics

Areacharacteristics Maincharacteristicsoftheservedarea Qualitativedescription:(Mostly)flat/hilly/

mountainous/smallislands

DSOwebsitesandpublications

Shareofurbancustomers Shareofconnectedcustomerslocatedinmunicipalitieswithmorethan15,000inhabitants

% DSOwebsitesandpublications

15

Table4:Variablesofcost


OPEX OPEXincludesallregulatedoperating expenditurerequiredfortheprovisionofregulateddistributionservices.Itisfullyrecoveredintheyear

inwhichtheexpenditureisincurred.

/year DSOAnnualReports;NRAReports

CAPEX Regulatedexpenditureforthecreationofassetsrequiredfortheprovisionofregulateddistributionservices.Costsarerecoveredthrough

depreciationoverseveralyears


RAB Valueoftheofficialregulatedassetbaseattheendoflastyear DSOAnnualReports;NRAReports

RABvaluationmethod Methodology usedforRABvaluationbytariffmethodology (Bookvalue,Currentcost,MEAV,othertobespecified

DSOAnnualReports;NRAReports

Xfactor Productivityimprovementfactor %/yeargeneral,%/yearspecific


Incentives Incentivesprovidedfor,forexample, theimprovementofthequalityofservices;smartmeters;connectionofdistributedgeneration,biogas;

otherdistributedenergyresources(electricvehicles,localenergystorage);useofbenchmarkingtechniques;andproductivityimprovementfactor(s)

Qualitativedescriptions DSOAnnualReports;GovernmentMinistry

Reports

Labourcost Theamountwhichisdirectlyorindirectlygiventoemployeesdefinedaslabourcostinthebalancesheet

/year DSOAnnualReports

Revenues Revenuesreceived(tobespecifiedfrom:connectionactivities,distributionactivities,other)


Customercarepersonnel Numberofemployeesinthecustomercareunit Count DSOAnnualReports

Totalemployees NumberofemployeesintheDSO Count DSOAnnualReports

Residentialdistributiontariffslevel

Tarifflevelsforresidentialcustomers(pleaseprovideTablebycustomerclassesifappropriate)

c/kWh GovernmentMinistryPublications;DSOAnnual

ReportsCommercialdistributiontariffs

levelTariffslevelforcommercialcustomers(pleaseprovideTablebycustomer

classesifappropriate)c/kWh GovernmentMinistry

Publications;DSOAnnual

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Reports

Industrialdistributiontariffslevel

Tariffslevelforindustrialcustomers(pleaseprovideTablebycustomerclassesifappropriate)


ReportsResidentialaveragestanding

chargeTariffslevelfor residentialcustomers(pleaseprovideTablebycustomer

classesifappropriate)/kWh GovernmentMinistry

Publications;DSOAnnualReports

Commercialaveragestandingorloadrelatedcharge

Tariffslevelforcommercialcustomers(pleaseprovideTablebycustomerclassesifappropriate)

/kWh GovernmentMinistryPublications;DSOAnnual

ReportsIndustrialaveragestandingor

loadrelatedchargeTariffslevelforindustrialcustomers(pleaseprovideTablebycustomer

classesifappropriate)/kWh GovernmentMinistry


Connectioncharges AverageamountrequiredbytheDSOforanewconnectionbyvoltageandbycustomertypeorratedpower

DSOAnnualReports

Averagerateofreturn WeightedAverageCostofCapital,orotherasapplicable;beforetax % NRAReports;DSOAnnualReports

Numberofregulatoryperiod Numberofregulatoryperiod Count NRAReports;DSOAnnualReports

Lengthofregulatoryperiod Lengthofcurrentregulatoryperiod(pleasespecifyifanychangeisexpected)

Years NRAReports;DSOAnnualReports

Awards/penalties TheamountofawardsorpenaltiescomingfromthemechanismusedtoimprovetheDSO'squalityperformanceorotherobjectives(outputbased

regulation)

DSOAnnualReports

Naturalgas:inputvariables

Theproposedrelevant inputsfornaturalgasDSOperformanceassessmentaresimilartothosedescribedforelectricityDSOs;however,theyalso include somedifferences,due to specific characteristicsofnatural gasdistribution.Natural gas sectorrelated input variables are alsogroupedintofourdistinctareas,namely:

Variablesofthenaturalgasfirmsproductsandservices(Table5);

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Variablesofthenaturalgasfirmsqualityofservice(Table6);

Variablesofthenaturalgasdistributionnetworktypology(Table7);and

Variablesofcost(Table8).

Table5:Variablesofthenaturalgasfirmsproductsandservices


Connectedendconsumers(residential)

Numberofcustomersdefinedasresidentialcustomers Count DSOAnnualReports

Connectedendconsumers(nonresidential)

Numberofcustomersdefinedasindustrialorcommercialcustomers Count DSOAnnualReports

Meteredconsumers Totalnumberofconsumersthathaveameterinstalledandproperlyworking,bysize,andtimeofmeasurement(daily,hourly)


Distributedproductionconnected

Cubicmetersofbiogas/biomethaneconnectedbysizeandtypology Cm DSOAnnualReports

Peakdemand Demandlevelduringpeakhourorday Cm/hrorcm/day DSOAnnualReports

Demandflexibility Quantityofinterruptiblegasconsumption Cm DSOAnnualReports

Storagecapacity StoragecapacityunderDSOcontrol Mcm DSOAnnualReports

Gasdelivered Amountofgasdeliveredinayearpereachtypologyofcustomer Mcm DSOAnnualReports

Meters Totalnumberofmetersinstalled Count DSOAnnualReports

Dailyorhourlymetering Totalnumberofmeterswithdailyorhourlymeasurementandrelatedconsumption

Count(specifyifhourly)and(ifpossible)cm

DSOAnnualReports

Pressure/temperaturecorrectedmeters

Totalnumberofmeterswithpressure/temperaturecorrectedmeasurementandrelatedconsumption

Countand(ifpossible)cm DSOAnnualReports

Smartmeters Numberandtypeofsmartmetersinstalled Count DSOAnnualReports

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Table6:Variablesofthenaturalgasfirmsqualityofservice


Interruptions Numberandamountofrelevantinterruptionsoccurredinayear Countandlostcm DSOAnnualReport;NRAReports

Checksonnetwork Percentageofsafetychecksonnetworkperyear CountandMWh DSOAnnualReport;NRAReports

Leakages Numberandamountofdetectedleakagesoccurredinayear CountandMWh DSOAnnualReport;NRAReports

Emergencyinterventions Noofemergencyinterventionsaftercustomersorthirdpartycalls Count DSOAnnualReports

Technicallosses Amountofenergy/cmaccountedastechnicallosses MWhorcm DSOAnnualReports

Commerciallosses Amountofenergy/cmaccountedascommerciallosses MWhorcm DSOAnnualReports

Outputbasedregulation Incentives,revenueortariffcomponentthatarerelatedtoqualityofserviceparameters

Qualitativedescription NRAPublications;DSOReports

Smartmetersincentivesframework

Adescriptionofanyrelevantmechanismsinplaceintheeventthatincentivestoinstallnewsmartmetersareinoperation

Qualitativedescription GovernmentMinistryReports;NRAPublications;

DSOReports

Table7:Variablesofthenaturalgasdistributionnetworktypology


Pipelines Kmofpipelinescontrolledandoperatedbythedistributors,bypressureclass

Km DSOAnnualReports

Distributedgenerationincentivesframework

Anyschemetoboosttheconnectionofbiogas/biomethaneproduction(FiTscheme,etc.)

Descriptionoftheincentivelevelrevision

methodology/timingandlengthoftheincentives


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Areasize Totalsurfaceareaofsuppliedmunicipalities5 Km2 DSOwebsitesandpublications

Areacharacteristics Maincharacteristicsoftheservedarea (Mostly)flat/hilly/mountainous/smallislands

DSOwebsitesandpublications

Areapopulation TotalNo.ofinhabitantsofservedarea Count DSOpublicationornationalofficialstatistics

Shareofurbancustomers Shareofconnectedcustomerslocatedinmunicipalitieswithmorethan15,000inhabitants

% DSOwebsitesandpublications

Table8:Variablesofcost


OPEX OPEXincludesallregulatedoperatingexpenditurerequiredfortheprovisionofregulateddistributionservices.Itisfullyrecoveredintheyear

inwhichtheexpenditureisincurred.6


CAPEX Regulatedexpenditureforthecreationofassetsrequiredfortheprovisionofregulateddistributionservices.Costsarerecoveredthrough

depreciationoverseveralyears


RAB Valueoftheofficialregulatedassetbaseattheendoflastyearifavailable DSOAnnualReports;NRAReports

RABvaluationmethod MethodusedforRABvaluationbytariffmethodology (Bookvalue,Currentcost,MEAV,othertobespecified


Xfactor Productivityimprovementfactor %/yeargeneral,%/yearspecific


Incentives Incentivesprovidedfor:theimprovementofthequalityofservices;smartmeters;connectionofbiogas;localstorage);useofbenchmarking

techniques;andproductivityimprovementfactor(s)

Qualitativedescriptions DSOAnnualReports;GovernmentMinistry

ReportsLabourcost Theamountwhichisdirectlyorindirectly giventoemployeesdefinedas

labourcostinthebalancesheet/year DSOAnnualReports

5Bythiswemeanthegeographicarea(km2)ofthemunicipalitywhichissuppliedbyaDSO.6DifferentarrangementsmaybeusedinthecasewhereTotexremunerationisused.

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Revenues Revenuesreceived(tobespecifiedfrom:connectionactivities,distributionactivities,other)


Customercarepersonnel Numberofemployeesinthecustomercareunit Count DSOAnnualReports

Totalemployees NumberofemployeesintheDSO Count DSOAnnualReports

Residentialdistributiontariffslevel

Tarifflevelsforresidentialcustomers(pleaseprovideTablebycustomerclassesifappropriate)


ReportsCommercialdistribution

tariffslevelTariffslevelforcommercialcustomers(pleaseprovideTablebycustomer

classesifappropriate)c/kWh GovernmentMinistry


Industrialdistributiontariffslevel

Tariffslevelforindustrialcustomers(pleaseprovideTablebycustomerclassesifappropriate)


ReportsResidentialaveragestanding

chargeTariffslevelfor residentialcustomers(pleaseprovideTablebycustomer

classesifappropriate)/kW GovernmentMinistry


Commercialaveragestandingorcapacityrelatedcharge

Tariffslevelforcommercialcustomers(pleaseprovideTablebycustomerclassesifappropriate)

/kW GovernmentMinistryPublications;DSOAnnual

ReportsIndustrialaveragestandingor

loadrelatedchargeTariffslevelforindustrialcustomers(pleaseprovideTablebycustomer

classesifappropriate)/kW GovernmentMinistry


Connectioncharges AverageamountrequiredbytheDSOforanewconnectionbyvoltage DSOAnnualReports

Averagerateofreturn WeightedAverageCostofCapital,orotherasapplicable;beforetax % NRAReports;DSOAnnualReports

Numberofregulatoryperiod Numberofregulatoryperiod7 Count NRAReports;DSOAnnualReports

7Bythiswerefertothenumberofregulatoryperiodswhichhavebeenineffectsincethefirstregulatoryperiodcommenced,uptoandincludingthecurrentregulatoryperiod(e.g.if4regulatoryperiodshavepreviouslybeenineffectbutsincestopped,thecurrentlyregulatoryperiodisthe5thregulatoryperiod).

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Lengthofregulatoryperiod Lengthofcurrentregulatoryperiod(pleasespecifyifanychangeisexpected)

Years NRAReports;DSO AnnualReports

Awards/penalties TheamountofawardsorpenaltiescomingfromthemechanismusedtoimprovetheDSO'squalityperformanceorotherobjectives(outputbased

regulation)

DSOAnnualReports

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2.4. ProposedindicatorsTheprojectteamproposestousearangeofindicatorsofDSOscosteffectivenessandoperativeefficiency,whicharesetoutbelow.Eachindicatorhasbeenconsideredinrelationtoitsabilitytomeettheselectionrequirementsexplainedinsection2,specifically:

Thevariation(improvement)oftheindicatorwoulddetermineaquantifiablebenefittogridusersand,ingeneral,societyasawhole;

It is possible to determine (measure or calculate) the value of the index in a sufficientlyaccurateandobjectiveway;

Thevalueoftheindexcanbeinfluenced(eveniftoalimitedextent)bythenetworkoperatororthesystemoperator;thisincludesmetering.Itisalsospecifiedthatperformancetargetsshouldbecleansedofexternaleffectsoutsidethecontrolofnetworkoperators;and

Theindexshouldbeasfaraspossible,technologyneutral.

For each indicator, an explanation of what is being measured (and the output/result of themeasurement)isprovided,aswellasadescriptionofthespecificmethod(formula)usedtocalculatetheindicatorvalue.8

Suggestedindicatorsarecommonlyused(orconsideredforuse)inbenchmarkingexercises.Whereassimple indicators may provide useful information, their separate use may be misleading. Forexample,comparisonofemployees/customers ratiosmaybemeaninglessunlesscharacteristicsofservedareasarealsoconsidered,whichare reflected inpopulationdensityornetwork lengthpercustomer,etc.Generally speaking,multivariateanalysis is recommended.The following indicatorsshouldbeconsideredaspreliminaryinformationinordertoidentifythemostrelevantissuesandsetupananalysisofserviceeffectivenessorefficiency.

IndicatorsforelectricityDSOsareprovidedinTable9andthosefornaturalgasDSOsareprovidedinTable10.

8It should be understood that these indicators are not used directly to assess DSO performance; rather,performance isassessed in termsofoutputs.Theuseof inputbased indicators,however,providesausefulmeansofnormalizing theoutputs indifferentMemberStates, inorder toallowsomedegreeofcomparisonbetweenMemberStatestobemade.

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Table9:ProposedindicatorsforelectricityDSOs

Indicatorname Formula Explanation Usesandlimitations

Indicatorsrelatedtocustomerbaseandtheprovisionofcustomerservices

Averagenumberofcustomers

[Totalnum.ofcustomersatstartofperiod(connections)+totalnumberofcustomersatendofperiod]/2

Thisisanindicatorontheaveragenumberofcustomers Averagenumberofcustomersforthebenchmarkingperiod.

Populationdensity Population/surfacearea(Inhabs./Km2) Thisislikelytoaffectcostsofserviceinseveralways Benchmarking

Customerdensity Totalcustomers/Kmofnetwork Thisisanindicatoroncustomerdensityinagivenarea Customerdensity

Indicatorsrelatedtorevisionsandupdatesofdistributionnetworktechnologies

Updatingofmetertechnology

Metersreplacedinayear/metersinserviceatthebeginningofthesameyear

Thisisanindicatoroftherateatwhichmetersarereplaced Meterreplacementrate

Distributiontransformerutilisation

(Electricitysold(MWh)*100)/(totaldistributiontransformercapacity(MVA)*8760h)

Thisindicatorlooksatthetotalenergydeliveredtoconsumersonthelowvoltagenetworkthroughdistributiontransformers.TotalDistributionTransformerCapacityiscalculatedbyaddingupthecapacity(nameplaterating)ofalldistributiontransformersinstalledonthedistributionnetwork

TheDistributionTransformerUtilisationindicatestheeffectivenessofdistributionplanninginmatchingtransformercapacitywithdemand.Alowutilisationimpliesagreaterinvestmentindistributiontransformers.Ahigherutilisationimplieshigherefficiencyincapitaloutlayonthedistributionnetwork(orontheothersideofthescale,deferredcapacityupgradeanderosionofsecuritymargins)

Indicatorsrelatedtotechnicalaspectsandcharacteristicsofthedistributionnetwork

Loadfactor (Annualelectricitysupplied(MWh)/8760)/Peakannualdemand(MW)

LoadfactorisaratioofaverageannualloadtomaximumannualloadperDSOlevel.Thisindicatormeasureshowmuchpowerissuppliedontheaverageperunitofpeakdemand.

Loadfactorprovidesinformationonhowefficientlythepowersystemequipmentisusedand,toacertainextent,helpsunderstandhowclosethepowersupplysystemistobeingoverloaded.Whenloadfactorishigh(i.e.,averagesupplyisonlymarginallybelowpeakdemand),equipmentusageefficiencyishighandvice

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versa.Atthesametime,whenloadfactoriscloseto100%,thesystemmightbeatitscapacitylimitandcouldcollapsewithpotentialincreaseinpeakdemand.

Undergroundcableratio

Lengthofundergroundcables/totalnetworklength Importantcostandqualityfactor

Benchmarkingofmostrelevantsolutiontoimproveurbanquality

Storage Averagestoredenergy/energydistributed TheratioofstoredenergytoenergydistributedAcomparisonoftheelectricitywhichisstoredtotheelectricitydistributed

Storagecapacity/peakdemand TheratioofnetworkstoragecapacitytopeakdemandofthenetworkTheproportionofpeakdemandwhichcanbemetbystoredelectricity

EV EVdemand/totaldemand TheratioofEVchargerstotalratedpowertopeakdemandofthenetworkThepotentialmaximumproportionofnetworktotaldemandwhichcomesfromEVs

EVinjections/totaldemand TheratioofelectricitywhichcanbeobtainedfromEVStototalelectricitydemand

ThepotentialmaximumproportionoftotalnetworkdemandwhichcouldbemetfromelectricitysuppliedbyEVs

Demandflexibilitycoverage MWofflexibledemand/peakdemand Theratioofdemandwhichisflexibletopeakdemand

Proportionofpeakdemandwhichcouldbemetbyflexibledemand

DGcoverage MWofDG/peakdemand TheratioofDGgenerationcapacitytopeakdemandonthenetworkThepotentialmaximumproportionofpeakdemandwhichcouldbemetbyDG

MWofDG/mindemand TheratioofDGgenerationcapacitytotheminimumdemandlevel

ThepotentialmaximumproportionofminimumnetworkdemandwhichcouldbemetbyDG.AlsoprovidessomeindicationofthelikelihoodforDGtobecurtailedinperiodsofminimumdemand

ReversePowerFlow

((NumberofhoursinwhichthereisaflowinversioninaprimarysubstationoragivenHV/MVtransformer)/8760)*100

The%ofhoursinwhichthereisaflowinversioninaprimarysubstationoragivenHV/MVtransformer

Indicatestherelativeamountoftimeinyearinwhichthereisreversepowerflowinaprimarysubstation

Indicatorsofserviceprovisionperformance

DistributionReliability

(Numberofdistributionforcedoutageevents(events)/lengthofdistributionline(Km))*100

Thisindicatorlooksatforcedoutageeventsper100kmofdistributionlinesandcables. Reliabilityofthedistributionnetwork

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SAIFI9 TotalCustomerInterruptions/AverageNumberofCustomers(connections)

SystemAverageInterruptionFrequencyIndex:TheTotalCustomerInterruptionsisthesumofthecustomerinterruptionsforeachoutageincludingbothforcedandplannedinterruptions.Acustomerinterruptionforapoweroutageisthetotalcustomersinterruptedfortheevent

SAIFIindicatestheaveragenumberofoutagesacustomerexperiencedfortheperiod

SAIDI9TotalCustomerInterruptionsDurationInterrupted(customerHr)/AverageNumberofCustomers(connection)

SystemAverageInterruptionDurationIndex:TotalCustomerInterruptionsDurationIndexisfoundbysummingthecustomerinterruptionsdurationforeachcustomerinterruptionevent.Thisincludesbothplannedandforcedevents.

SAIDIindicatestheaveragepoweroutagedurationexperiencedbyacustomerduringthebenchmarkingperiod

CAIDI

Sumofcustomerminutesoffforallsustainedinterruptions/Totaln.ofcustomersaffectedbythesustainedinterruptions

CustomerAverageInterruptionDurationIndex:CAIDIistheweightedaveragelengthofaninterruptionforcustomersaffectedduringaspecifiedtimeperiod

CAIDIindicatesthedurationofoutagesrelatedtothenumbersofcostumers

Distributionlosses(energyinputLESSenergybilledtoconsumersinkWh/energyinputinkWh)*100

Distributionlosses(Technical+Commerciallosses):isthedifferencebetweenenergysuppliedattheinputpointsandenergybilledtocustomersinpercentagetermsforaparticularperiod.ElectricityDeliveredtotheDistributionNetwork(inputpoint)isthetotalenergymeasuredatthedemarcationpointsbetweentransmissionanddistribution.Whereautilitydoesnothaveatransmissionnetwork,theelectricitydeliveredtotheDistributionNetworkwouldbeequaltotheNetGeneration.

Efficiencyofdistributioninfrastructure

9TheSAIDIandSAIFI indicatorsofservicecontinuitycouldbefurtherseparatedandelaborated,taking intoaccounttheworkdeveloped inrecentyearsbyCEERbenchmarkingelectricityDSOqualityofservice.Forinstance,itcouldalsobepossibletocalculateSAIDIandSAIFIvalueswhereplannedinterruptionsandforced/unplannedinterruptionsareconsideredseparately,therebygeneratingseparateSAIDIandSAIFIvaluesforeachtypeofnetworkinterruptionevent.

26


Curtailment10 DGnotwithdrawnduetocongestionand/orsecurityrisk

Curtailment:thisisthetimeinwhichaDGcouldbegeneratedbutitishaltedfromdoingsobyhumandecision,duetotheriskofcongestionand/orsecurityrisk.Curtailmentisexpressedintermsoftheproportionoftimeinwhichaunitcouldbegeneratingbutiscurtailed

ProportionoftimeinwhichaDGunitiscurtailed/preventedfromgeneratingelectricity

Indicatorsoffinancialaspectsandcosts

DistributionO&Mcosts

DistributionO&Mcosts()/Lengthofdistributionline(Km)

DistributionOperating&Maintenancecostsrelatedtothelengthofthedistributionnetwork

Thetotalcostofoperatingandmaintainingthedistributionnetworkonaperkmline(overheadlineandundergroundcable).Thisindicatorshouldbecarefullyinterpretedasitdoesnotincludetheageofthenetwork.

Actualdebttoequityratio

Longtermdebt\noncurrentliability()*100/Equity\Netassets\Capitalreserves+Longtermdebt\noncurrentliability

Thislooksatthegearingofthebusiness.Gearingisameasureoffinancialleverage,demonstratingthedegreetowhichafirm'sactivitiesarefundedbytheowner'sfundsversuscreditor'sfunds

Thehigherthegearing,thegreatertherisk.Whenthebusinessisperformingwellhigherreturnsaregeneratedfortheowners.Whenlossesareincurredtheimpactontheownerisincreased.Theoptimumgearingratioisspecificforeachindustry.

RateofReturnonAssets,actualand

allowedbyregulator

EBIT\OperatingProfit()*100/Averagenoncurrentassets()

Therateofreturnonassetsisthereturngeneratedfromtheinvestmentintheassetsofthebusiness.EarningsBeforeInterestTax(EBIT)istheoperatingprofitsgeneratedbythebusinessafteralloperatingcostsincludingdepreciationhavebeendeductedfromtheincome.

Thereturngeneratedfromtheinvestmentintheassetsofthebusiness.

ReturnonEquity Profitaftertax\earningaftertax()*100/Equity\netassets\capitalreserves

ReturnonEquityisthereturnsgeneratedbythebusinessfortheownersofthebusiness.InmostutilitiesinthePacifictheownersoftheutilityisthegovernment.Profitaftertax(PAT)istheprofitafterinterestispaidonfundsfromdebtfinanciersandtaxispaidtoGovernment.

Thereturnsgeneratedbythebusinessfortheownersofthebusiness

10NotethatnospecificuniformjudgmentonDSOperformanceismadeinrelationtocurtailmentrate.Forinstance,inMemberStateswhichhaveadeeporrelativelyshallowconnectionboundary,DSOsmaybeable toconnectgeneratorsto thenetworkonacurtailedcontractwhichotherwisewouldnothavebeenconnectedduetohighconnectioncosts. Insuchanexample,theoverallamountofdistributedgenerationwithinthesystem is increased,whichhaspositivebenefits.Asmentionedabove,inputbasedindicatorsareusedhereasameanstonormalizetheoutputsofdifferentMemberStates,whichallowsintercountrycomparisonstobemade

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CurrentRatio Currentassets()*100/Currentliabilities()

Currentratioindicatestheabilityofautilitytomeetitsshorttermliabilities(liabilitiesduewithin12months).Wheretheratioislessthan100%,thereisariskthatshouldthesuppliersandliabilityownerscallonpaymenttheutilitywouldnotbeabletomakeallpayments

Theabilityofautilitytomeetitsshorttermliabilities

Labourcostefficiency Totallabourcost/customer

Thisindicatorshowstheaveragelabourcostsincurredpercustomer TheaveragelabourcostsoftheDSOpercustomer.

Averagesupplycost Totaloperatingexpenses()/Naturalgassold(cm)Thisindicatorshowstheoperatingcostsincurredperunitofelectricitysold(expressedin/cm) Averagedistributioncost

Costrecovery Operatingrevenue/costs Thisindicatoristheratioofunitrevenuetocost Sustainabilityofcostlevels/tariffs.Itwouldreflectthepricecostrevenuecollectionrelationship.

Opexrecovery Operatingcosts/revenuebilledTheindicatorofoperatingexpensescoveredbyrevenuesisaratioofoperatingcoststorevenuesbilled,expressedaspercentage.

Itreflectsiftheutilityiscapableofrecoveringitscurrentexpendituresattheexistingconsumptionlevelandtariffs.Thisindicatorisbelow100%ifoperationalcostiscoveredbyrevenues.Tobeabletorecovercoststhatincludecapitalexpenses(inadditiontooperatingexpenses)andtoaccountfornoncollection,thisindicatorshouldbenoticeablybelow100%.

AverageOpex Opex/MWh ThisistheindicatoroftheaverageOPEXincurredperunitofelectricitydistributed

AmeasureofhowmuchOPEXisincurredindistributingaunitofelectricity.Itsuseisrelevantinthecontextofmultivariateanalysis.

Opex/connection TheratioofOPEXincurredtoconnectionswithinthedistributionnetwork

AmeasureofhowmuchOPEXisincurredperconnection(ratio)withinthenetwork(i.e.itisnotareflectionoftheOPEXincurredbyeachconnection).Itsuseisrelevantinthecontextofmultivariateanalysis.

Opex/km TheratioofOPEXincurredtothenumberofkilometresofnetworklines

AmeasureofhowmuchOPEXisincurredinthecontextofthesize/lengthofthenetwork.Itsuseisrelevantinthecontextofmultivariateanalysis.

AverageCapex Capex/MWh ThisistheindicatoroftheaverageCAPEXcostsincurredperunitofelectricitydistributed

AmeasureofhowmuchCAPEXisincurredindistributingaunitofelectricity.Itsuseisrelevantinthecontextofmultivariateanalysis.

Capex/connection TheratioofCAPEXincurredtoconnectionswithinthedistributionnetwork

AmeasureofhowmuchCAPEXisincurredperconnection(ratio)withinthenetwork(i.e.itisnotareflectionoftheOPEXincurredbyeachconnection).Its

28


useisrelevantinthecontextofmultivariateanalysis.

Capex/km TheratioofCAPEXincurredtothenumberofkilometresofnetworklines

AmeasureofhowmuchCAPEXisincurredinthecontextofthesize/lengthofthenetwork.Itsuseisrelevantinthecontextofmultivariateanalysis.

Indicatorsofrelatedtotheuseofinnovativetariffs

Incentivisingtariffsshare

Percentageofconsumersontimeofuse/criticalpeak/realtimedynamicdistributionpricing

Percentageoftotalnumberofconsumersontimeofuse/criticalpeak/realtimedynamicpricing

Proportionoftotalconsumerswhichareondistributionincentivisingtariffsatanygivenpointintime.

LoadchangesMeasuredmodificationsofelectricityconsumptionpatternsafternewpricingschemes

Measuredmodificationsofelectricityconsumptionpatternsaftertheintroductionofnewpricingschemes

Percentagechange(+=consumptionincrease;=consumptiondecrease)inelectricityconsumptionfollowingtheintroductionofnewpricingschemes11.

11Theformulationofthisindexdependsontheissuethattheinnovativepricingschemeismeanttoaddress.If,forexample,themeasureaimestoreducewithdrawalsatcertaintimes,loadchangesatthosetimewillbemeasuredbytheindex.

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Table10:ProposedindicatorsfornaturalgasDSOs


Indicatorsrelatedtocustomerbaseandtheprovisionofcustomerservices

Averagenumberofcustomers

(Totalnum.ofcustomersatstartofperiod(connections)+totalnumberofcustomersatendofperiod)/2

Thisisanindicatorontheaveragenumberofcustomers Averagenumberofcustomersforthebenchmarkingperiod.

Populationdensity Population/surfacearea(Inhabs./Km2) Thisislikelytoaffectcostsofserviceinseveralways Benchmarking

Customerdensity Totalcustomers/Kmofnetwork Thisisanindicatoroncustomerdensityinagivenarea12 Customerdensity

Productivenaturalgasusage

(Totalcommercialgasbilled(MWh)+Totalindustrialgasbilled(MWh)orTotalother(productive)gasbilled(MWh))*100/naturalgassold(MWh)

Thisisanindicatorforthenaturalgasusedineconomicproductiveway;itistheratioofthecommercialandindustrialnaturalgasbilledwiththeoverallnaturalgassold

Itisassumedthatthenaturalgasbilledtocommercialandindustrialcustomersisproductivefortheeconomy.Basedonthisassumption,thisindicatorcapturestheproductiveeconomicimpactofnaturalgassupply.Itignorestheeconomicimpactofdomesticsupplyandothercategories

Servicecoverage(Numberofhouseholdssupplied(household)/Totalnumberofhouseholdincountry)*100

Thisindicatorgivestheservicecoveragebytheratioofhouseholdssuppliedandhouseholdsinthecountry

Thisindicatorlooksatthenaturalgascoveragewithrespecttothecountryservedbytheutility.Italsoindicatesthepotentialmarketyettobeservedbytheutility

Indicatorsrelatedtorevisionsandupdatesofdistributionnetworktechnologies

Realtimemeterreading

No.ofmeterswithdailyorhourlymeasurement/TotalNo.ofmeters

Thisexplainstheshareofgasthatissubjecttoprecisereadinganddoesnotrequireestimationbyloadprofiling

Availabilityofrealtimemeterreadingimprovestheestimationofconsumptionbysuppliersandhencefacilitatesmarketbalancingandliquidity

12Thismeasurealsoencompassestechnologicalchoiceswhichhavebeenmadeinthearea(including,forexample,networkredundancies)

30


DistributionReliability(Numberofdistributionforcedoutageevents(events)/lengthofdistributionpipeline(Km))*100

Thisindicatorlooksatforcedoutageeventsper100kmofdistributionpipelines Reliabilityofthedistributionnetwork

SAIFITotalUnplannedCustomerInterruptions/AverageNumberofCustomers(connections)

SystemAverageInterruptionFrequencyIndex:TheTotalCustomerInterruptionsisthesumofthecustomerinterruptionsforeachoutageincludingbothforcedandplannedinterruptions.Acustomerinterruptionforanoutageisthetotalcustomersinterruptedfortheevent

SAIFIindicatestheaveragenumberofsupplyinterruptionsacustomerexperiencedfortheperiod

SAIDI

TotalUnplannedCustomerInterruptionsDurationInterrupted(customerHr)/AverageNumberofCustomers(connection)

SystemAverageInterruptionDurationIndex:TotalCustomerInterruptionsDurationIndexisfoundbysummingthecustomerinterruptionsdurationforeachcustomerinterruptionevent.Thisincludesbothplannedandforcedevents.

SAIDIindicatestheaveragesupplyinterruptiondurationexperiencedbyacustomerduringthebenchmarkingperiod

CAIDI

Sumofcustomerminutesoffforallsustainedunplannedinterruptions/Totaln.ofcustomersaffectedbythesustainedinterruptions

CustomerAverageInterruptionDurationIndex:CAIDIistheweightedaveragelengthofaninterruptionforcustomersaffectedduringaspecifiedtimeperiod

CAIDIindicatesthedurationofsupplyinterruptionsrelatedtothenumbersofcostumers

Unaccountedforgas13

(Totalbilledgasplusownconsumption)/totalgasattheinputpoint)*100

AggregateTechnical&Commerciallosses:thisaggregatemeasurecomparesnaturalgassuppliedtothedistributorwithnaturalgassoldtocustomers.Thedifferencebetweenthesefiguresistheenergylostindistributionduetotechnicalreasons(e.g.,networkleakages),commercialreasons(e.g.,theftandunaccountedorunmeteredsales)anderrorsintheestimationofconsumerswithoutdailyorhourlymeters..

Effectivenessinminimizingunrecoverableenergycost.Theproblemcomesinestimatingactualenergydeliveredtocustomersthatarenotmetered,whichisparticularlycommoninruralareas.Energypurchasedbyunmeteredcustomerscanbeestimatedfromtheconsumptionofcomparable,meteredcustomers,orfromsubstationmetereddata

Numberofgasnetworkinspections

Numberofinspectionsundertakeninoneyear/totallengthofgaspipelinenetwork

ThenumberofgasinspectionsundertakeninoneyearasaproportionofthetotalgaspipelinenetworkownedandoperatedbytheDSO.

ThisisanindicatorofthelevelofactivitythateachDSOmakesregardingnetworksafetyinspectionsinitsnetwork.

13Thisisanindirectwayofmeasuringgasleakages

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Odorisinggasleveltesting

Numberoftestsofodorisinggaslevels/numberofconnectionpoints

Thenumberoftestsundertakenofodorisinggaslevelswithinayear,asrelatedtothenumberofconnectionpointswithinthenetwork

ThisisanindicatorofthedegreeofsafetyinspectionactivityundertakenbyaDSO,andinthiscasespecificallyrelatedtoodorisinggaslevels

Indicatorsoffinancialaspectsandcosts

DistributionO&Mcosts

DistributionO&Mcosts()/Lengthofdistributionpipeline(Km)

DistributionOperating&Maintenancecostsrelatedtothelengthofthedistributionnetwork

Thetotalcostofoperatingandmaintainingthedistributionnetworkonaperkmpipeline.Thisindicatorshouldbecarefullyinterpretedasitdoesnotincludetheageofthenetwork.

DebttoEquityRatio

Longtermdebt\noncurrentliability()*100/Equity\Netassets\Capitalreserves+Longtermdebt\noncurrentliability

Thislooksatthegearingofthebusiness.Gearingisameasureoffinancialleverage,demonstratingthedegreetowhichafirm'sactivitiesarefundedbytheowner'sfundsversuscreditor'sfunds

Thehigherthegearing,thegreatertherisk.Whenthebusinessisperformingwellhigherreturnsaregeneratedfortheowners.Whenlossesareincurredtheimpactontheownerisincreased.Theoptimumgearingratioisspecificforeachindustry.FortheutilitybusinessinthePacificaBenchmarkof50%isdeemedsuitable.

RateofReturnonAssets



Thereturngeneratedfromtheinvestmentintheassetsofthebusiness.

ReturnonEquityProfitaftertax\earningaftertax()*100/Equity\netassets\capitalreserves

ReturnonEquityisthereturnsgeneratedbythebusinessfortheownersofthebusiness.InmostutilitiesinthePacifictheownersoftheutilityisthegovernment.Profitaftertax(PAT)istheprofitafterinterestispaidonfundsfromdebtfinanciersandtaxispaidtoGovernment.

Thereturnsgeneratedbythebusinessfortheownersofthebusiness

CurrentRatio Currentassets()*100/Currentliabilities()

Currentratioindicatestheabilityofautilitytomeetitsshorttermliabilities(liabilitiesduewithin12months).Wheretheratioislessthan100%,thereisariskthatshouldthesuppliersandliabilityownerscallonpaymenttheutilitywouldnotbeabletomakeallpayments

Theabilityofautilitytomeetitsshorttermliabilities

Averagesupplycost Totaloperatingexpenses()/Naturalgassold(cm)Thisindicatorshowstheoperatingcostsincurredperunitofelectricitysold(expressedin/cm) Theunitcostsofsupplyingnaturalgas

Labourcostefficiency Totallabourcost/customer Thisindicatorshowstheaveragelabourcostsincurredpercustomer TheaveragelabourcostsoftheDSOpercustomer.

Costrecovery op.revenue/costs Thisindicatoristheratioofunitrevenuetocost Sustainabilityofcostlevels/tariffs.Itwouldreflectthepricecostrevenuecollectionrelationship.

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Opexrecovery operatingcosts/revenuebilledTheindicatorofoperatingexpensescoveredbyrevenuesisaratioofoperatingcoststorevenuesbilled,expressedaspercentage.

Itreflectsiftheutilityiscapableofrecoveringitscurrentexpendituresattheexistingconsumptionlevelandtariffs.Thisindicatorisbelow100%ifoperationalcostiscoveredbyrevenues.Tobeabletorecovercoststhatincludecapitalexpenses(inadditiontooperatingexpenses)andtoaccountfornoncollection,thisindicatorshouldbenoticeablybelow100%.

AverageOpex Opex/cm ThisistheindicatoroftheaverageOPEXcostsincurredperunitofnaturalgasdistributed

AmeasureofhowmuchOPEXisincurredindistributingaunitofnaturalgas.Itsuseisrelevantinthecontextofmultivariateanalysis.

Opex/connection TheratioofOPEXincurredtoconnectionswithinthedistributionnetwork

AmeasureofhowmuchOPEXisincurredperconnection(ratio)withinthenetwork(i.e.itisnotareflectionoftheOPEXincurredbyeachconnection).Itsuseisrelevantinthecontextofmultivariateanalysis.

Opex/Km TheratioofOPEXincurredtothenumberofkilometresofpipelineinthedistributionnetwork

Ameasure ofhowmuchOPEXisincurredinthecontextofthelengthofthepipelinenetwork.Itsuseisrelevantinthecontextofmultivariateanalysis.

AverageCAPEX CAPEX/cm ThisistheindicatoroftheaverageCAPEXcostsincurredperunitofnaturalgasdistributed

AmeasureofhowmuchCAPEXisincurredindistributingaunitofnaturalgas.Itsuseisrelevantinthecontextofmultivariateanalysis.

CAPEX/connection TheratioofCAPEXincurredtoconnectionswithinthedistributionnetwork

AmeasureofhowmuchCAPEXisincurredperconnection(ratio)withinthenetwork(i.e.itisnotareflectionoftheOPEXincurredbyeachconnection).Itsuseisrelevantinthecontextofmultivariateanalysis.

CAPEX/Km TheratioofCAPEXincurredtothenumberofkilometresofnetworkpipelines

AmeasureofhowmuchCAPEXisincurredinthecontextofthelengthofthepipelinenetwork.Itsuseisrelevantinthecontextofmultivariateanalysis.

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3. Task2EUwideprinciplesfortariffregulation3.1. PolicyobjectivesandtheroleofDSOsTraditionallytheregulationofDSOactivitieshasbeenfocussedontheattainmentof(operational)costefficiencytogetherwithanadequatelevelofqualityofserviceandservicecoverage.Withinthisframework the DSOs have to adapt the infrastructure to the needs of demand growth and arepushedtoincreasetheir(operational)efficiencythroughincentivemeasuresonallowedrevenues.

Thegradualdiffusionofnewsmartgrid technologiesand thenewmodelsand rolesattributed toDSOs within the process of smartening of the grid have added new relevant objectives to thedistributionactivityandanewdimensionand relevance to the traditionalones. DSOsarenowafundamentalactorintheimplementationoftheactivenetworkandwillincreasinglyinteractwithTSOsandmarketparticipantsinthemanagementoftheirsystems.

ApartfromthepolicyobjectivestraditionallylinkedtoDSOactivities,theadditionalpolicyobjectivesthat can be identified in European and national policies in the fields of energymarkets, climatepoliciesandsecurityofsupplyare:

Encouragingenergyefficiency;

EncouragingthedevelopmentofDistributedEnergyResources(DER);

Contributingtosystemflexibility;

Promotingthewellfunctioningoftheelectricityandgasmarkets.

Theseobjectiveswillbepursuedthroughthedevelopmentandsmarteningofthedistributiongridsforwhich sixdeploymentprioritieshavebeen identifiedby theEUTPSmartGrids.Theprioritiesinclude:enablingthegridtointegrateuserswithnewrequirements;enhancingefficiencyindaytodaygridoperation;ensuringgridsecurity,systemcontrolandqualityofsupply;betterplanningoffuture grid investment; improving market functioning and customer service; enabling andencouragingstrongerandmoredirectinvolvementofconsumersintheirenergyusage.

TheaccomplishmentoftheabovementionedobjectivesanddeploymentprioritiesencompassesalltheaspectsoftheregulationofDSOactivities,including:

TherelationshipofDSOswithotherstakeholders;

Thedefinitionofstandardsforsmartgriddeployment;

The regulation of the interfaces (i.e. the boundaries of asset ownership and operatingactivities)betweentheDSOs,TSOsandmarketparticipants;

Theinstallationandmaintenanceofsmartmetering;

Datahandling;

Dataprivacyandsecurityrules;

Therolesandresponsibilitiesforelectricvehicles(EV)connection;

Theproceduresandplatforms for theprocurementanduseofsystemservices in theDSOnetworks;

TheregulationofDSOstariffsintermsofallowedrevenuesandtariffsstructure.

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This last aspect constitutes the focus of the current study and is particularly relevant for theaccomplishmentsofthecorepolicyobjectivesthatapplytoDSOactivities.

3.2. PolicyobjectiveslinkedtodistributiontariffsIn this chapter principles for distribution tariffs are discussedwithin the broader analysis of theobjectivesandtoolsavailabletoregulators,governmentsandtheCommissiontoshapethefutureroleoftheDSOs.

Basedon the traditionalandnew roleofDSOswithin theprocessofsmarteningof theelectricitynetwork the followingbroadsetofpolicyobjectivescanbe identified related todistribution tariffsystem:

Efficientoperationofthenetwork;

Deliveringtargetqualityrequirementsatminimumcost;

Allocatingdistributioncostsamongstnetworkusersinafairandefficientmanner;

Enhancingcoverageofnetworks.

Selectingtherightsetofinvestmentstodevelopandenhancedistributiongrids;

Coordinating the distribution network development and the deployment of smarttechnologieswiththedevelopmentofDistributedEnergyResources(DER);

Extractingdemandsideflexibility;

These last twoobjectivescorrespond to thenew roleattributed toDSOswith thedeploymentofsmart grid technologies and expected penetration ofDER at EU level, but all the objectives aredirectlyorindirectlyaffectedbythecurrentdevelopmentandsmarteningofdistributiongrids.

ThenewroleofDSOinthecurrentcontextwillinfactrequirethemtoaccommodatetheentranceofDER by expanding network capacity and improving its reliability, on the one side, and to allowdemand flexibility throughgrids characterizedby real time informationexchangesbetweenDSOsandtheTSOaswellasspeedingupgreatermarket integrationandoperationalnetworksecurity(ERGEG,2010)ontheother.Makingthispossibleisstrictlyrelatedtothecomprehensivedesignandregulationofdistributiontariffsasitwillbeaffectedby:

1. Thecapacityofrevenueregulationtoprovideincentivesoninvestmentandinnovation;

2. The capacity of the regulation of tariffs to promote and facilitate network users activeparticipationandflexibility.

3.3. Principlesoftariffregulation3.3.1. PrinciplesAccordingtoliteratureandregulatorypractice,thedesignoftariffregulationschemesshouldreflectvariousprinciplesrelatedtotheabilitytosendshorttermandlongtermsignalsforoptimalsystemoperationandsystemdevelopmentaswellasthesustainabilityofthedistributionbusinessandtheprotectionofconsumers.

Thosetariffregulationprinciplescanbegroupedintothreemainsets:

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ThefirstsetregardsSystemSustainabilityPrinciplesandincludes:

Sufficiencynetworktariffsshouldallowthefullrecoveryofefficientnetworkcostsandareasonablereturnoncapital

Achievabilityandadequacyoftheregulatedrateofreturntheregulatedrateofreturnshouldguaranteeareturninlinewiththerelativeriskoftheinvestmentsandfinancingconditions.

Achievabilityoftheincentivecomponentstheincentivemechanismshouldposeachievabletargets.

Additivityofcomponentsvarioustariffcomponentsmustadduptogivethetotalrevenuerequirementtoberecovered

ThesecondsetregardsEconomicEfficiencyPrinciplesthataimtoprovidesignalsbothtoDSOsandnetworkuserstobehaveinawaythatmaximisessocialwelfareinboththeshortandthelongterm.Thisincludes:

Productiveefficiencynetworkservicesshouldbedeliveredtoconsumersatthelowestpossiblecost

o Infrastructurecostefficiency:tariffregulationshouldaimtoincentiviseefficientinvestment;

o Operationalcostefficiency:tariffsregulationshouldaimtoreduceoperational(includingadministrative)costs;

o Coordinationtariffregulationshouldaimtominimisethetotalsystemcostbycoordinatingdistributioninvestmentandoperationwithotherstakeholdersinvestmentdecisionsandoperationincluding:transmission,generation,consumption,ancillaryservices.

Allocativeefficiencytariffshouldincentivisetheuserstousethegridefficiently

o PeakreductionNetworktariffsshouldpromotepeakdemandmanagementandaimtoreduceinfrastructurecostforpeakdemand

o FlexibilityTariffsshouldencouragesystemflexibility,e.g.distributedgeneration,demandresponseandenergyefficiency

o MarketpromotionTariffsshouldpromotewellfunctioningelectricityandgasmarkets

Costreflectivenessconsumersshouldbechargedinaccordancewiththecostsoftheservicestheyhavereceivedtakingintoaccounttheircontributiontopeakdemandandtheirpositioninthenetwork.

PromotionofinnovationtariffregulationshouldnotcreateanybarriertoDSOinnovation

ThethirdsetregardsProtectionPrinciplesinordertosafeguardtheinterestsofstakeholders:

Transparencythemethodologyandresultsoftariffallocationsshouldbepublishedandavailabletonetworkparticipants,whosebillsshouldclearlystateeachchargedcomponent

Nondiscriminationallusersthatbelongtoacertaincategoryanddemandthesamenetworkservicesshouldbechargedthesame,irrespectiveoftheenduseofelectricity

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Equitycertaincategoriesofusers,likelowincomeusers,orusersthatarelocatedinremoteareas,arechargedatariffwhichislowerthanthecostoftheservicesreceived

Simplicitythemethodologyandresultsofthetariffallocationsshouldbeeasytounderstandandimplement

Predictabilitytariffsshouldbebasedonobservablevariables,knownbyusersandotherinterestedparties,whoshouldbeabletoeasilyforecastfuturecharges

Stabilitytariffsmethodologyshouldbestableinordertominimizeregulatoryuncertainty

Consistencytariffregulationhavetocomplywiththelegislationinplace.

3.3.2. TradeoffsbetweenprinciplesThemultipleobjectivesbelongingtothethreesetsdescribedabovearenotalwayscompatiblewithoneanotherandinmanycasespresentcleartradeoffsthattheregulatorshouldtakeintoaccountwhendesigningtariffregulation.

For instance, tariffs that satisfy the cost reflectiveness principlesmay not satisfy the simplicityprincipleastheircalculationmayrequiretheuseofacomplexmethodologythattakesintoaccountthecostscausedbytheposition inthenetworkandthecontributiontopeaks.Moreover,thecostreflectiveness principle may be in contrast with the stability principle if it requires a frequentupdatingoftariffsdependingonnetworkconditionsanduse.

Withrespecttotheequityprinciple,asystemmaychooseto implement itby introducingasocialnetworktariff.Lowincomecustomersmayresulttohavealowertariffeventhoughtheyimposeacostofdeliveryidenticalorsimilartohighincomecustomers.Inthiscase,tariffsmaynotbeefficientbutcouldstillsatisfyothersystemrequirementssuchascompletecostrecovery.

Similarly,therecanbesystemsinwhichthecostofservicesdeliveredtocertainusersmaybehigherthan other users depending on their geographical position. In such electricity systems, postagestamptariffsbasedontheprincipleofequitywouldresultinahigheraveragetariffsforconsumersin relatively low cost areas, thereby subsiding the customers in high cost areas. Such a tariffstructureisinconsistentwiththeprincipleofallocativeefficiencyandcostreflectiveness,butcouldbedeemedfairacrossthepopulationasawhole.

Another example is given by the principle of allocative efficiency thatmay be in contrastwithsustainabilitysincenetworkcharges thatarebasedonmarginalcostsarenotexpectedtoprovidefull cost recovery (due to the lumpiness of grid investments, economies of scale, reliability constraints) toDSOs. In thesameway, theefficientallocationofcostsmaybebasedon theRamseypricingprinciple,whichisclearlydiscriminatory.

The tradeoff between System Sustainability Principles and Economic Efficiency Principles mayactually result to be particularly relevant in the current context where DSOs are increasinglyrequired to invest inandoperatenew (smart) technologies,asanalysedmore indepth inTask4,.Withthatrespectitisimportanttodecidethedegreetowhichregulatedfirmsshouldberequiredtoaccepttherisksofinvestinginnewtechnologiesandtherightbalancebetweenrisksandincentives.Ifregulatedfirmsarerequiredtotakeontherisksofinvestinginnewtechnologieswhichtypicallyhave uncertain cost and performance profiles one likely consequence is that those firms willrequirehigherratesofreturnbecauseinvestorswhichprovidecapitalforsuchnetworkinvestmentswillofferlessattractiveconditions(ascompensationforhigherlevelsofuncertainty,comparedwith

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investments in technologieswhich havewellunderstood lifetimes and cost profiles).As a result,regulatedfirmswilllikelydemandhigherallowedrevenuesfromtheregulator;andthiswouldhavetheeffectofpushinguppricesforconsumers.

It is therefore the case that during periods where a major determinant of the successfuldevelopmentofsmarterdistributionnetworksistheabilitytoattractcapital(atacceptablerates)forinvestments, the ideal point on the tradeoff may lean towards sustainability and theimplementationofregulatoryframeworkswhichplacelessriskonregulatedfirms.

3.3.3. RelevantsynergiesBesides the tradeoffs existing between different tariff regulatory principles there are also someimportant synergies thathave tobe taken intoaccount.Oneexample isgivenby the intertwinednatureof theproductive efficiency, allocative efficiency and cost causalityprinciples. The sharednetwork infactcomplicatesthedecisionofwhatnetworktobuild,howtobalanceshorttermcostminimizationwith long termnetworkdevelopment,whichconnections toenable,whatqualityofservicetoreachandhowtosharethecommoncostsofthenetworkamongdifferentusers.Allthat,takingintoaccountthatthereareindividualdecisionsthatcanaffecttheoverallcostofserviceandthecostsupportedbyfuturecustomersasinthecaseofnewconnections,peakloadandflexibilitydecisions of network users, while, on the other hand, there are general decisions that affectcustomerswithdifferentpreferencesandbenefits.

The principle of productive efficiency implies the principles of infrastructure cost efficiency andoperativecostefficiency.The regulationcan treat themseparatelyor together,dependingon theregulatory approach. One aspect of the productive efficiency principle that is gaining relevancetoday is the substitution effect of OPEX and CAPEX and the coordination between them. Thedeferredinvestmentvalueofdistributedgenerationcanbedefinedasthevalueofpostponingtheneedtoreinforcethesystemincaseofloadgrowthorreducingtheinvestmentrequiredincaseofequipment replacement14. A proper coordination of network investment and DER and flexibilitydevelopment can alleviate congestion and reduce the need for generation in other parts of thenetwork.Itmayalsochangethedistributionofloadandpowerflowsacrossthenetworkandlowertheoverall levelof losses in the system. It is important to take into account that the impactofdistributedgenerationonDSO investmentexpendituresmaybepositiveornegativedependentonnetwork characteristics, typeofnetworkmanagementoperationanddynamics in thedistributionnetwork (e.g. electricity demand growth and need for asset replacement). The impact on DSOinvestmentexpendituresalsovariessignificantlydependingonwheredistributedgeneratorschoosetoconnect. In theevent thatmostoralldistributedgeneratorschoose toconnect inareaswherespacecapacitydoesnotexist, thencostswillbeconsiderablyhigher than if theyconnect inareaswherethereissparecapacity.

These factorshighlight the relevanceofhow to incentivizeDSOs to engage in activedistributionsystem management and introduce another fundamental synergy between economic efficiencyprinciples and innovation promotion.While the form of remuneration itself results in differentincentivestobecostefficient(e.g.withinanincentivebasedsystemDSOsgettokeepallthesavingsfromcost reductions),andalso in thechoicesamongCAPEXandOPEX, the regulatory frameworkcan also include additional elements that recognize the different risk profile and cost drivers of14Caoetal.,2006;Mndezetal.,2006a;Jil&Goos,2006

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innovativetechnologiesandoperatingprocedures inordertostimulatetheirdeploymentbyDSOs.Indeed, inasurveyconductedbyCEER(2011),twomajorbarrierstothedeploymentofsmartandactivedistributionsystemswereidentified,namelyfirst,toencouragenetworkoperatorstochoosethemostcostefficientinvestmentsolutions,andsecond,toencouragenetworkoperatorstochooseinnovativesolutions.

3.4. EUwideprinciples3.4.1. CurrentprinciplespresentinEUlegislationThetwokeyDirectivesconcerningcommonrulesfortheinternalmarketinelectricity(2009/72/EC)andnaturalgas(2009/73/EC)providesignificantflexibilitytonationalregulatoryauthorities(NRAs)inthedevelopmentofregulationsforelectricityandnaturalgasdistributionpricing.

Inparticular,Article37(1) (a)ofDirective2009/72/ECandArticle41(1)(a)ofDirective2009/73/ECstatethattheNRAshallhavethedutyof:

Fixingor approving, in accordancewith transparent criteria, transmissionor

study on tariff design for distribution systems

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