Network operators own, maintain and develop the infrastructure for transmission and distribution of electricity. To ensure socially efficient operation, utilisation and development of networks, the authorities regulate network operators using a range of policy instruments.
NVE, in the role of being the national regulatory authority in Norway, is responsible for the regulation of the distribution system operators (DSOs) and the transmission system operator Statnett (TSO). The DSOs operate local (22kV-240V) and regional (132kV-33kV) distribution networks. The TSO operates the transmission grid (400kV-132kV).
NVE regulates the network operators with a combination of direct and economic revenue regulations, as well as compliance monitoring.
Direct regulations define standards, roles and procedures. Compliance monitoring is important to ensure that the operators follow these regulations. The role of the economic revenue regulation is to incentivise the network operators to provide a stable and secure service in a socially efficient manner.
In the economic revenue regulation, each network operator receives an annually allowed revenue set as a legal decision. The allowed revenue covers operating cost and depreciations and gives a reasonable return on investments given efficient operation, utilisation and development of the network.
The companies set their tariffs based on their allowed revenue, which is the sum of the revenue cap, pass-through costs related to property tax and tariffs paid to other regulated networks. Approved R&D costs are also included. To remove the time lag in the cost of capital recovery, the difference between actual cost of capital (depreciations and return on assets) in the revenue cap year and the amounts from two years back are included.
Further, any Costs of Energy Not Supplied (CENS) during the year are deducted from the allowed revenues. CENS is a measure of the calculated value of lost load for the customers. The CENS arrangement provides an incentive for network operators to maintain their assets properly and to ensure necessary investments in order to avoid power outages at a socioeconomic efficient level.
The revenue compliance is subject to regulatory control. Excess or deficit revenue for a given year is calculated as the difference between actual collected revenues and allowed revenues in a year. Actual collected revenues include tariff revenues from customers, congestion revenue and revenue from system operations. As revenue generated from congestions are considered to be a part of Statnett’s actual revenue, these revenues thereby reduce the base for tariffs that can be collected from Norwegian customers. However, costs related to removing congestion are also part of the tariff base, which implies that the congestion revenue is used in order to finance investments to eliminate congestion. NVE decides an excess/deficit revenue balance every year. The decision is made approximately one year after the RC is set, when the companies have reported their actual costs in the RC-year. The balance is to be adjusted towards zero over time, through tariff changes. Excess revenues must be reimbursed to the customers, while deficit revenues may be recovered.
According to the economic regulation of network companies, transactions within a vertically integrated company and transactions between network company and other companies in the same group needs to be based on competitive market conditions. Further, the national regulator may impose a specific method for cost allocation between areas of operation in vertically integrated companies. NVE audits annually a selection of the companies to reveal any cross-subsidies.
Revenue Cap model
NVE regulates the network companies using an incentive-based revenue cap (RC) model. The RC is set annually, based on a formula of 40 percent cost recovery and 60 percent cost norm resulting from benchmarking models. There is a two-year lag in the cost data. The model regards operators of all networks. Statnett is benchmarked together with other European TSOs, while the other network operators are benchmarked in models based on data envelopment analysis (DEA). There are separate models for local and regional distribution. The DEA-results are adjusted using second stage regression analyses to take into account the differences in geographical challenges between the companies. The models take differences in network structure and operating environments into account.
NVE notifies the RC for the coming year in November and the network companies set the tariffs accordingly. All data, benchmarking results and revenue cap calculations are published on web every year. This increase the transparency of the methodology and data used in the calculation of RC. In principle, the only difference between the notified and the final RC for a year, is the actual prices, inflation and WACC that has to be estimated in the notification. In addition to this, any errors in the companies’ cost or technical data discovered after the notification, are corrected in the final RC.
Any changes in the rules and regulations will be subject to a public consultation, implemented before the RC-year begins. Changes in the methodologies not stated in the regulation, are mainly subject to a consultation with affected parties but are also publicly available on NVE’s web site.
The RCs are calculated based on expected total costs using inflated cost data from two years back. The deviation between the expected total costs and the actual total costs of all companies in a year is included in the RC calculation two years later (e.g. the deviation between expected and actual costs for 2014 will be corrected in the RC for 2016). The total cost deviation is distributed among the companies using their share of the sectors total regulatory asset base. This mechanism does not apply to the regulation of Statnett.