Regulation of the Energy Market in Finland, Nordic Countries and EU. Veli-Pekka Saajo Head of Economic Regulation Energy Market Authority

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1 Regulation of the Energy Market in Finland, Nordic Countries and EU Veli-Pekka Saajo Head of Economic Regulation Energy Market Authority

2 PROACTIVE MARKET SUPERVISION Energy Market Authority (EMV) supervises and monitors the activities of the electricity and natural gas markets and enhances the realization of climate goals

3 EU Energy Market Directive 2009/72/EC 37.8: In fixing or approving the tariffs or methodologies and the balancing services, the regulatory authorities shall ensure that transmission and distribution system operators are granted appropriate incentives, over both the short and long term, to increase efficiencies, foster market integration and security of supply and support the related research activities.

4 Legal basis for Methodology Decisions With the methodology decision EMV can order on following (1) valuation principles of capital bound to network operations; (2) method of determining the approved return on the capital bound to network operations; (3) methods of determining the result of the system operations and the correction of the income statement and balance sheet required by them; (4) target encouraging improvement of the efficiency of the system operations and the method of determining it, as well as a the method to apply the target in pricing

5 DSO regulation model since 2005 Fixed regulatory periods of 4 years 1 st regulatory period started in January 1st, 2005 covering years and 2 nd years Fixed methodology to be applied during the regulatory period according to the methodology decisions After the regulatory period, EMV gives regulatory decisions in which realised profits or losses are calculated and compared to allowed rate of return DSOs set the actual network charges and tariffs independently

6 Decisions after the Regulatory Period EMV will confirm with its decision the reasonable rate of return (in euro) during the entire regulatory period Operators are obliged to reduce their network service fees during the on-going period by the amount by which the return has exceeded the reasonable return during previous period The reimbursement will be effectuated through pricing no direct refunding to separate customers Operators are also entitled to raise their fees by the amount that the return has remained below the reasonable return during previous period Decisions can be appealed to the Market Court (and to the Supreme Administrative Court)

7 Incentive based regulation for the DSOs Additional Cost Additional Yield Allowed turnover with interruption cost Efficiency Requirement: Interruption cost Controllable OPEX Reasonable rate of return Pass-Through Cost Cost Performance Reasonable rate of return Pass-Through Cost Cost Performance Reasonable rate of return Pass-Through Cost

8 Nordic Electricity Network Market 1 TSO 6 DNOs 1 TSO 209 DNOs 1 TSO 169 DNOs 1 TSO 99 DNOs 1 TSO 92 DNOs

9 Regulation in the Nordic Countries NordREG since 1999 Sweden: a new network regulation model to be implemented this year First ex ante regulation period starts in 2012; Revenue cap? Norway: a long history in network regulation Regulation started in 1991 and Revenue cap with yardstick applied Island: network regulation started in 2004 Revenue cap regulation Denmark: network regulation began in 2000 Revenue cap regulation

10 European Regulation ACER - Agency for the Cooperation of Energy Regulators Director: Alberto Pototschnig, Location: Ljubljana, Slovenia Effective March 2011 ENTSO-E launched in Dec 2008

11 3rd Package Art 3:11 In order to promote energy efficiency, Member States / / shall strongly recommend that electricity undertakings optimize the use of electricity, for example by providing energy management services, developing innovative pricing formulas, or introducing intelligent metering systems or smart grids, where appropriate.

12 German DSO Regulation Model 4 TSOs and 836 DSOs! Revenue Cap regulation model with yardstick since 2009 Efficiency requirements Quality regulation to be implemented in to the regulation model German Network Charges Ordinances are more detailed than Finnish Ordinances Several open court cases

13 Conclusion Finnish Regulation Model evolving and giving incentives to the Electricity Distribution Companies Several court cases in the regulation history Nordic Regulation Models differ significantly EU Regulation taking first steps with ACER German Electricity Distribution Regulation Several court case in the regulation history