Benchmarking in Regulation Current practise and future developments

1
Benchmarking in Regulation Current practise and
future developments

• Thor Erik Grammeltvedt
• Senior Adviser
• Section for economic regulation
• Norwegian Water Recourses and Energy Directorate

2
Content

• The main elements of the Norwegian Revenue Cap
  Regulation.
• Difference and similarities compeered to other
  regulatory regimes.
• Future devolvement of the regulatory models and
  the benchmarking tools.

3
The development of the Norwegian regulation

• Before 1990 cost of service regulation.
• 1990 to 1996 ex post rate of return regulation.
• Since 1997 ex ante revenue cap (RC)
• 1997 RC based on cost from 1994 and 1995 with a
  general X of 2 pct.
• 1998-2001 RC with X between 1,5 -4,5 pct.
• 2002-06 RC based on cost from 1996-99 with X
  between 1,5 and 6,7 pct.
• 2007 RC - yardstick based on cost with a 2 year
  lag 40 pct. cost recovery and 60 pct. norm.

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The development of the X

• 1997 Based on studies of historical
  productivity using Data Envelopment Analysis
  (DEA).
• 1998-2001 DEA-model
• Input Labour, services, capital (both historical
  and replacement value) and losses.
• Output Energy delivered, number of customers and
  km of HV, LV and Sea cables.
• 2002-2006 DEA-model
• Input Labour, services, capital (both historical
  and replacement value), losses and an
  environmental variable (Estimated amount of
  energy not delivered).
• Output Energy delivered, number of customers and
  km of HV, LV
• 2007 DEA-model
• Input Total cost.
• Output Energy, Holiday homes, Reaming Customers,
  Km HV, stations, degree of transformation and 3
  environmental variables.

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The information game - Basic tradeoffs in
regulatory design

• Three main problems in contract design
• Motivation
• Coordination
• Transaction cost

• Incentives by decupling costs and revenue
• Time lag
• Benchmarks or Norms

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Similarities and differences
Degree of norm/benchmark
DEA models
Engineering models
Ex ante
Ex post
Degree of cost recovery
7
Future development an research tasks

• More yardstick - reducing the time lag in the ex
  ante models
• Reduce investment uncertainty.
• Introduce more norm.
• Main challenge in the current DEA models is the
  application of endogenous output variables.
• Calling for the development engineering models
  either
• to create exogenous output variables or
• to be applied directly inn the regulation