What can we learn from Benchmarking? Bård Uthus BKK Nett AS

BKK One of Norway’s largest companies in the field of –Generation ( 6 TWh) –Sale ( customers) –Transport of electrical power Owned by local authorites and Statkraft Second largest distribution company –550 employees – customers –Energy supplied: 6 TWh – km power lines and cables

Introduction – historical review 1991 New Energy Act Unbundling of supply and transmission Rate of Return Regulation Revenue cap regulation Benchmarking study 2001 Quality dependent revenue CENS-arrangement Revision Revenue cap regulation New Benchmarking study

DEA, a regulatory Benchmarking tool Benchmarking as a mean to reduce tariffs Often based on DEA –A linear programming technique –Handle multiple inputs and outputs in a neutral way Input: Total costs Output: Customers, energy, network, quality of supply –Poor data quality for one company normally not critical to others Efficiency = Red line Black line DEA is easy to calculate, yet difficult to understand

Parametric Benchmarking methods Size Total costs Efficiency = Red line Black line Benchmarking as a mean to improve Often based on cost functions or activities –Require accurate knowledge about conditions inside a company Time consuming and expensive –Incorrect data for one company can be critical to others Compares the actual costs with estimated necessary costs Parametric methods often difficult to calculate, yet easy to understand

Experience Make improvements, not wait for more exact Benchmarking studies BKK has participated in several Benchmarking studies –Internal and regional studies –Effometer, a Norwegian study –The grid volume model, a European study Benchmarking is not an exact science –Often followed up with new studies Inefficient activities and actions of improvement often known before Benchmarking studies are done

Results from regional benchmarking Statkraft SF, has ownership interests in several energy companies, also BKK –Benchmarking used to exploit synergy effects Based on a simplified cost function Replacement value and customers –Action From time based to condition based maintenance strategy Experience shows that simplified Benchmarking is precise enough to indicate inefficient activities

Internal Benchmarking The benchmarking results can be used to control performance year by year Ratio between operation costs and replacement value a rather stable size Increased operating costs in 2002 –Less efficient

International Benchmarking International Benchmarking studies must deal with differences in: –Cost level –Accounting principles, tax legislation and labour legislation –Cost allocation between grid activities and other activities –Data quality –Demand for power quality The European Benchmarking shows a significant distance between the most and the least efficient company International Benchmarking more inaccurate than national Benchmarking, and should not be used for regulation purposes

What can we learn from Benchmarking? DEA seems to be the preferred Regulatory Benchmarking tool –Be familiar with this model to ensure that you are a qualified discussion partner You don’t need exact benchmarking studies to start actions of improvements International Benchmarking should not be used for regulation purposes