Norwegian experience from re-regulating the power sector Tore Langset, Head of Economic Regulation, NVE

NVE regulates the power sector 193 Power Producers 227 Power Suppliers 1 Transmission System Operator (TSO) 124 Distribution System Operators (DSOs) Markets, prices fixed by competition Monopolies, prices fixed by economic regulation

Re-regulating the Power Sector Corporatization 1988-1992 From Public Administration to Regulator, and Public Utilities Unbundling 1991 TSO, legally DSOs, by accounting rules Develop Markets and regulation 1991-1996 Market design Economic Regulation

Development of the Economic Regulation of DSOs and TSO 1993 - 96 Cost+  data 1997 - 01 “CPI – X”  efficiency 2002 - 06 “CPI – X”  efficiency & quality 2007 - 12 Yardstick competition  efficiency, quality & investments 2013 - Yardstick competition  … R&D, smart meters, new technologies… Lessons learned Dependent on data with high quality More advanced models over time Developed in dialog with stakeholders Efficiency Quality of service Incentives for investments R&D, smart meters, new technologies,….

Economic Regulation of TSO and DSOs OPEX CAPEX Depreciations Return on Assets Cost Base Cap 40% Revenue Data Envelopment Analysis (DEA) Regression Analysis environmental differences Calibration Cost Norm 60% Yardstick Competition through benchmarking

DEA model for Local DSOs Output 2 / Input One Input: Cost Base Three Outputs Number of customers Km high voltage grid (> 1 kV) No of substations Output 1 / Input Input-oriented Cost minimizing Constant Returns to Scale (CRS)

Regression Analysis to adjust DEA-scores for environmental differences Geo1 (mountain environments) Geo2 (coastal environments) Geo3 (cold environments) Share of underground cables Share of lines located in forest

Using Geographical Information Systems (GIS) to assess environmental differences Left map: average steepness of terrain. Blue area indicates flat terrain, lighter areas indicates more steep terrain Right map: shows woods, indicated by the green areas. Distance to coast, indicated by the red/yellow/gray areas Maps are just examples Map of Norway is divided into grid squares of 100 by 100 meters In each grid square, we know what the geography looks like, we know what climate it faces, and we know which grid components are located in it Example: a line on the map. We know in what grid square it is located, the average temperature, average snow depth, average wind force, how steep the terrain is, and how much forest it is in this location This information makes it possible to adjust efficiency scores for environmental factors.

Resources Energy Regulatory Authority 61 economists, engineers and legal professionals Section for Economic Regulation of 124 DSOs, 1 TSO 13 in-house economists Developing regulations and models Data collection and validation Various analysis Benchmarking Programming Compliance monitoring DSO guidance Use academics and consultants when exploring new areas of knowledge

What’s next? Ongoing R&D Benchmarking Power and Energy Distance Construction of exogenous output variables combining information from Smart Meters with GIS to construct and apply advanced optimization technics Market surveillance Develop Machine Learning Methods and Models for detecting market manipulation in the Wholesale Market

Thank you for your attention! trl@nve.no