PAN-EUROPEAN BENCHMARKING OF ELECTRICITY DISTRIBUTION COMPANIES - The EURELECTRIC experience Mr. Otso KUUSISTO Chairman of EURELECTRIC WG “Distribution Benchmarking”

Representing the European Electricity Industry at Expert, Strategic and Policy-making Level

Our technical partners:

48 companies from 22 countries were benchmarked MAIN PARTIES INVOLVED: –EURELECTRIC WG Distribution Benchmarking –EURELECTRIC NE Finance & Economics –PA Consulting Group

Why benchmarking? Benchmarking already used by many regulators in assessing companies’ efficiencies Learning about benchmarking methods Disseminating knowledge –various degrees of understanding and experience in the participants Experimenting on European-level –Anticipating regulators’ actions –first truly pan-European benchmarking Indicative benchmark of overall performance

Interest in International Benchmarking

Method used “Grid Volume model” developed by PA Consulting Group Cost driversCost drivers : physical parts of grid infrastructure Cost equivalentCost equivalent : average costs of operating a cost driver / year Grid volumeGrid volume = cost drivers cost equivalents Only OPEX benchmarked Companies compensated for 1) labour cost level and 2) customer density

Method used (2) Cost drivers (indexed):

Method used (3) Participating companies grouped by 1) Region 1) Region : –North - South - East - Central 2) Size 2) Size : (number of customers) –Large: > –Medium: –Small: < ) Level of urbanisation 3) Level of urbanisation : Nr of customers / km of low voltage line –“City”: > 80 –“Mixed”: –“Rural”: < 20

Main results (1)

Main results (2)

Main results (3)

Main results (4)

Main results (summary) –Performance from 100% to 45% * –Efficient companies in all regions of Europe –Efficient companies in all size categories –Sensitivity: robust model, but data uncertain –High satisfaction by participants (survey) * 3 low-end companies considered as outliers; at the top-end 2 companies outliers; 20% error margin

Troubles & uncertainties –22 different accounting legislations, 48 different internal accounting systems… –Guidelines & manual created for the project, to help report the various operating costs –Separating OPEX and CAPEX not always self-evident: ratio of CAPEX to OPEX: from 28% to 72%… –Allocation of overhead costs to operations also added to uncertainty –Different degree of unbundling complicates allocation –Labour costs: 10-fold difference between highest and lowest salaries

CONCLUSIONS (1) THE MAIN UNCERTAINTY IN THE BENCHMARKING STEMS FROM THE USE OF DIFFERENT ACCOUNTING PRINCIPLES WELL DEFINED DATA IS A BASIC PREREQUISITE FOR ANY BENCHMARKING EXERCISE

CONCLUSIONS (2) THE CORRECTION FOR DIFFERENT LABOUR COST LEVELS IS PRAGMATIC – AND AN “EXACT” CORRECTION CANNOT BE DEFINED The effect of labour cost level on the total performance is influenced by: Average labour costs (wage level) Productivity Level of automation

CONCLUSIONS (3) THE DENSITY CORRECTION IS AN APPROXIMATION MADE TO COMPENSATE CITY COMPANIES THE MODEL CAN BE IMPROVED – IN ORDER TO IMPROVE THE BENCHMARK AND TO INCREASE LEARNING

What we got… –INDICATIVE benchmark of overall efficiency –Results NOT suitable to draw regulatory conclusions –Sharing of experience among participants –Improved understanding of benchmarking as a process within participants inside EURELECTRIC “BENCHMARKING IS FAR FROM BEING EXACT SCIENCE”

CONCLUSIONS Aims of Benchmarking are Important: Incentives for Companies High quality of supply Lowest Possible costs Appropriate level of investments

Project timing: February – September Project start-up 2 Adaptation of model to national conditions (questionnaire) 3 Fir st wor k- sho p 4 Data colle ction pha se 5 Calc u- latio ns 6 Fi na l w or k- sh op MarchAprilJuneMayFebruaryJuly 7 Last data adju st- men ts 8 Final reports September

Two recent EURELECTRIC reports: –“Pan-European Benchmarking of Electricity Distribution Companies - Final Report” –“Business Trends in the European Power Industry - the Financial Situation of Distribution Business” BOTH REPORTS AVAILABLE AT OUR CONFERENCE STAND! Distribution issues in EURELECTRIC –Networks Committee –WG “Distribution Issues”, chaired by Peter BIRKNER (Lech-Elektrizitätswerke AG) MORE INFORMATION AVAILABLE AT OUR CONFERENCE STAND!

THANK YOU FOR YOUR ATTENTION! Contacts: Mr. Otso KUUSISTO Mr. Mihai PAUN The Union of the Electricity Industry – EURELECTRIC