1. Cired 2003 - Alpha Session 6 Special Report Question 3
“Is there a need for an international standardisation of the methods how to remunerate the distribution companies and the setting of the price cap for a given utility?”

2. Basic Principles of Regulation
Operating Expenditure
Return
Cost of Capital
Regulatory Asset Base
Depreciation
Asset Lives
Capital Expenditure
Total Revenue
A “Price Control”

3. Basic Types of Regulatory Regime
Rate of return regulation
typically used in US
rates usually set annually
Incentive based regulation
performance based regulation / ‘RPI - X’ regulation
rates / revenue set for a fixed number of years
incentive to make expenditure efficiency savings
In both cases:
Total Revenue = Operating Costs + Depreciation + Return

4. What do we mean by “Price Cap”
Basic price cap:
Pt = Pt-1(1 + RPI-X)
Predominantly variable costs:e.g.Supply
Basic revenue cap:
price * measure of volume
High fixed costs: e.g. Transmission
Variable revenue cap - Hybrid cap:
link revenue to a ‘revenue driver’
Both variable and fixed costs: e.g. Distribution
Allowed Revenue
(as % of expected
revenue)
Price Cap
Hybrid Control
100%
Revenue Cap
Volume
Expected
Volume

5. Things that will need to be Standardised
Excluded Services
Accounting Practices
Cost of Capital
Asset Valuation
Price Index
Excluded Services
work done for a third party e.g. connections; diversions etc
metering
Accounting Practices
OPEX capex split CCA, HCA etc. RAGs
Cost of Capital
Pre or post Tax
Asset Valuation
HCA, CCA, Optimized, Replacement deprival values
Price Index