Commission for Energy Regulation (CER) is responsible for the regulation of the electricity sector and, in particular, it plays a major role in transmission and distribution of electricity. For a better understanding of the electricity distribution sector in Ireland, the other activities should also be considered: generation, transmission and commercialization.
First, the generation market is fully liberalised, leading to an increase in competition in recent years. Regarding transmission, EirGrid is the independent state-owned body licensed by the CER to act as unique transmission system operator (TSO) and is responsible for the operation, development and maintenance of the system. Third, the distribution of electricity constitutes a natural monopoly and the company that explores that service is ESB Networks, the distribution system operator (DSO). ESB Networks also owns the transmission system and is responsible for carrying out the maintenance and construction of the system. Furthermore, relatively to commercialization, there are a number of electricity suppliers licensed by CER to supply electricity to retail customers. However, ESB Electic Ireland (formerly called ESB Customer Supply), an independent business unit within ESB, still nowadays operates as the Public Electricity Supplier. Hence, it is required to supply all customers who are not served by another supplier.
CER applies an incentive based approach to regulate the distribution sector. CER uses a Revenue cap in order to control the revenues/charges of the DSO, and in doing so it considers different elements/issues. First, the incentive regulation can be broadly described as a CPI-X model since an inflation index is assigned to the base allowable revenue. However, the efficiencies enter mainly in the incentive to provide the service with a cost below the forecasted values of capex and opex, whereas the X is used to smooth out the allowed revenue over the regulatory period (2011-2015). Second, other costs that are in equation and do not enter in the base level of revenue allowed are the costs the regulator is not able to forecast (Uncertain costs) and costs that lie outside the business’s control (Pass-through costs). CER objective is to minimize both these kind of costs. Further incentives are also considered in the formula, but are limited. An example is the incentive to improve quality of supply to the “worst served customers”, where the regulator’s objective is to ensure that although outages in cities and villages do not affect the same way, they must receive equal treatment from the electricity distributor. Finally, the regulator introduce two correction factors, whose role is to balance the revenue equation according to differences between actual and forecasted values across time.
The key principles that lie behind this formula do not concern only efficiency. In fact, the maximum revenue allowed should be sufficient in order to develop, operate and enhance the distribution system and to provide a reasonable return on assets.
A direct rule is not applied to the distribution tariffs because they are directly determined by the specification of the maximum revenue allowed. However, they need the approval of the regulator.
Diogo Ribeiro, 1707 Management
Mariana Costa, 1902 Management
Riccardo Passeggeri, 677 Economics
Rita Taborda, 1943 Management