Chair for Energy Management Prof. Dr. Christoph Weber German Electricity Infrastructure Incentive Regulation: Simultaneously Overcapitalizing and Underexpending in Infrastructure? 6th Conference on Applied Infrastructure Research Berlin, 05./06. October 2007 Dominik Schober (speaker) Christoph Weber Chair for Management Science and Energy Economics University of Duisburg-Essen, Germany 1
Chair for Energy Management Prof. Dr. Christoph Weber Overview 1. Introduction of the problem 2. Various problems in refinancing caused by insufficient standardisation 1. Different depreciation policies 2. Different activation policies 3. Heterogeneous capital structures 4. Application of two cost bases 5. Efficient firm standard 3. Overcapitalization tendencies Asset register with standardised cost 4. Possible solutions and their drawbacks 5. Annex: Proofs 2
Chair for Energy Management Prof. Dr. Christoph Weber „Incentive Regulation in Germany: Averch-Johnson and Unsustainable Refinancing of Infrastructure?“ • German by-law will introduce Revenue Cap-Yardstick Hybrid • Key elements of regulation: Benchmark level Cost bases • has to be sufficient • unstandardised If not: No firm that can vs standardised Cost base for survive in the long run cost bases for efficiency target revenue determination Unsustainability Cost base for efficiency factor • no refinancing of calculation investments Cost base for start of revenue Overcapitalization gliding path • tendencies similar to Averch-Johnson effect 3
Chair for Energy Management Prof. Dr. Christoph Weber the 3 cost bases Positive X cost factor? 12 11 -9% 10 10 +25% 8 8 standardised -9% 7,2 benchmarking cost base standardised 6 benchmarking cost base unstandardised cost of Po 4 2 0 1 2 3 4 5 t 4
Chair for Energy Management Prof. Dr. Christoph Weber The 3 cost bases Firm i ‘s profit in pure yardstick : • π = − R C X ind i i unstd , i ⎛ ⎞ − C min C ⎜ ⎟ π = − − std , i std , j C 1 C ⎜ ⎟ i unstd , i unstd , i C ⎝ ⎠ std , i ⎛ ⎞ C ⎜ ⎟ → π = − unstd , i min C C ⎜ ⎟ i std , j unstd , i ⎝ C ⎠ std , i − C C = std , i unstd , i Additional X factor: X • 3 c ost bases C unstd , i 5
Chair for Energy Management Prof. Dr. Christoph Weber The 3 cost bases Firm i ‘s profit in transition period: hybrid yardstick-revenue cap • • One benchmarking period with glide path π = − Glide path R C p , i p , i unstd , p , i parameter ⎛ ⎞ − T C min C ∑ ⎜ ⎟ π = − α − std , t , i std , t , j C 1 ( t ) C ⎜ ⎟ p , i unstd , t , i unstd , t , i C ⎝ ⎠ = t 1 std , t , i • Weighted revenue: ⎛ ⎞ T C ∑ ⎜ ⎟ π = − α + α − unstd , t , i ( 1 ( t )) C ( t ) min C C ⎜ ⎟ p , i unstd , t , i std , t , j unstd , t , i C ⎝ ⎠ = t 1 std , t , i Revenue cap Benchmarking 6
Chair for Energy Management Prof. Dr. Christoph Weber just 2 standardised cost bases the 3 cost bases for revenue determination cost 12 11 -10% 10 10 +25% 8 8 standardised -10% 7,2 benchmarking cost base standardised 6 benchmarking cost base unstandardised cost of Po 4 2 0 1 2 3 4 5 t 7
Chair for Energy Management Prof. Dr. Christoph Weber „Incentive Regulation in Germany: Averch-Johnson and Unsustainable Refinancing of Infrastructure?“ • German by-law will introduce Revenue Cap-Yardstick Hybrid • Key challenges for regulation: Depreciation policy Heterogeneous • comparability of costs capital vintage Activation policy Maintenance is difficult with structures policy • standardisation of heterogeneous capital capital costs is a • choice of structures • will affect lifetime of problem when standardisation assets � standardisation investments are hidden period is difficult in operating costs • even standardising costs • asym. Info prevents does not help, if perfect identification depreciated assets are not considered 8
Chair for Energy Management Prof. Dr. Christoph Weber Key challenges for regulation – remedies? • Attempts to control challenges: Different standardisation approaches • Recalculation of Asset register Annuity-based approach current cost with • physical asset register • for capex : indexing of • identical asset lifetimes historical investment cost • valuation with standard cost • respect to influence of • also: totex annuities depreciation period length on cost of capital employed 9
Chair for Energy Management Prof. Dr. Christoph Weber Depreciation policy • Pure capex effect • Investment cycles and „sudden death“ of assets K t, τ τ A A i � Easy to heal with simple standardisation of depreciation periods � Adapt cost of capital employed equivalently 10
Chair for Energy Management Prof. Dr. Christoph Weber Activation policy Constant lifetime � constant length of investment cycle • Costs w/ No • capital and operating costs: Activation � Investments solely depreciation and constant maintenance entirely hidden in opex K t, τ Costs w/ Complete Activation � Depreciation on investments is smoothed over the τ cycle � Investment needs in t are entirely captured by costs in t and not distributed over depreciation period 11
Chair for Energy Management Prof. Dr. Christoph Weber opex Activation policy capex A A ∑ ∑ = α + − α K a K ( 1 ) a K τ τ t , i i t , i , i t , i , τ = τ = 1 1 Even if capital costs are standardised by an annuity-based approach, • following cost base will result: A A ∑ ∑ = − − α + + − α C a K ( 1 ) a K O ( 1 ) I τ τ − t , i t , i , i t , i , t , i i t N , i max τ = τ = 1 1 = + − − α − C aK O ( 1 )( aK I ) − t , i G t , i i G t N , i max • A regulator would derive following benchmark: (for the sake of simplicity identical activation policies are assumed) = + − − α + − α B aK O ( 1 ) aK ( 1 ) min I − t G t , i G t N , i ∈ max i S � Would be easy to heal with annuity-based approach on total expenditure 12
Chair for Energy Management Prof. Dr. Christoph Weber Heterogeneous capital structures Even with an annuity-based approach on total cost, heterogeneous capital structures can lead to problems… 1. Standardisation period is not equal to the length of the investment cycles 2. Different maintenance strategies 13
Chair for Energy Management Prof. Dr. Christoph Weber Standardisation period ≠ asset lifetime • Example: Standardisation period is longer than the investment cycle K t, τ τ V>N=A � Benchmark would be set by: = + B aK min aI − − t G t N 1 , i ∈ max i S � heterogeneous capital structures lead to unsustainable refinancing 14
Chair for Energy Management Prof. Dr. Christoph Weber Standardisation period ≠ asset lifetime • Consequence: – Standardisation period has to be set equal to asset lifetime � annuity-based approach based on indexed historical cost, of course doesn‘t help neither – Asset lifetimes would have to be respected individually • Possible solution: Asset register with current cost � consideration of one entire capital stock 15
Chair for Energy Management Prof. Dr. Christoph Weber Different maintenance strategies • If grid operators have influenced the asset lifetime by different maintenance strategies, the standardised cost bases have also different cycles K t, τ firm i firm j investment of i maintenance of j maintenance of i investment of j τ – � The benchmark would be set by ⎛ ⎞ + A j ∑ ⎜ ⎟ K − τ + ⎜ ⎟ t 1 , j A = τ = + φ τ 1 B min aK o K ⎜ ⎟ t , j t G t G ∈ K A j S ⎜ ⎟ G j ⎜ 16 ⎝ ⎠
Chair for Energy Management Prof. Dr. Christoph Weber Different maintenance strategies • Sustainability would be pure luck: if different capital costs and different operating costs would outweigh each other • Very unlikely: Capital costs will probably tend to decrease more than operating expenditure will increase • The same as before: Asset register with current cost 17
Chair for Energy Management Prof. Dr. Christoph Weber Efficient Firm Standard Certain variation in cost of respective firms � usual for competition • • Each firm will have problems of refinancing in the long run • Grid operators continue to produce as long as opex are covered � Set the benchmark also for sustainably efficient firms (…until they leave the market…) • proposition: π = − min C C – instead of i std , j unstd , i = ∑ – better M 1 π γ − C C i std , j unstd , i M = j 1 „convenient“ intensity of competition � workable competition 18
Recommend
More recommend
