The aim of a price control regulation is to protect consumers paying correct prices, while ensuring the company remains viable and having an incentive to operate efficiently. The price control signifies a constraint on the overall level of the company revenue and corresponding prices.
The Romanian Energy Regulatory Authority (ANRE) has selected and implemented in the year 2004 the revenue cap regulation.
The transmission system operator (TSO) has an exclusive monopoly over the provision of transmission services granted by the Romanian Law. The price control applied by the Romanian regulator for the first time in 2005, has a major scope to protect consumer interests by a fair allocation of the gains resulted from the increase of efficiency over the targets set by regulator, between TSO and customers. Transmission tariffs are based on justified cost. Their stability is realized by the smoothing mechanism over the regulatory period. In order to close the balance sheet of the company from prognoses/estimation to achieved values, annual and at the end of the regulatory period corrections are performed.
The schemes applied to controllable operating a maintenance cost and, from the second regulatory period, losses gave to TSO the incentives to increase the efficiency of its activity in order to increase their profits on short term. These schemes also gave to TSO the base in establishment of new efficient investments. More, using a rate of return applied to the average assets base registered in each year of the regulatory period versus a cost plus methodology, gives the incentive to TSO to invest. Only the efficient investments in the transmission network are considered by the regulator.
Penalties are applied by the mechanism if, it doesn't receive the proper attention from the TSO.
In order to ensure the quality of the transmission service, according to the special provision of the Electricity Law no. 13/2007 (no. 318/2003), quality standards are in force for supplying, distribution, transmission and system service beginning with the year 2008.
The performance publication represents the basis in promoting the quality. The quality standards with overall and customer guaranteed standards make sure that no uneconomic degradation of quality occurs. Overall guaranteed standards are levels of performance set by the regulator and companies must use their best endeavours to comply with them, or penalties are applied. Customer guaranteed standards are levels of performance which must be achieved in each individual delivery of a specified service. Customers who fail to receive the required level of service under a guaranteed standard may be entitled to receive a penalty payment.
The incentive schemes represent an even more powerful instrument to promote the improving of quality, in the establishment of investments. Price and quality are closely related: each quality is associated with a price adjustment.
The company's performance is compared to some quality target; deviations result in either a penalty or a reward. There are many variations of quality incentive schemes. Price and quality can be mapped continuously, in a discrete fashion, or a combination of these, the level of the penalty or reward can be capped, dead bands may be applied etc..
The idea for this capping is to reduce the financial risks at the company and customers. The dead band is introduced in order to avoid, on short term, the stochastic element which can lead to significant quality fluctuations and as result, unintended penalty and reward fluctuations. Asymmetries between penalty and reward are possible.
At present, ANRE intends to impose an incentive scheme for quality of transmission service related to the continuity aspect. It monitors the Energy Not Served – ENS and Average Interruption Time – AIT for transmission service and balancing energy requested due to the network congestion and their annual costs for system service. For technical and commercial aspects, guaranteed standards are in place. In order to promote the stability of the tariffs, the correction's cap of the associated revenue is calculated based on the smoothed revenue to be covered by tariff.
The evolution of the ENS (unplanned interruptions caused by TSO), except force majeure, varies between 80 and 387 MWh for period 2004 – 2008. The investment program, configuration and the low loading level of the network allowed the TSO a good efficiency in this field.
A sensitivity analyses will be performed on the target of the incentive scheme, considering a dead band of ±20% and an inflexion band of ±40%.
The paper will present, for a discount rate of 10%, the variation of the consumers gain and ENS price over the study period 2004 – 2008 with target considered for the incentive scheme.
In order to reduce the financial risk and the stochastic variation, the scheme continuous with cap and dead band is considered as appropriated. The proposed target of the scheme is 120 MWh of energy not served (unplanned interruptions caused by TSO) with a dead band of ±20% and an inflexion band of ±40%.
More, for calibration, two options are considered as transitory application of the scheme: with a correction cap of ± 2.5% of associated yearly revenue without correction of the next tariff period revenue or with a correction cap of ± 1.0% of associated yearly revenue with correction of the next tariff period revenue. After the transitory period, the level of the correction cap established by the Romanian regulator will not be over ± 2.5% of associated yearly revenue, according to the tariff methodology in force. Accordingly, the correction cap associated to the year 2008 is 2.66 mil Euro for the cap of ± 1.0% and 6.64 mil Euro for the cap of ± 2.5%.
New developments are considered regarding to the undelivered energy from generators and, for the quality of the system service, to the congestion, as soon as more historical data will be available.