NMa announces method of tariff regulation network managers

The Netherlands Competition Authority (NMa) today announces in what way it will calculate tariffs for regional network managers in the electricity sector in the third regulatory period (2007 up to and including 2009). To this end a number of method decisions have been published, indicating how the NMa wishes to stimulate network managers to achieve an optimal price/ quality ratio.

The Office of Energy Regulation (DTe) of the NMa regulates network managers, because they operate as monopolists in the regions under consideration and are not affected by incentives to competition. In its method decisions, the regulator explains how it encourages these companies to operate more efficiently (through the so-called price cap or 'x-factor') on the one hand, and guarantee a high-quality network on the other (through the so-called quality term, the 'q-factor'). Both methods of calculation are based on the average performance of the network managers (benchmark).

The x-factor

On the basis of provisional data and the draft decision on the x-factor, the NMa has for now set the x-factor at 1.3 per cent.

In its method decisions, the NMa also determines the WACC (Weighted Average Cost of Capital) appropriate to network managers. This concerns a compensation for the costs of invested capital, allowing network managers to invest in their network adequately. On the basis of both a consultation procedure involving the sector and an independent inquiry into the level of this compensation, the WACC has been brought down from 6.6 to 5.8 per cent. This percentage is endorsed by the Erasmus University of Rotterdam, which carried out a second opinion consultation on the WACC in collaboration with Boer & Croon Strategy and Management Group.

With a view to setting the x-factor, the NMa has also studied so-called 'objectifiable' regional differences between network managers. A regional difference is a given difference in local circumstances between one and another network manager. These may lead to structural costs variations and justify a tariff increase or decrease. On the basis of its investigation, the NMa has decided to correct tariffs for two regional differences. These concern the necessity to construct 'water crossroads' and differences in local taxes. The NMa does not exclude the addition of further regional differences in future.

The q-factor

By means of the q-factor, regional network managers are either rewarded or penalised (quality regulation) for the quality of their networks, based on the number of power interruptions that affect consumers on the network. The q-factor will therefore differ for every network manager, it is expected to vary between -0.1 and +0.6 per cent.

On the basis of the method decisions, the NMa will establish the definite x and q factors for each network manager in August. In December of this year, the energy market regulator will establish transport tariffs for each network manager.