In 2012 a government committee was put in charge of the future of electrical grid companies. The committee made 16 key recommendations and approximately 100 further assessments and recommendations, which have been incorporated into a new executive order concerning the revenue framework for electrical grid companies.
The executive order sets out a framework for how grid companies can cover their operational costs and return of investment from January 1 2018 and will be one of the most important tools for electrical grid companies going forward.
The executive order stipulates the rules governing the prices that the electrical grid companies can charge consumers in order to cover the costs of running the grid. Among these are the costs of investing in the grid's operation and providing a good service to both consumers and electricity producers.
A five-year regulation period with annually updated revenue frameworks has been introduced, which aims to provide better regulatory security than the previous regulation. There is expected to be more consistency between the actual costs of operation and maintenance and the future cost framework. The framework will also cover depreciation.
The revenue framework consists of:
- return of investment;
- supplements and deductions; and
- efficiency improvements.
In the first regulatory period, the framework will be based on historical costs. However, these will subsequently be recalculated before each annual regulation period. The framework will be adjusted subject to, among other things:
- differences in activity level;
- new or lost business; and
- large infrastructure projects.
Return of investment will concern interest on new assets and assets put into operation before December 31 2017. This will be a market-based interest on new investments with an industry-specific weighted average cost of capital model.
The revenue framework is intended to reflect actual operational expenses. Therefore it will be adjusted for, among other things:
- inadequate quality of deliverance;
- differences in activity levels;
- grid loss; and
- large infrastructure projects.
The new framework contains both a company-specific and general efficiency requirement. Further, the Energy Regulatory Authority will develop new total expenditure benchmarking. The companies' costs will still form the foundation for benchmarking, while the general efficiency requirement will be determined annually by the Energy Regulatory Authority.
It remains to be seen how the rules will be applied; the grid companies' revenue framework for 2018 is not due to be announced before Spring 2018 and there is a significant amount of work involved in compiling a new benchmarking model. The model will be effective from 2019.
The new executive order provides timeframes for a series of evaluations of the new rules, which the Danish Energy Regulatory Authority will carry out accordingly.
For further information on this topic please contact Nicolaj Kleist at Bruun & Hjejle by telephone (+45 33 34 50 00) or email (email@example.com). The Bruun & Hjejle website can be accessed at www.bruunhjejle.com.
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