Regulation of district heating and water sector in Estonia. Märt Ots Estonian Competition Authority Director General

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1 Regulation of district heating and water sector in Estonia Märt Ots Estonian Competition Authority Director General BALTIC UTILITIES FORUM Tallinn

2 Multisector regulation in Estonia The Estonian Competition Authority is responsible for competition surveillance and regulation of different sectors. Energy Natural gas District heating Water Postal services Telecommunication Railway Airport 1

3 Regulation in different sectors Electricity Ex-ante type of regulation of network services (EU directive). Universal service, no regulation in Estonia by 2013 Natural gas Ex-ante type of regulation of network services (EU directive). Universal service, regulation of households gas prices. The sales margin added to the import price for household customers shall be approved by the Competition Authority. Since the gas importer and the single wholesale supplier AS Eesti Gaas is a market dominating enterprises the prices shall be justified. Similar customers shall be treated on equal basis. 2

4 EU regulation in different sectors (2) District heating and co-generation No EU rules for price regulation Water The prices shall be cost based, but no exact rules for price regulation 3

5 The goal of the regulation The best regulator is the market. The regulator can never be as efficient as the market. The regulation (especially the price regulation) is needed in the sectors where competition is limited (natural monopolies, market domination). It is more efficient to avoid the market domination, than to introduce the price regulation. 4

6 The level of competition (1) Natural monopolies the customer has no alternatives. Power transmission and distribution Water supply Gas transmission and distribution Etc. Monopolies where the parallel network or technical alternative is possible. District heating Telecommunication Postal services Etc. 5

7 The level of competition (2) Exclusive rights granted by the government or by local municipality Waste management free market before 2006 Public transport Change of pension funds restricted three times per annum, before once per annum District heating zoning exclusive right granted to the company + price regulation Etc. It is always a question if the granted exclusive right is efficient or not. 6

8 District heating in Estonia DH is the most used heat source in Estonia, 70% from the total heat demand. The prices vary 27,5 /MWh Narva (100% oil shale CHP) 47,6 /MWh Tartu (95% peat and wood) 61,9 /MWh Tallinn (30% wood; 70% gas) 80 /MWh small utilities using oil The share of natural gas has reduced and is replaced by wood and peat. The sector is operated by private enterprises mostly. 7

9 Fuels used for heat generation in DH 8

10 Gas demand in Estonia 9

11 Regulation of district heating, legislation Until 1998 soft type of price regulation by local municipalities introduction of energy act. Establishment of national price regulator the Energy Market Inspectorate. Ex-ante type of price regulation for all DH enterprises. Annual sales more than MWh by Energy Market Inspectorate, the rest by local municipalities DH act, the price regulation not changed, the local municipalities got the right to establish DH zones all DH prices are regulated by the Competition Authority. 10

12 Type of price regulation (1) According to the DH act the price of heat shall be set that: 1) the necessary operating expenses, including the expenses incurred upon the production, distribution and sale of heat, are covered; 2) necessary investments for the performance of operational and development obligations are made; 3) environmental requirements are met; 4) quality and safety requirements are met; 5) justified profitability is ensured. 11

13 Type of price regulation (2) The justified profitability is based on the regulatory asset base (RAB) and WACC. The RAB is the book value of the assets. The WACC is in the range of 8-8,5% 12

14 Strong direction to the efficiency A number of DH enterprises are with low energy efficiency. Losses in the networks up to 30%. Clear targets set for efficiency: The maximum network losses 15% by 2017 Energy efficiency for heat generation Cost saving targets for operational costs 13

15 Third party acces to the network If the independent heat generator indicates the interest to sell heat to the network, the network operator is obligated to announce the procurement. The producer is allowed to sign a long term (12 years) contract for heat sales. The Competition Authority may obligate the network operator to announce the procurement in the case of inefficient heat generation (no CHP or alternative fuels). 14

16 Is this type of strong regulation a good choice? Yes if the DH company is a monopoly for it s customers. The most of municipalities have granted the exclusive right (DH zone) to the company. A not regulated monopol is the worst option for the customer. 15

17 Is this type of regulation DH zone + strong regulation the best option? The local municipalities are granting DH zones without detailed energy planning. By economic point of view the DH is sustainable by using of CHP and lower quality fuels(waste, peat, etc.) The DH enterprise using natural gas or oil is not suitable. Its more efficient to transport the fuel to the end-customer without energy losses at the network. 16

18 Problem for the regulator - too many small enterprises The total number of regulated enterprises 200 Annual sales more than MWh 39 enterprises Annual sales between and MWh 27 enterprises Annual sales less than MWh 134 enterprises. Tallinn MWh, Tartu MWh; Pärnu MWh; Võru MWh; Jõgeva MWh; Vändra MWh; Roosna-Alliku MWh, etc. 17

19 The few DH companies have big impact to the economy 18

20 Future developments No need for DH zoning and price regulation in smaller villages. For small-size enterprises the free competition could be introduced. Light hand ex-post type of price control if the company remains its market dominating position. The number of regulated companies could be reduced by ½. Obligation to the local municipalities to prepare a comprehensive energy plan before DH zoning (incl. CHP and use of alternative fuels). The DH zoning + price regulation if the DH is an sustainable option. 19

21 Water sector regulation Amendments in price regulation of water utilities by The total number of regulated utilities 200, from which 70 under regulation of Competition Authority and 130 under local municipalities. Before that, all utilities under regulation of local municipalities. Instead of fixing price approval. 20

22 Main principles of price regulation Prices for water services shall be established such that the water undertaking can: 1) cover justified operating expenses; 2) make investments in order to ensure the sustainability of the existing public water supply and sewerage systems; 3) comply with environmental requirements; 4) comply with quality and safety requirements; 5) ensure justified profitability of the capital invested by the water undertaking 21

23 Main issues The sector is operated by municipal enterprises mostly. Very few private companies, the largest in the city of Tallinn. The reason for changing the regulator was the limitation the conflict of interest, where the owner and the regulator are the same institution. Better know-how on price regulation and more efficient to concentrate the price regulation activities to a single administration. 22

24 Main principles of price regulation The main investments are financed by EU aid programmes and are not included to the tariff. The justified profitability is based on the regulatory asset base (RAB) and WACC. The RAB is the book value of the assets. The WACC is in the range of 8-8,5%. Clear target to operational efficiency. 23

25 Sectoral and competition regulation The energy, telecommunication, postal services etc. are regulated by sector regulation and general (competition) act. The first priority is to use the sector act. In energy sector the network business is very well regulated by electricity market and gas market acts. The generation and supply (in abuse of market dominant position) is not well regulated by sector legislation. In telecommunication sector some cases can be regulated by the competition act. 24

26 Thank You for Your Attention. Further information 25