Regulatory Options for Natural Gas Distribution

Transcription

1 Regulatory Options for Natural Gas Distribution The World Bank Workshop on Gas Distribution Regulation Santiago, Chile September 24, 2014 Ashley C. Brown Executive Director, Harvard Electricity Policy Group Harvard Kennedy School Harvard University

2 General Principles a. Incentives for Efficiency and Productivity 1. Reasonable Opportunity for Cost Recovery and Reasonable Return 2. No Guarantees b. Price Signals to Consumers for End Use Efficiency c. Risk/Reward Symmetry

3 General Principles cont d a. Consumer Protection 1. Reasonable Rates 2. Quality of Service 3. Health and Safety 4. Complaint Process b. Transparency 1. Open Processes for Making Decisions 2. Meaningful Opportunities for Public Participation

4 Two Dimensions of Regulating Natural Gas Distribution a. Distribution Services b. Commodity

5 Regulating Distribution Services

6 Pricing Monopoly Services Rate-of-Return vs. Price Cap 1. Rate-of-Return Formula i. (capital investment depreciation)ror + expenses 2. Price Cap Formula i. (cost basis)rpi (-x?) 3. Revenue requirement i. (cost basis) 6

7 Pricing Monopoly Services Rate of return Price cap Revenue cap Fact intensive Theory intensive Theory intensive Regulatory review of management Clear boundary between management and regulation Clear boundary between management and regulation Direct review of profits Indirect review of profits Indirect review of profits Factors may/may not be internalized Internalization of many factors (but not all) Internalization of many factors (but not all) Rates may/may not have specific terms in time Rates may/may not have specific terms in time Rates may/may not have specific terms in time Throughput based (volume) Throughput based (volume) Focus on revenue requirement (non-volumetric) 7

8 Pricing Monopoly Services Alternative Pricing Foundations A. Historic Costs Advantages 1. Tested reasonableness 2. Ascertainable/documented 3. Established applicability Disadvantages 1. Prudence filter 2. Little inherent incentive for efficiency gains 3. Embeds inefficiencies/waste 4. Accounting controversies 5. Original costs depreciation? Replacement cost? Other? 8

9 Pricing Monopoly Services Alternative Pricing Foundations B. Comparative Costs Advantages 1. Benchmarks good performance (partially ascertainable) 2. Promotes competition Disadvantages 1. Uncertain applicability 2. Uncertain accuracy 3. Could embed inefficiencies 9

10 Pricing Monopoly Services Alternative Pricing Foundation C. Theoretical Costs Advantages 1. Sets performance objectives 2. Avoids accounting controversies Disadvantages 1. Untested/potential for being unrealistic 2. Potential for uncertainty 10

11 Boundaries between Regulation and Management/Risk Allocation Demand 1. Investors need to be able to manage their own assets and affairs if they are to be held accountable 2. Regulators must be able to allocate risks in accordance with controllability Responses 1. Reasonableness of costs? 2. Prudence? 3. Effectiveness of incentives? 4. Ex post or ex ante regulation? 5. What is internalized (socialized)? 6. What is externalized (privatized)? 11

12 Social Expectations and Standards Demands 1. Economic efficiency 2. Social expectations (e.g., universal service, environmental, low-income subsidies, quality of service) 3. Consumer expectations (e.g., timely payment of bills, reasonable access, protection from theft of service) Responses 1. Articulate expectations in license or law (ex ante) 2. Internalize into privatization 12

13 Tariff Structure Issues a. Fixed Costs b. Variable Costs c. Fixed Variable Ratio d. Efficiency Signals vs. Certainty of Fixed Cost Recovery

14 Capacity Rights a. Open Season Opportunity? b. Secondary Capacity Market? c. Firm and Interruptible?

15 Commodity Regulation

16 Monopoly Supply vs. Open Access a. Who, if Anyone, Gets Open Access b. Who, if Anyone, is Default Provider c. Distributor Role in Commodity Business

17 Monopoly Provider a. Procurement 1. Self Dealing Allowed? 2. Transparency in Procurement 3. Pass Through or Profit Permitted or Benchmarks Provided?

18 Monopoly Provider cont d a. Prudence Review 1. Pre-Approval or Not 2. Nature of Review i. Use of Benchmarks? ii. Retroactive Review of Options iii. Standards Applied Lowest price? Considerations Besides Price (e.g. reliability, diversity) iv. Possible Asymmetric Risks (No Upside/Potential Downside)

19 Open Access Regime

20 General Issues a. Parallel Regulated/Unregulated Markets? b. Limits on Arbitrage Between Regulated and Unregulated Markets c. Role of Distributor d. Licensing Competitive Suppliers e. Customer Eligibility for Competitive Supply Market

21 Distributor Role in Competitive Commodity Market a. Distributor Permitted to Compete Issues 1. Account and/or Corporate Separation 2. Self Dealing? 3. Cross Subsidy (regulated and unregulated services) 4. Insider Dealing 5. Isolate Risks (e.g. Ring Fencing)

22 Distributor Role in Competitive Commodity Market b. Distributor Not Permitted to Compete b. Reduces or Enhances Attractiveness to Investors/Managers? c. Eliminates Conflicts and Self-Dealing Issues c. Distributor as Default Supplier b. To Whom are Costs/Risks Allocated c. Posted Default Tariff or Simply Marginal Cost