Smarter regulation of electricity distribution networks


Description of impact

Electricity distribution is a natural local monopoly. In Finland, there are 80 local distribution service operators (DSOs) that are regulated by the Energy Authority (EA). To prevent the abuse of monopoly power and to provide incentives for cost-efficient operation, EA systematically applies ex ante return cap regulation to all DSOs since 2005. The yearly return cap is determined for each DSO such that the regulated return is equal to the opportunity cost of fixed capital plus acceptable operational expenditure (OPEX). To determine an efficient level of OPEX, EA applies frontier estimation methods.