Incentive schemes for regulating DSOs including for Innovation

Incentive schemes for regulating DSOs, including for Innovation Prof Leonardo Meeus Florence School of Regulation & Vlerick Business School 19/04/2017, Brussels, CEER Public Hearing

Fundamentals 1

Conceptualizing the regulatory challenge Imperfect information • Firms cost function • Firms efforts to reduce costs Laffont & Tirole, 1993 www. florence-school. eu

Incentives for cost efficiency? Price P 0 Rent extraction for efficiency gains greater than X By decreasing P 0 and increasing X, the rent can be transferred to consumers P 1 Pt = Pt-1*(1+RPI-X) Real efficiency gains of the monopoly Period 1 www. florence-school. eu Review of P 0 & of X Period 2 Time

Incentives for service quality? www. florence-school. eu

Incentives for innovation? www. florence-school. eu

Incentives for innovation? • Regulatory incentives • EU & national funding • Company strategy www. florence-school. eu

Different approach different regulators? www. florence-school. eu

TSO Risk Cost efficiency incentives: Balancing risk and return? Incentives to invest: TSO rate of return www. florence-school. eu

Remarks 2

Main observations • Focus seems to be an short term innovation that can be triggered by cost efficiency incentives, but what about longer term innovation or system transformation? • Focus seems to be on input regulation rather than output regulation, while whole system approach implies output regulation, no? • Good to mention that it is also important to – Balance incentives/risks with return/capital cost – Balance complexity/sophistication of an incentive regulation scheme with skills/resources of the regulatory authority www. florence-school. eu

Need for clarification www. florence-school. eu

Need for clarification www. florence-school. eu

leonardo. meeus@eui. eu Leonardo. Meeus