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REGULATION OF TARIFFS WITH USE OF THE METHOD OF RETURN
ON THE INVESTED CAPITAL
Aleksey Makrushin, FGC
July 27, 2007
Moscow
0
PRINCIPLES OF THE METHOD OF RETURN ON
THE INVESTED CAPITAL
AIM:
•
Building and modernisation of the grid infrastructure that provides
accessible, reliable and high-quality supply of consumers with electric
energy and connection to the networks of new consumers and objects of
generation
MEANS:
•
•
Attraction to the branch of long-term investments, decrease of investment
risks and cost of the invested capital
Creation of business struggle between local monopolists, stimulation of the
companies to striving for efficiency of operating and investment expenses
ESSENTIAL CONDITION:
•
The consumer must not suffer during turn of DGC to use of the method of
return on the invested capital
1
TARIFF DESIGN IN RAB SYSTEM
Regulated base
Of the capital
Current capital
Original base
of
the invested
capital
Necessary
gross proceeds
Repatriation of capital
in 20 years
Repatriation
of the invested
capital
Nominal
rate of return
Leverage
Return on
the invested
capital
Return on the borrowed
capital
New investments
Return on the joint-stock
capital
Fixed assets introduced
, in accordance with
the coordinated investment program
Fixed on the ground of independent evaluation
of physical value of the fixed assets,
intangible assets and incomplete construction
with regard of depreciation
Operating
expenses
Fixed for
a long-term period
Regulatory tempo
of curtailing of expenses
(С…-factor)
Annual indexation
on change of prices
and production output
Controllable
operating expenses
(intramural maintenance
expenses )
Independent
operating expenses
(payment of FGC for DGC,
services of controlled
Organisations, etc.)
Fixed on the basis
of the forecast,
,
updated
annually on deviation of fact
from the plan
2
REGULATED BASE
OF THE INVESTED CAPITAL
Investments
Objects built in accordance with
the coordinated investment
program
Base of the capital
for the beginning
of the year
Repatriation of the
capital
Original amount of capital
is fixed as equal to the cost
of substitution of the fixed assets,
intangible assets,
and incomplete construction
with regard of depreciation
Repatriation of the capital
is carried out during
economically sound
equipment service life
3
RATE OF RETURN ON
THE INVESTED CAPITAL
•
•
•
Nominal rate, before payment
of taxes
Economically achievable
optimal leverage
Base of the invested capital is
corrected with account of
swing of risk-free interest rate
(for example, at change of
forecast of inflation and
exchange-value of ruble)
Joint-stock
capital
Borrowed
capital
1– 2%
regional
risks
11 – 13 %
remuneration
for branch risks
and size of
the company
7–8%
cost
of capital
of federal
monopolies
3–4%
Return on
government
papers
8 – 10 %
14- 16 %
12 – 14 %
4
RISK DISCOUNT MECHANISM
Swing
of return
on the invested
capital
Europe
Rate
of return
Indexation
Inflation
Core
Inflation
Price risks
Inflation
Russia
Nominal
Price risks
Change
of return
on T-bills
(takes into account
all risks)
5
HOW TO GAIN
OPERATIONAL FAT?
Logic of state ownership and management of
DGC in expenses+ system
The system is built up on opposition
of DGC and the regulator
•
•
Private owner creates PRESSING on
management to decrease expenses in order
to make profit from growth of capitalisation
The state creates regulatory enviroment
controlling reliability and stimulating dicrease
of expenses
Driving force of effectiveness –desire of the
private investor to make profit from growth of
capitalisation by disposal of operational fat
Reliability
management
Expenses
regulator
Reliability
•
The state cannot effectively combat growth
of tariffs without detriment to reliability
The state controls not the result (reliability
and capitalisation) but the process itself –
realisation of expenses
Expenses
•
Logic of private ownership and management of
DGC in RAB-Regulation system
6
RESERVES OF CUT-DOWN ON
OPERATING EXPENSES
Benchmark study of loss
Lines, km / staff, people
Loss rate
18%
65
70
60
15%
50
40%
Rate of low pressure in productive supply
Russian distribution networks
East European distribution networks
West European distribution networks
60%
10
15
CE East EON
20%
13
Tula
0%
Moscow
0
7
11
Vladimir
3%
8
13
Pskov
10
14
Volgograd
6%
13
Chelyabinsk
20
20
Ekaterinburg
30
Nizhni Novgorod
9%
Rostov
40
St.Petersburg
12%
7
REGULATION OF OPERATING EXPENSES
ACCORDING TO PRICE CAP SYSTEM
Material
costs
Costs included
into the tariff
In the new period
of regulation reasonableness
of expenses of the previous
period is taken into account
In the new period expenses are
fixed on the basis of
the actually achieved level
8
MECHANISM OF MAINTENANCE OF
ECONOMIES BY WAY OF REDUCTION OF
EXPENSES
Expenses
Economies
of the current year
Economies
of the previous years
Tariff with consideration for economies
of the previous period
Unspecified economies
are averaged out
Profit from economy of consumption
The profit lasts 5 years
Economies
, that were not
specified in the first period
9
LONG-TERM CONSEQUENSES OF SWITCH TO
RAB SYSTEM
Tariffs
(in comparable prices )
Expenses plus
Return on
the capital
Returns
Repatriation
of the capital
Amortisation
Operating
expenses
Operating
expenses
Investments
ownership
capital
loans
Return decreases
Due to decrease of risks
•
Repatriation of the capital
Increases together with growth
of the base of the capital
Decrease of expenses
is realised due to
Growth of investments and
economical incentives
Provision of economic growth due to
development and modernisation of
network infrastructure
пЃµ
•
Ownership
capital
Massive investments
on new construction
and modernisation of networks
allows to attract
RAB
more loans
пЃµ
•
loans
economical incentives to decrease
expenses
Decrease of cost of the capital
Increase of reliability and quality of
service on transmission of e/e
пЃµ
Capital
Attraction of massive private
investments
Decrease of expenses of consumers
пЃµ
RAB
Expenses plus
Long-run objectives of switch to
RAB System
RAB
The base of the capital increases
Due to putting in operation of
•
New equipment and modernisation
( decrease of depreciation) of the existing
(
пЃµ
one
Conformity of tariffs with the level of
reliability and quality of services
Growth of capitalisation
RAB
Expenses plus
Base of the capital
Gearing is growing (cost of capital is
falling down)
Balance cost
Debt
Debt
пЃµ
Increase of base of the invested capital
due to growth of investments
Decrease of regulatory risks and
uncertainty
10
STRUCTURE OF THE TARIFFE ON
TRANSMISSION OF E/E IN RUSSIA AND
GREAT BRITAIN
Grid companies of the Russian
Federation
Investment part
Operating part
Operating part
Data of business plans for 2006
FINGRID
Elia
ENEL
TenneT
Svenska Kraftnat
Investment part
Reseau d'E
National Grid
Red Electrica
0%
FGC
0%
Tula
20%
Vladimir
20%
Pskov
40%
Volgograd
40%
Chelyabinsk
60%
Ekateringburg
60%
Nizhni Novgorod
80%
Rostov
80%
St.Petersburg
100%
Moscow
100%
Endesa
Grid companies of Great Britain
Reports of the companies for 2004
11
RESULTS OF THE REFORM OF TARIFF
REGULATION IN GREAT BRITAIN
ВЈM 1 400
120%
1 300
100%
1 200
80%
1 100
1 000
60%
900
40%
800
20%
700
600
0%
1990
1992
1994
Annual investments
Source: OFGEM, proper calculations
1996
1998
2000
2002
2004
Tariff on transmission in real prices
12
TARIFFS ON ELECTRIC ENERGY IN THE
PERIOD OF REFORMING OF THE ENERGY
INDUSTRY
Stake of electric energy realised on the
wholesale market at regulated prices
Forming of tariffs on electric energy in the
transition period (until 2011)
•
100%
90%
Maximum stake
of electric energy
realised at regulated
РїРѕ
prices
80%
•
70%
60%
50%
Minimal stake
of electric energy
realised at
regulated prices
•
40%
30%
20%
•
10%
0
1 s
2s .
1s .
2s.
1s .
2s .
1s .
2s .
1s .
2s.
2006 2006 2007 2007 2008 2008 2009 2009 2010 2010
year
The government fixes maximum amount of
electric energy for sale at free and regulated
prices on the wholesale market and price zones
of the wholesale market
The government fixes maximum levels of
prices on electric energy for consumers with
different prices for the population
Since January 1, 2011electric energy is in the
full amount transferred at free (not
regulated) prices (except for the population)
The population will be supplied with electric
energy at free prices not earlier than in 2014
Activity on transfer of electric energy has to
be regulated and controlled by the
government (including state regulation of
tariffs). Constituent entities of the Russian
Federation have the powers to fix the tariffs
Sources: 35-FZ On Electric Power Industry, 36-ФЗ On Peculiarities of Functioning of Electric Power Industry in The Transition Period, 147-FZ On Natural
Monopolies, Government decree в„–643 On The Rules of The Wholesale Market of Electric Energy (capacity) of The Transition Period
13
SWITCH TO RAB SYSTEM
UNDER CONDITIONS OF MAXIMUMS TARIFFS
Forming of discount
Calculation of tariff with view of discount
Tariff
Tariff
Return in other
branches
Repatriation of withheld returns
Withheld returns are to be
repatriated until 2016
Discount
The amount of dividends
is restricted, the returns
are reinvested
compulsorily
Actual cost
of the capital
Return on
the capital
Returns
on the capital
Returns
Cost of the fixed assets
Is marked down
2-5 times ,reevaluation
is annually
carried out
Operating expenses
in the tariff are lower
than the actual expenses
,
but the companies
have no incentives to
decrease them
Amortisation
Operating
expenses
Expenses
plus
•
•
Discount
Repatriation
of the capital
Operating
expenses
RAB
Repatriation
pf the capital
Returns on capital
are considered in the tariff
in full since 2011
Maximum
tariff
Withheld returns
are considered in
the tariff after
abolishment of discount
Repatriation of the capital
is performed
with the fixed tempo
Since 2011
The capital base
decreases slower
Rate of operating
expenses falls away
in the tariff
Operating
expenses
RAB with
discount
The discount allows to switch to RAB system with
maintenance of level of the tariff growth in the existing
system of regulation
The discount is maximum in systems with low capital
outlays and undervalued fixed assets
2008
•
•
•
2009
2010
2011
2012
2013
2014
2015
The amount of discount equals 30 – 40 % from the
return and repatriation of the capital (15 – 20% of the
necessary gross proceeds)
Abandoning the discount in pilot systems can be
performed within 3 years
During the period of validity of the discount payment
for technical connection is preserved
14
STEPS OF THE GOVERNMENT IN REFORMING
OF THE SYSTEM OF TARIFF REGULATION
October 19, 2006, order of President:
“To introduce proposals on changing of tariff policy that guarantee attraction of
investments into development of transmission and distribution electric networks”
November 30, 2006, order of President:
“… until June 1, 2007 to complete the methods of tariff regulation of services on
electric energy transmission aimed at stimulation of development of network
infrastructure on the basis of turn on January 1,2008 to establishment of long-term
tariffs with regard of guarantee of effectiveness of investments and stimulation of
network companies to decrease of their expenses…”
December 29, 2006, resolution of Interagency Committee on
Reforming of Electric Power Industry (Khristenko’s committee).
“… to prepare amendments to the existing legislation of the Russian Federation,
aiming at installation in distribution grid companies of system of tariff regulation based
on principles of fair market return of the capital employed (RAB) together with
economic incentives for a large-scale attraction of private investments…”
15
CHANGES IN 35-FZ
ON ELECTRIC POWER INDUSTRY
• Opportunity of setting preliminary tariffs, including maximum
ones, is stipulated
• The government of the Russian Federation and the ministries
have the powers to establish long-term parametres of regulation
(rate of return, С…-factor)
• Maximum tariffs may be exceeded without coordination with
Federal Tariff Service if it is caused by necessity of realisation
of investments
• The norm is introduced that guarantees not only return on the
capital at the level of other branches but also repatriation of the
invested and borrowed capital
• The proprietor can Собственник may lose his/her right to
manage networks if he/she misuses them
16
AMENDMENT TO GOVERNMENT DECREE в„–109
•
Item 35 concerning methods of return on the invested capital is completed. The said RAB
method can be used in the whole electric power industry
– Necessary gross proceeds were formed from operating expenses, returns on the invested capital and
repatriation of the invested capital
– Principles of calculation of the investment capital base were fixed
– Powers to establish rates on returns were transferred to the Ministry for Economic Development
and Trade of the Russian Federation
– Expenses included into NGP on the basis of indexation (controllable) and in factual volume
(uncontrollable) were fixed
– Rules of the annual updating of NGP were fixed
•
Main features of use of RAB in distribution networks was formulated in item 65
– The period of capital repatriation equals 20 years
– During transition period (2008-2010) х-factor equals 0, remuneration/penalties for achievement of
indicators of reliability and quality of services on transmission of electric energy were restricted
– Possibility of discount on the invested capital base with full change of discount within 3 years and
repayment of withheld returns until 2015 were stipulated
•
•
Item 7 – Establishes attachment of tariff to reliability and quality of services
Item 8 – Stipulates incentives to decrease of expenses – maintenance of economies resulted
from decrease of expenses during 5 years
17
THE CURRENT STATE OF THE REFORM OF
TARIFF REGULATION
•
•
•
•
•
•
•
On May 18 and July 4 JSC UES FGC (Рђ.Рђ. Demin, Рђ.N. Rappoport) sent to the Federal Tariff
Service of Russia a proposal on reforming of the system of tariff design including normative
legal documents providing switch to RAB system
On May 24 Minpromenergo of Russia (Рђ.V. Dementiev) sent to the Federal Tariff Service of
Russia proposal on development of methods of tariff regulation of services on transmission of
electric energy based on the principles of RAB system
On May 25 the Federal Tariff Service of Russia (Ye.V. Yarkin) sent to the Ministry for Economic
Development and Trade of Russia, the Ministry of Industry and Energy of Russia and the
Federal Antimonopoly Service of Russia draft addendum to Methodical guidelines on calculation
of regulated tariffs and prices on electric (thermal) energy on the retail (consumer’s) market
Proposals of the Federal Tariff Service of RussiaРЅРµ were coordinated with the Ministry for
Economic Development and Trade of Russia, the Ministry of Industry and Energy of Russia and
the FAS of Russia
On June 2 the Adimistration of President of the Russian Federation (S.S. Sobyanin) sent a letter
to the government of the Russian Federtion ordering to prepare by August 01 a report on the
progress of realisation of the orders of President of the Russian Federation
On June 15 the Federal Tariff Service f Russia (Ye.V. Yarkin) sent a letter to Minpromenergo og
Russia with the report on realisation of the order of the government of the Russian Federation
and a request to postpone the date of completion of the given order
On July 18 Minpromenergo of RussiaРё (V.B. Khristenko) sent to the government of the Russian
Federation a letter and the report on the progress of realisation of the orders of President of
18
CHART OF SWITCH TO RAB SYSTEM
MUPGC, MCGC, Sverdlovenergo, Permenergo,
Volga DGC,
,
Orenburgenergo,
,
Nizhnovenergo,
,
Belgorodenergo , Kubanenergo ,
Krasnoyarskenergo,
, Kuzbassenergo
Selection of pilot DGC
2007
Development of normative
legal base
Forming of IDGC
Abandoning of maximum tariffs
Switch to RAB
of pilot DGC
2008
Switch of IDGC to RAB in the majority
of constituent entities of the Russian Federation
2009
Establishment of parameters of
RAB for2008 – 2010
Federal law 35 –FZ On Electric Power
Industry
Establishment of the original
Base of the invested capital
Federal law 41-FZ
On State Regulation of Tariffs on
Electric and Thermal Energy
Establishment of discount on expenses
On provision of returns and repatriation
Of the invested capital
Government Decree 109 on Price Formation
Concerning Electric an Thermal Energy
Methodical guidelines of the Federal Tariff
Service of Russia on calculation of tariffs with
Use of method of returns on the invested
capital
Establishment of rate of returns
On the invested capital
Establishment of normative tempo
Of decrease of expenses
(С…- (x-factor)
)
Completion of development
Of normative legal base
Methodical guidelines
Concerning calculationof rate of returns
On the invested capital
Methods of reliability observation and
Quality of services on transfer/СЌ
of e/e
Methods of calculation of the original base
Of the invested capital
Methods of account of normative tempo
Of decrease of operating expenses
(Of- С…- factor)
2010
Calculation of tariffs by RAB method
Usage of system of assessment
Of reliability and quality of services on
Transfer of /e/e in test mode
Gradual increase of the amount of
discount
Establishment of the level of operating
Expenses and indexation of operating
Expenses on the rate of price increases
Of producers and salary
Switch of IDGC to RAB
in all
constituent entities of The Russian Federation
2011
Establishment of parameters of
RAB for2011 – 2015
Targeted structure of RAB
Regulation period – 5 years
5
Abandoning of discount
Establishment of a normative tempo
Of growth of operating expenses
(of x-factor)Establishment of tariffs with account
Of reliability and quality of services
On transfer/СЌ
of e/e
Structural decision on practice of
Payment for technical connection
19
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