6. REGULATION LEVERAGE

6.1. INTRODUCTION: SOME QUESTIONS ABOUT REGULATION OF LOSSES

The previous parts of the report have revealed that the reduction of losses is a complex issue/problem (au choix):

1. Technical Losses represent a physical phenomenon and cannot be reduced to zero : their "acceptable" or "efficient" level depends on the specificites of networks(structure, flows etc).

2. Non-Technical Losses are, in general, evaluated by a global measurement, but may arise out of different factors located either on the network (theft, .) or on DSO processes (on meter to bill chain). These factors need to be correctly specified and weighted before defining relevant mitigation actions.

3. TL and NTL mitigation actions depend on a technical and economic approach and require a positive ROI to allow a concrete application on DSO process, either for investments (AI, IT, .) or operations (analytics, field teams).

As global losses represent a global challenge for the electric system, the first objective of regulation should be to set to the "right" economic level, with relevant incentives to all concerned actors.

Consequently, here are some of the key questions that regulation has to address :

1. How to define and measure an efficient level for losses?

2. What is the role of each actor in the mitigation/reduction (au choix) losses?

3. How regulation can help actors in their roles?

This section of the report proposes different steps to answer to these questions :

1. An overview of the situation of different actors with respect to regulation (Cf. WG survey results).

2. An analysis of the possible scenarios of losses regulation, with concrete illustrations.

3. A synthesis of these scenarios, including key points aiming to foster the TL and NTL mitigation approaches previously presented in the report : these approaches are detailed according to each DSO, with a specific point of view on its economic situation and smart meter strategy.

6.2. AN OVERVIEW OF THE DIVERSE DSO SITUATIONS (SURVEY RESULTS)

This section of the report presents the main results from the survey conducted by the Group related to the regulatory issues (Nota-Bene: no answer for DSO from USA).

Actor in charge of losses payment

The situation is quite balanced between countries with DSO or supplier payment, with the specific case (*) of integrated companies in China, where the responsible is the power company (i.e. the owner of assets) is responsible for the losses (Table 1).

Question	DS0	Supplier	0ther (*)
Who pays for TL and NTL on the distribution network?	7	6	1

Table 1: Survey question on actor in charge of TL / NTL payment

In case of DSO payment, the cost is finally transferred to consumer through network fees, as it is in case of supplier payment with supplier offer (Table 2).

A special case worth mentioning is Indonesia, where the cost the cost of power losses is not transferred to the customer, but calculated by the DSO as the cost of production of electricity, which will be the input cost calculation of subsidies from the government (in the DSO income statement).

Question	Yes	No
If the DSO pays for losses, is this cost transfered to consumer?	6	1
If the DSO pays for losses, Is it kept in the income statement?	3	1

Table 2: Survey question on cost tranfer to customer Regulatory constraints and incentives

A majority of countries have regulatory constraints and incentives for losses, but more

widespread on prices than on volumes (Table 3). The regulation framework on losses may be either a constraint (tariff penalty) or an incentive (tariff reward).

Is there a regulatory constraint and incentive for your company with regards to management of distribution losses?	Yes	No
On volumes	10	6
On prices	13	3

Table 3: Survey question on regulatory constraint and incentive

The regulation period duration is in general between 3 and 5 years (Table 4), with some notable exceptions:

− 1 year period for an integrated company in China and even 3 months periods for distribution subsidy calculation in Indonesia (*): losses regulation is coherent with DSO operational and accounting cycle

− 8 years period in UK (**) : regulation rules are fixed in coherence with DSO investment cycle on losses

Question	S 1 year	3 years	4 years	5 years	8 years
Are these constrainsts / incentives based on a periodic cycle? If yes, what is the period?	2 (*)	3	3	2	1 (**)

Table 4: Survey question on regulatory periodic cycle Losses volume regulation

In a majority of countries, the regulation for losses is global (Table 5). In other countries, the

regulation allows for a differentiation between TL and NTL, with some specific definitions (for example, in Japan, NTL costs are not recovered). One DSO in Brazil underlines that, even if the regulation for losses is global, the difference between TL and NTL management exists in fact: TL are inherent in the distribution process and NTL come from human action or process failure.

Question	Yes	No
From a legal and regulation standpoint, are there differences between TL and NTL management?	5	10

Table 5: Survey question on TL/NTL regulatory management

All DSOs communicate information on losses to a regulator or public authorities (Table 6). This corresponds in general to the value of global losses, which are rarely detailed between TL and NTL. In countries where NTL is neglected (Austria, Finland and Japan for example), this corresponds to the value of TL.

Question	Global	With detail TL - NTL	0nly TL (*)	No
How do you have to communicate your losses? Is it the same for TL and NTL?	12	1	3	0

Table 6: Survey question on communication about losses Losses price regulation

Losses are priced based on market prices for a majority of DSOs, but other DSOs have specific

loss tariffs (Table 7). Japan is a particular case where generation sources are used to compensate for losses. There is no general rule between type of actor (DSO vs supplier) and type of price (market price vs tariff).

Question	Market price	Tariff	Other (Generation)
08. What is the price for TL and NTL?	8	4	1

Table 7: Survey question on price for TL and NTL

Future evolutions

In a majority of the countries, regulation is not the only reason for losses reduction. Such efforts are also motivated by cost reduction and/or energy efficiency (Table 8).

Question	Cost reduction	Energy Efficiency	No other reason
Is there any other reason impacting your willingness to tackle losses?	6	4	4

Table 8: Survey question on reasons to tackle losses

In European countries (*: only European respondents), the main direct impact that the said Directive may have on DSO processes concerns national regulation (Cf. Energy Audit by ENEA in Italy and possible evolution of Czech regulation) or on long term objectives (with more metering and losses attention expected in Sweden).

Question	Impact	No impact	No answer
If relevant, what has been (or will be) the impact of the European Energy Efficiency Directive (Art.15.2) on your process to tackle losses?	3	4	7 (*)

Table 9: Survey question on European Energy Efficiency Directive

The opinion expressed predominantly by DSOs is a growing concern on losses management (Table 1O). The main given reasons are AMI projects, some network investment (low losses transformers, new SCADA or DAS), a "meter-to-cash process" optimization in Portugal (a holistic approach to the revenue value chain and NTL reduction, including metering and analytics), and potential impact of DG on losses levels for one European DSO. Furthermore, a "stable" evolution in the losses management is often considered by DSOs who are already highly involved in loss mitigation (e.g. in Brazil).

Question	Increase	Decrease	Equal
How do you see the evolution in the losses management when comparing the last 5 years and the future? Why?	10	1	5

Table 10: Survey question on evolution of losses Analysis of Survey Responses on Regulation

Regulation is an integral part of the management of losses, and is one of the contributing

factors to the reduction of losses, along with cost reduction and concerns over energy efficiency. This part of the report helped identify the current state of regulation in different countries with respect to losses. This was done through the analysis of responses to a survey conducted by the working group.

In the future, it should be possible to better identify the key questions regarding the roles of different actors on losses, the perimeter of regulation and the duration of regulation cycles. The current situation with respect to these questions is hererogeneous and unclear, with contrasting answers received for the survey.

6.3. ANALYSIS ON LOSSES REGULATION

6.3.1. Theoretical regulation models

Different theoretical models may be considered for regulation of distribution cost in general and losses in particular:

1 Cost recovery model: tariffs cover the totality of network costs and include a margin for the DSO, calculated as a % of ROI.

2 Cap regulation model: DSO Tariffs are defined ex ante for the period and each DSO has to challenge its specific given level. The DSO may have higher or lower margin depending on its effective results.

3 Beat yourself (output based): real losses in the network of each DSO during the last regulatory period are compared with their own losses during the previous period (it is an adaptation of cap regulation model).

4 Yardstick model: global tariffs are defined ex ante for all DSOs on a common mean value, whatever their initial level of losses, and DSOs have to challenge the given level.

Thus, distribution losses characteristics are specific to each DSO network and highly depend on global regulation scheme in each country. Therefore, the application of theoretical regulation models to distribution losses requires a preliminary analysis and a relevant adaptation, as illustrated in some European countries (Table 11):

Model	Cost recovery	Cap regulation	Beat yourself (output based)	Yardstick
Examples	Belgium, France, Germany	UK (new regulation)	Spain (from 2O14)	Italy, Spain (until 2O14)
Application to losses regulation	Preliminary step to learn on "efficient" level and uncertainties evaluation for losses	0nly if expected gain greater than uncertainties (measurement, risks)	0nly with a majority of DS0s already efficient in losses management Otherwise, this model would benefit inefficient DSOs (with much room to improve).	A necessary adaptation to specificities and variability of losses

Table 11: comparison of regulation models for distribution losses

The choice of a regulation method and the definition of its key parameters (threshold, cycle duration .) highly depend on the situation of each DSO in front of losses: estimated losses volume and rate, losses factors identification, possibility to manage and forecast .

6.3.2. Possible regulation schemes

Two different regulation schemes may apply to losses according to how they are defined:

1. Regulation to control the evolution of lossesas a whole (Cf. Level 1 losses definition).

2. Regulation to focus on specific sources of losses (Cf. Level 2 and 3 losses definition). We now propose a global analysis of each regulation scheme.

1. Regulation to control the evolution of losses as a whole

Where an electricity market exists, the regulation scheme depends on who buys the energy for the losses. This is described in Table 12:

Who buys losses	Risk for the actor who buys losses	Possible regulation
DSO	DSO is directly exposed to : • Evolution of loss volumes • Market price • Effects in their own price due to loss forecasting	DSOs are allowed to recover the cost related to procure their losses in the market. There are two different approaches: o Pass-through approach: revenues related to the procurement of losses are calculated as a pass- through. In this case, incentives/penalties should be also implemented in order to incentivize losses reduction. (Cf. infra) o Competitive approach: revenues related to the procurement of losses are calculated using a yardstick model (e.g. considering the amount of energy losses related to the amount of delivered energy, the price obtained, etc.)
Supplier	Suppliers are exposed to every kWh of losses of a network that cannot be controlled by them. e> DSO shall cover supplier risk: isolate correctly the supplier from an eventual increase of the losses volumes	DSOs are encouraged to promote an efficient management of losses using an incentives/penalties based on: o Evolution of losses in the system as a whole; and/or o Evolution of losses per DSO. Calculation of the incentive/penalty for each DSO can be based on: o Benchmarking: considering outcomes from other DSOs. o Per DSO: not considering outcomes from other DSOs.

Table 12: Regulation scheme depending on who buys the energy for the losses

We can identify that different systems exist for purchasing losses (integrated company, DSO, or supplier) according to the prevailing situation and regulatory choices.

These specifities may have a major impact on definition of losses and on their measurement process.

11. Regulation to focus on specific sources of losses

Here are in Table 13 some examples of regulation incentives that aims to lower the cost of mitigation of losses:

Approach	TL	NTL
Awards related to improving efficiency	X	X
R&D efforts	XX	XX
Mitigation means	X	XX
Smart-meter with automatic identification and meter "handling" (big data IT, analytics, optimized process)	X	XXX
DSO keeps part of losses gain	X (investments)	XX (fraud)
Incentive on price of losses	X

Table 13: Regulation incentives aiming to lower the cost of mitigation of losses

The efficiency of regulatory incentives depends on the created value:

− A better knowledge and control on TL / NTL (X): possibility to have more focused mitigation actions.

− Optimized mitigation actions on TL / NTL (XX): better TL/NTL control and detection at lower cost.

− A break-through in losses mitigation (XXX): new optimized processes, high control on network and meter dysfunctions.

111. Comparison of regulation schemes

The following table 14 compares the two approaches proposed for losses regulation:

Approach	Type of situation	1ncentive / DS0	Key point
Control losses evolution as a whole (level 1 losses definition)	High losses level	Increase revenue	Political agreement DSO losses strategy
Focus on losses sources (levels 2 and 3 losses definition)	Low losses level and/or Low uncertainties level	Process efficiency (ROI + 0uality of service)	Measurement accuracy Relevant incentives / mitigation actions

Table 14: Comparison of approaches proposed for losses regulation (global vs detailed)

The scenario with a control on losses evolution as a whole consists of giving DSOs a global incentive on losses volumes (and prices), which means:

− Sufficient losses volumes to make losses strategy profitable.

− A political agreement on DSO losses strategy (e.g. billing acceptance).

The scenario with a focus on losses sources consists in having a sufficient view on:

− Measurement accuracy compared with losses gain and uncertainties (e.g. DG impact, climate hazard).

− Coherency between regulation and DSO action plan strategy (relevant incentives according to quantified losses mitigation actions).

1V. Actor in charge of losses

Different systems may exist (Integrated, DSO, Supplier) according to prevailing situation in a given country and regulatory choices made in it. Any given system has not proved to be better than the others. However, some good practices across systems can be noticed:

− The transparency on loss level and sources, according to a common definition for losses as proposed in the report (cf 2.4):

o A global understanding of the mitigation objectives and actions, with a necessary cooperation between actors (Cf. metering data sharing between supplier and DSO for datamining approaches in the UK).

− Relevant regulation adapted to the level and structure of losses:

o Technical losses : take into account network specificities and uncertainties (climate hazard, DG location).

o Non-technical losses : take into account DSO global environment (e.g. country economic situation and metering strategy, especially for smart-meters).

6.4. CONCLUSION

Regulation does not create value or reduce losses by itself : It is an ingredient of a quite an elaborate recipe that has to take into account the specificities of each DSO situation on with respect to the network structure, operational processes, and more globally, the economic and social and economic environment.

However, some key factors can be underlined as a result of the work leading to this report:

− The transparency on levels and sources of losses, according to a common definition as proposed in the report.

− A global understanding of losses mitigation objectives and actions, which implies a necessary cooperation between actors.

− A Relevant regulation fit to losses level and structure.

The report has also identified some good practices for regulation of losses:

− The need of a preliminary study before defining a global strategy and an action plan, especially for choosing between a global regulation on losses (volumes and prices) and a more specific approach.

− The definition of a relevant regulatory scenario with adapted parameters (period, ratio, incentives, .), which should be realistic, quantifiable, compatible with market rules, and preferably distinguished between TL and NTL.

− A long-term view on losses, with a coherency with investment valorisation (with a relevant ROI) and a limited impact of losses inherent variability (with a suitable regulation period).

The economic decisions of a DSO, in general, encompass many other factors apart from losses. However, losses have to be part of the equation, either as a cost that is leveraged (when the decision helps reducing losses) or as a cost that is borne (in all other cases). Consequently, regulation has a major role in guiding and facilitating choices, not in penalizing or "punishing" a DSO. If regulation does have to "punish" DSOs, it should do so only for short periods and only with justifiable reasons. For example, regulation may help develop new efficient ways for mitigating losses, with new measurement systems such as pre-paid or smart meters.

In the global sense, loss regulation should always consider the views of all concerned stakeholders, be it for mitigating energy theft, reducing distribution bills, or for increasing energy efficiency.

In this point of view, regulation of losses can be seen :

− Inside DSOs, as a key decision factor for global economic decisions and process optimization.

− Outside DSOs, as a way for measuring, controlling, and optimizing electric flows, considering their cost for the global electric system.