IEEE Power & Energy Magazine - May/June 2020 - 38

flexibility services between regimes to achieve, through decentralized operation of various distribution systems and the
transmission grid, optimal solutions systemwide.
These considerations are critical in countries where costs
must be kept as low as possible while improving quality and
addressing other objectives of the new energy policy agenda.
To achieve those goals, new regulations must remunerate
and charge for distribution networks. Next, we present relevant regulatory discussions from Chile and Brazil, whose
authorities are conducting rate making reforms. We focus
specifically on remuneration and tariffs.

Chile
The New Policy Landscape
In Chile, as in the rest of the world, new energy policies are
evident. Today's agenda includes themes that go beyond the
historical debates about limiting costs and improving access
to electricity systems. Chile's energy policy has been reasonably successful in regulating network development, access,
and costs (as shown in the previous sections) and progressed
to incorporate two major objectives: 1) improve poor reliability by evolving toward a more resilient system and 2)
decarbonize the energy sector by integrating renewables.
There are other more specific objectives. In the context of
distribution networks, they include the following:
✔✔ more DG and DERs
✔✔ an increased role for demand-side response and management
✔✔ including more innovative smart grid solutions
✔✔ increasing participation from the transport and heating/cooling sectors
✔✔ more buildings and communities that have their own
generation, storage, energy-management systems and
controls (such as microgrids)
✔✔ growing the number of initiatives to foster smart cities.
To address these objectives, the government began to change
its approach to distribution network regulation by supporting
the transition toward a more reliable, resilient, affordable,
and sustainable energy sector. We now summarize the main
aspects of the debate in Chile, focusing on remuneration.
Aspects associated with tariffs will be discussed for Brazil.

The Remuneration Approach
The Philosophy

Distribution network remuneration in Chile, unchanged since
1982, is based on the idea of benchmarking the cost performance of real firms against model ones. The so-called model
firm is a theoretical, virtual company created to -calculate
remuneration. It is optimally designed in a greenfield fashion
at the beginning of each control period (such as every four
years) to provide distribution network services in the same
area as the corresponding real company. Because model
firms are designed in a greenfield fashion, their infrastruc38

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tures are valued at current market prices by using the replacement-cost concept. Once model firms have been constructed
and valued, the final network tariffs to be applied to the real
companies are calculated so that the model firms feature a
10% cost of capital (before taxes and assuming there is no
leverage). The main idea behind model firms is to incentivize real companies to be economically efficient, since their
revenues and costs are decoupled. Under this philosophy, the
cost functions of real companies do not affect tariffs. The
method simulates competition between a regulated incumbent monopolistic firm and a virtual one that was cost-effectively designed from scratch using the latest technologies.
Practical Implementation

In practice, model firms are determined by using characteristics from reality that reflect exogenous variables that are
beyond the control of distribution companies, including
✔✔ locations and capacities of transmission-distribution
entry points and primary substations
✔✔ locations and loads of demand points (including the
current consumption and what is projected for the next
15 years)
✔✔ city road maps
✔✔ other constraints imposed by security standards and
municipalities (for example, the use of underground
rather than overhead lines).
Although today's model firms are calculated based on
advanced computational mathematical models, during the
1980s and 1990s they were determined without significant
support from computers. The complexity associated with the
escalating number of companies to be regulated was simplified by using a sample of representative firms selected
through clustering methods. More than 30 distribution companies were divided into six clusters according to their density metrics (companies with similar $/km-kW belonged to
the same cluster). One firm per cluster was chosen as the
basis for the model-firm remuneration process. Six model
firms were determined, and each real company adopted the
tariffs for its cluster.
For each representative firm, two model firms are determined through simultaneous studies, one undertaken by the
regulatory authority and the other by the company. Hence,
the final cost valuation (including the CAPEX and OPEX)
of every representative firm is equal to the weighted average
valuation of the studies: two-thirds and one-third for each
authority's and firm's study, respectively. This mechanism
avoids long negotiations between the authority and each
company because each study is developed in isolation, and
the company and authority do not have to agree on input
parameters and results to determine their corresponding
model firms.
To account for the possibility that the costs of real companies and model firms differ, a check is undertaken after
the tariffs have been determined to verify that the aggregated profitability of the nationwide distribution sector is
may/june 2020

IEEE Power & Energy Magazine - May/June 2020

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