IEEE Power & Energy Magazine - May/June 2020 - 42

Recognizing uncertainty in the network-expansion-planning
problem increases the value of smart grid technologies, which
network planners and regulators must acknowledge.
that their investments will be adequately remunerated, companies are likely to prefer conventional solutions that may
be less expensive during the short term but compromise the
distribution system's economic performance (and the entire
electricity system) through the longer term.
The debate about modernization and innovation includes
the uncertainty related to planning network expansions.
This is becoming increasingly important due to the many
factors that must be considered, including the rapidly evolving costs of technologies, market prices, policies, and DER
deployment. The need to find technical solutions to network
uncertainty becomes a challenge, and regulators must properly scrutinize and incentivize proposals. With uncertainty,
innovative solutions (such as battery energy systems and
open soft points, which apply power-electronic devices to
normally open portions of the distribution system) become
more attractive as a means to more easily adapt to, costeffectively deal with, and hedge against a number of scenarios that might happen in the future. In other words, recognizing uncertainty in the network-expansion-planning
problem increases the value of smart grid technologies,
which network planners and regulators must acknowledge.
The second important aspect of planning under uncertainty relates to regulatory scrutiny. It is important to recognize that an optimal-investment decision that was made
under uncertainty cannot be evaluated and justified ex post
facto, when complete information is available. From a stochastic-programming viewpoint, it is clear that an ex ante
decision made under uncertainty may seem suboptimal at a
later date. This argument has special relevance for incentivebased remuneration methods that face after-the-fact regulatory scrutiny and correction of the regulatory asset base
(RAB), where companies face the risk of a backlash if investments are deemed unjustified. This is also important in Chile,
where real companies' infrastructure, in every tariff period,
is valued through a greenfield model firm that possesses perfect information, an approach that disregards legacies built
under uncertainty and the optimal infrastructure needed to
face future unknowns. Incorporating tools to deal with uncertainty in network regulation is becoming a must.
Other Concerns About Remuneration
There are other important concerns that arise in the debate
surrounding the model-firm approach and are common to
other remuneration methods. Among them the following:
✔✔ Model firms minimize costs within the distribution
sector, in isolation from the rest of the power system.
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This relates to the discussion about the interface between transmission and distribution and the need to
have a whole-system view of the planning and regulatory problem.
✔✔ The set of prices used to calculate the model firms' costs
follows the concept of the replacement cost, valuing
assets as new according to current market prices. This
can cause fluctuations in a company's valuation and
produce higher risks for investors.
✔✔ The real costs of capital to investors remain hidden
during the regulatory process, since companies'
expenses are valued by the replacement cost. Most
importantly, this blindness includes the return that investors will ultimately receive and is a failure of monopoly regulation.
✔ ✔ A referential cost of capital equal to 10% (before
taxes and assuming that there is no leverage) that is
fixed by law (for model firms) may not appropriately
reflect 1) market conditions at the time of the control
and 2) real firms' risks, including those imposed by
the remuneration approach. This problem should be
fixed by calculating appropriate costs of capital every
time tariffs are determined.
✔✔ Within the control period, there is no differentiation
between the costs that distribution companies can and
cannot control. Therefore, all variations in real costs,
even those that cannot be managed by the companies,
are passed to network owners. This increases the risk
to investors, without a clear benefit.
✔✔ Despite its complexity, the remuneration mechanism is,
in practical terms, too approximated (it relies on a small
sample of companies, averages results from different
sources in a two-thirds and one-third fashion, uses simplistic greenfield model firms, and so forth). Even for
the same company, results can vary too much, depending on who determined them (the authority or the firm;
see the values and biases in Figure 6). This implies that
a network owner can realize a lower or higher cost of
capital depending on the inherent randomness of the
process, not on corporate efforts to reduce expenses.
✔✔ There is no coherence between the distribution of network owners' capital costs and efficiencies. Following
the principle of comparing similar companies through
yardstick regulation, firms with larger efficiencies
should receive larger returns. This does not occur under
Chile's remuneration approach, which does not measure
firms' relative inefficiencies to mimic real competition.
may/june 2020

IEEE Power & Energy Magazine - May/June 2020

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