Regulation and monitoring of investment activities of regulated companies (AHEF 111.MD)

Publication date: 2015

This report is prepared by INOGATE in providing assistance to the National Energy Regulatory Agency (ANRE) of Moldova. The main objective of this report is to assist the ANRE in understanding the rules and practices applied in EU member states for assessing investments to enable the Regulator to develop the necessary guidelines and reporting requirements that the regulated entity must provide to enable the assessment of the submitted investment proposal by the Regulator.The report reviews the main driving factors behind infrastructure investments in European Energy Markets, analyses the approach of different pricing methodologies and their effects in approving and monitoring capital investment projects, provides examples of some of the means used by Regulators to appraise investments and summarises approaches used in various EU and ECT countries to regulate investments. Finally, the report reviews ANRE‘s current draft policy governing the regulation of investments and provides proposals and recommendations for updating the current procedures used by ANRE. The report consists of an introduction, 4 chapters (the last chapter includes recommendations), list of references and 2 annexes, providing real examples from the EU and ECT countries on the relevant issues.The 2nd chapter shows the driving forces behind investments into the network assets. The main differences between transmission and distribution companies are described and different objectives of investments in these activities are explained. As the main aim of liberalisation and integration of the EU electricity markets is a creation EU-wide electricity market, it requires significant increase of investments into the grids, both national and international (cross-borders). All EU transmission system operators are oblige to prepare 10-year development plans, the plans must be approved by the national regulatory authorities.The main difference between investments into transmission and distribution networks is that usually there is only limited number of investments in the transmission networks with big budgets and long planning periods, and there is a large number of investments into the distribution networks with lower investment volumes, shorter planning periods and strong relationship with the local demand.The 3rd chapter of the report shows that different regulatory regimes have different impact on investments. Two the most popular pricing approaches: rate of return (or cost-plus) and incentive pricing are discussed. Under the rate of return regulation prices are set on the basis of operating costs plus a return on capital and thus facilitating cost recovery and avoidingpricing above costs. Yet, as all costs are covered, incentives for grid operators to increase their efficiency in service provision are limited. The emphasis on cost recovery in rate of return regulation is the source of the concern that companies may not operate efficiently. For example, if the regulator allows a rate of return that is higher than what the company actually needs to ensure that shareholders continue to provide capital for investment, the company could increase its returns to shareholders by making unnecessary investments (if the regulator does not catch the company doing so). This is called the Averch-Johnson effect.The 4th chapter of the report reviews the practices of UK, Ireland, Croatia, Slovenia, Kosovo and Lithuania in regulating investments in the energy sector. The 4th chapter of the report reviews the practices of UK, Ireland, Croatia, Slovenia, Kosovo and Lithuania in regulating investments in the energy sector. 

Theme of the document



EU project
Type of Document
Country report
Number of pages