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Energy consumption in Norway is dominated by electricity

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					Preliminary project description for Thor Erik Grammeltvedt
PhD project:
 “Energy network regulation – The Norwegian case in light of
                 international experience”
                                     10. March 2003

Background
The PhD thesis will be part of a larger project co-financed by the Norwegian Water
Resources and Energy Directorate (NVE) and the Norwegian Research Council (NFR)
under the umbrella of the EMBa and SAMSTEMT program.

The novel aspect of the research project is the study of inter-linkages between the
regulatory policies towards different, but related, energy networks. The regulatory policy
towards the today dominating electricity utilities affects the incentives of developing new
energy networks, as well as local production, that facilitates a desirable consumer switch
to other energy sources in the future. Market design of new energy sources – both the
downstream level (energy retailing) and regulation of new energy networks – should not
be studied in isolation, but as an integrated part of policies towards energy markets in
general.

In the project description which followed the application to NFR in June last year the
research task were divided in two specific parts:

      Designing integrated regulatory polices towards energy networks
      Comparative studies of energy network regulation practice in Europe

In the first part of the project we will develop new insight about the design of integrated
regulatory regimes that covers several energy networks, both currently developed
networks, and new network technologies developed in the future. The regulatory regime
must define integrated policy rules both towards the innovation and investment phase for
alternative energy sources and for the network operation phase.


The second part of the project will seek to derive a better understanding of existing
regulatory regimes and how utilities adjust to these regimes. In particularly focusing on;

      regulatory challenges in mixed energy systems and
      energy utilities’ response to economic incentives.
The first bullet point relates to studies of different regulatory regimes that has been
adopted in different countries under different circumstances and that may lead to some


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recommendations of best practice when it comes to the development of the regulation of
mixed energy systems.

The second bullet point relates to studies of the variations in regulatory practices between
countries over time. These variations makes it possible to undertake empirical research to
reveal the importance of economic incentive for the performance of energy utilities.
Gaining a better understanding of the empirical importance of economic incentives and
utility ownership is important for the design of policy towards development of new
energy sources.

This preliminary project description relates mainly to the second part of the project
focusing on empirical analysis of the experiences both form Norway and other countries.
But will also contain suggestions for one study that challenges the normal assumptions of
profit maximizing firms and the implication for the design of the regulation mechanisms.

Preliminary list of specific projects:

   1. The effect of changes in regulation on investments and efficiency - The
      Norwegian case.
   2. A comparative study of regulatory approach in Europe (Sweden, Denmark,
      Holland and the UK) – both of the development over time and of particular
      changes.
   3. An empirical investigation of the effects of regulation and changes in the
      regulation, on the level of investments and efficiency in Sweden, Denmark,
      Holland and the UK.
   4. An empirical analysis of the choice of regulatory instruments and the contribution
      to social welfare.
   5. A theoretical analysis of the implications for the design of the regulation of
      different type owners that respond differently to economic incentives.


Research approach and methodology
The approach of this particular work will mainly be positive and seek to derive a better
understanding of existing regulatory regimes and how utilities adjust to these regimes. An
important element of these analyses will be the application of methods for measuring
relative efficiency and productivity growth at firm level. This will include the Data
Envelopment Analysis (DEA), which is based on linear programming techniques, and use
used to derive relative performance measures.

But the thesis will also include a more normative approach based on the economic theory
of regulation under asymmetric information. The assumption is that the regulated
industry may have better information about cost of production, demand, and quality of
services. The approach is normative in the sense that optimal, welfare maximizing,
contracts that regulate the price structure, access to markets, and possibly cost sharing
rules with the government are derived.



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A closer description of the specific projects

1. The effect of changes in regulation on investments and efficiency - The
   Norwegian case.

   This study will investigate the effects of the revenue cap regulation put in place in
   1997 and how this over time has affected the short run and long run efficiency of the
   network utilities in Norway. It will in particular focus on the effect on investments,
   both replacements and new investments. The study will also try to investigate the
   effect of system of Quality Dependent Revenue Caps that was introduced on the 1st of
   January 2000. The study will in particular study whether type of ownership influence
   how the different companies respond changes in the regulation.

   The study will be conducted on the extensive dataset derived form the utilities annual
   reports to NVE. To undertake this study I will use a combination of Data
   Envelopment Analysis (DEA) and more traditional (comparative) statistical tools. We
   will also consider to supplement the empirical analyses with specific case studies of
   one or more of the companies.

    (The description will be extended with the necessary literature references)

2. A comparative study of regulatory approach in Europe (Sweden, Denmark,
   Holland and the UK) – both of the development over time and of particular
   changes.

   This study will evaluate the different regulatory approaches undertaken in the in
   different countries in light of the best practice as it is put forwarded in the theoretical
   literature, unraveling the strengths and weakness of each approach. An important
   factor in this research will be to discover the different institutional and political
   structures influencing these approaches.

   (The description will be extended with methodology and the necessary literature
   references)

3. An empirical investigation of the effect of regulation and changes in the
   regulation on the level of investments and efficiency in Sweden, Denmark,
   Holland and the UK.

   In this study I will evaluate the results form the first study using data form other
   countries.

   (The description will be extended with methodology and the necessary literature
   references)




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4. An empirical investigation of the choice of regulatory instruments and design
   and its contribution to social welfare.

   According to the literature (for example Laffont and Tirole (1993) and Shleifer
   (1985)) the regulator is supposed to maximize the total welfare (consumers surplus
   and profit of the firms). I will conduct an empirical study to analyze the contribution
   to social welfare of regulators in different countries and sectors. I will try to evaluate
   the possible relationship between the effect on efficiency and on total social welfare
   of the design of the regulation – in particular focusing on comparing the use of an
   individual efficiency factor (X) and a general X in the regulation.

   (The description will be extended with methodology and the necessary literature
   references)

5. A theoretical investigation of the implications for the design of the regulation of
   different type owners that respond differently to economic incentives.

   If difference in type of owner ship and industry organization has a bearing on the way
   and the speed the companies respond to economic incentives this has a large impact
   on the optimal design of the regulation. In this work I will try to model how this
   influences the classical results in the regulation literature.

   (The description will be extended with methodology and the necessary literature
   references)


The way forward
In the project proposal to NRF the following progress plan with millstones were
presented.

Progress plan – milestones
Phase 1: Review of relevant research and hiring Phd. students on the project (2003)
Phase 2: Comparative studies of regulatory practices in Europe (2003-2004)
Phase 3: Theoretical studies of integrated energy network regulation (2004-2005)
Phase 4: Empirical studies of regulatory regimes and utility behavior (2004-2005)
Phase 5: Submission of two Phd-theses. (2006), organizing a conference and presentation
of research (2006)


Based on this the study number 1 and 2 above should be completed with in the frame of
the first phase of the project and study number 3 to 5 during the second and third phase.



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Further work
The project list and progress plan will be developed further in cooperation with the
research team and it international contacts.




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