Corporate Governance

Regulatory framework

The establishment of tariffs plays an extremely important role in securing TenneT's income. The tariffs are based on TenneT's annual permitted income, which is established by the Office of Energy Regulation. In September 2008 the Office of Energy Regulation published the Method Decision and the associated X Factor Decision for the fourth regulatory period (2008-2010). The X Factor Decision determines TenneT's annual permitted income. TenneT finds that the permitted income for the 220 kV and 380 kV grids covers the costs incurred for these grids to a reasonable extent. However, the income level established for the 110 kV and 150 kV grids is insufficient to cover all costs. TenneT has therefore lodged an appeal with the Netherlands Trade and Industry Appeals Tribunal for the following reasons:

• The method used by the Office of Energy Regulation to determine the value of the high-voltage grids did not include any safeguards to ensure its accurate establishment. The regional grid operators established the level of the standardised asset value and the operating costs of the high-voltage (110 kV and 150 kV) grids themselves, and the Office of Energy Regulation established the grid values based on the information received from the regional grid operators, leaving the indirect operating costs out of the equation entirely.
• TenneT is not being reimbursed for a substantial part of the non-recurring costs resulting from the transfer of management of the high-voltage grids.

In addition, a deduction is being made on all costs (including capital costs) as a result of the application of a parameter for generic productivity development (frontier shift). TenneT believes that it is no longer possible to achieve a productivity improvement on investments already made.

Like TenneT, both the Ministry of Economic Affairs and the Office of Energy Regulation recognise that the current regulatory framework is exerting a squeeze in the changing energy market. According to the 2008 Energy Report, the regulatory framework is aimed too much at cost reduction and not enough at promoting investments in the grid. TenneT is about to make considerable investments in the replacement and expansion of the Dutch transmission grids. These investments are essential to be able to continue meeting the growing demand for transmission capacity in the years ahead and, at the same time, to go on assuring the Dutch standard of security of supply.

For many years, cost reduction was the primary focus of attention. TenneT believes that more attention should now be paid to covering the costs of necessary investments. The investment climate for TenneT would improve significantly if investments were assessed in terms of their effectiveness once, in advance.