Report by the Board of Management

New regulatory framework needed

The Electricity Act 1998 and the pursuant regulatory framework require TenneT to perform its statutory transmission duty effectively. The strong focus on cost control has proved its usefulness over the past years: Dutch households pay relatively little for a high degree of security of supply. But with the major changes planned in the energy market this regulatory framework is beginning to exert a squeeze. Over the coming period TenneT will spend hundreds of millions of euros on upgrading and expanding the high-voltage grid. This is necessary because of the expected increase in the transmission of electricity. Factors that play an important role include the growth in sustainable energy production, plans for large new power stations and the projected expansion of interconnection capacity.

What challenge does this pose? On the one hand, the regulatory framework provides an incentive for short-term effectiveness and cost efficiency. TenneT was recently instructed to save 2.1% year-on-year up to 2010, for example. In TenneT's view, the regulatory framework disregards the wish of customers for a high degree of security of supply (which requires expansion of connection and transmission capacity), sustainability (i.e. the transition to a 'clean' energy supply) and modernisation. The present regulatory framework also creates negative incentives for long-term investments. Under the present regulatory system the grid administrator is denied prior certainty as to whether it will earn back its investments, while TenneT is also being docked on the capital costs of investments already made. If this situation continues over several regulatory periods, TenneT will be unable to earn back its earlier investments, let alone achieve the return deemed reasonable on its investments. This is counterproductive given the major challenges facing TenneT.

The investment climate would improve significantly for TenneT if lawmakers were to give the company greater prior certainty regarding its ability to earn back investments. It is also important for the effectiveness of investments to be scrutinised once-only instead of several times as now happens. It would be beneficial for the division of roles between the Ministry of Economic Affairs and the Office of Energy Regulation to be defined more clearly. We take the view that the ministry should determine beforehand the usefulness of and need for investments. The Office of Energy Regulation is the supervisory body that checks TenneT's investments against predefined efficiency criteria. 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.