Managing regulatory risks when outsourcing network-related services in the electricity distribution sector

Abstract

Deregulation of the electricity sector liberated the electricity sale and production for competitive forces while in the network business, electricity transmission and distribution, natural monopoly positions were recognised. Deregulation was accompanied by efficiencyoriented thinking on the whole electricity supply industry. For electricity distribution this meant a transition from a public service towards profit-driven business guided by economic regulation. Regulation is the primary means to enforce societal and other goals in the regulated monopoly sector. The design of economic regulation is concerned with two main attributes; end-customer price and quality of electricity distribution services. Regulation limits the costs of the regulated company but also defines the desired quality of monopoly services. The characteristics of the regulatory framework and the incentives it provides are therefore decisive for the electricity distribution sector. Regulation is not a static factor; changes in the regulatory practices cause discontinuity points, which in turn generate risks. A variety of social and environmental concerns together with technological advancements have emphasised the relevance of quality regulation, which is expected to lead to the large-scale replacement of overhead lines with underground cables. The electricity network construction activity is therefore currently witnessing revolutionary changes in its competitive landscape. In a business characterised by high statutory involvement and a high level of sunk costs, recognising and understanding the regulatory risks becomes a key success factor. As a response, electricity distribution companies have turned into outsourcing to attain efficiency and quality goals.

This doctoral thesis addresses the impacts of regulatory risks on electricity network construction, which is a commonly outsourced activity in the electricity distribution network sector. The chosen research approach is characterised as an action analytical research on account of the fact that regulatory risks are greatly dependent on the individual nature of the regulatory regime applied in the electricity distribution sector. The main contribution of this doctoral thesis is to develop a concept for recognising and managing the business risks stemming from economic regulation. The degree of outsourcing in the sector is expected to increase in years to come. The results of the research provide new knowledge to manage the regulatory risks when outsourcing services.