Analyzing the returns and rate of return regulation of Finnish electricity distribution system operators 2015–2019

Abstract

Electricity distribution prices have steeply increased in Finland since 2015. This research investigates the returns from the Finnish low-voltage electricity distribution business and compares them to returns from three European industry indices. The within-industry distribution of returns is also studied. The Finnish rate of return regulation model used is presented together with the level of allowed returns by the model, four changes to the model are proposed, and the effect of the four proposed changes on the returns allowed by the model are investigated.The results show that the returns of the Finnish DSOs are very high absolutely and comparatively. There is a ca. ten percent segment of the industry that is not very profitable, while ninety percent of the Finnish DSOs have high or very high returns. The proposed changes to the regulation model are shown to have a remarkable effect on the return level. A change limiting the return for equity only would bring down the return to a level that can typically be expected of a return from a natural monopoly company.The results are relevant to the ongoing process of legal and regulatory changes taking place in Finland and for decision-makers and regulators everywhere.