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Yle investigation: Electricity bill hikes not justified by storm-proofing investments

New rules that followed devastating winter storms allowed power companies to hike transfer prices to pay for major investments.

Sähkölinjojen päälle kaatuneita puita.
Electricity distribution companies were called on to invest large sums to bury power lines following two devastating winter storms, Tapani and Hannu. Image: Yle

An Yle analysis has found that revenue from steep increases in electricity transfer prices have not been spent on storm-proofing power lines, as companies claimed and the regulator intended.

Yle reviewed public data available for 13 electricity transfer companies over a four-year period and found that a change in the maximum prices they could charge led to an unprecedented increase in electricity transfer prices.

This was ostensibly to cover the cost of putting power lines underground to protect them from fallen trees when storms hit.

But firms only spent a fraction of the new revenue on updating their networks.

Legislation passed by parliament in 2013 meant electricity companies had a strict deadline to repair power cuts after storms, although the new rules would not come into force until 2028.

The cost of storm-proofing had been estimated at three billion euros and electricity distribution companies demanded an increase in revenue to pay for it.

The Energy Authority, the regulatory body governing the industry, was therefore under pressure to ensure that smaller and more vulnerable rural companies would be able to comply with the new rules, as they required the biggest investments in infrastructure.

Professor: Scale of price change "unprecedented"

Electricity bills in Finland are made up of two parts: the electricity itself, which can come from any number of power firms, and the transfer price, which is always paid to the company that owns the transmission network in any one area.

That makes it a 'natural monopoly' in economics theory and therefore the prices these companies can charge are regulated by the state.

Among a slew of regulatory changes in 2013, the Energy Authority gave power companies the ability to increase the rate of return from their power networks from five to 7.4 percent. The Authority estimated that the change would allow firms to increase prices by 15 to 20 percent. However that proved to be a miscalculation.

When the change took effect at the beginning of 2016, it meant that at the stroke of midnight 31 December 2015, energy companies’ combined revenues rose on average by 38 percent.

In cold cash, that meant they could impose a total price increase of 330 million euros starting in 2016.

Story continues after graphic

Revenues earned by 13 network companies
Image: Samuli Huttunen, Lasse Isokangas / Yle

Tampere University professor of electrical power engineering Pertti Järventausta reviewed Yle’s analysis and confirmed that the scale of the pricing changes was unprecedented.

"Presumably the Energy Authority did not fully recognise the overall impact of the change in the regulatory model. Such a major change would hardly have been made if it had been known," Järventausta added.

He said that the Authority appeared to have taken care of the network companies, but forgot about customers such as households and businesses.

"The regulator viewed the matter from the network company’s perspective so as to facilitate network investments and to fulfill security of supply mandates. It forgot to conduct an holistic assessment of what would happen at the customers’ end," he noted.

Regulator: "We did not have a crystal ball"

Veli-Pekka Saajo, the Authority’s director responsible for network company supervision said that the regulator needed to make sure that all 77 network companies in Finland could have sufficient income from customer fees to strengthen the storm resilience of their networks.

He explained that in practice this meant that the regulatory model was designed to support the weakest links -- smaller rural firms that needed more financial support to fulfill their mandate. However, this meant a bonanza for large firms operating in urban areas where networks had already been protected because power lines had been laid underground.

These big city firms were nevertheless able to raise prices by dozens of percentage points. For example, power distribution firm Caruna saw revenues rise by 109 percent between 2015 and 2018, although investments during that time were well below depreciation. There was no network construction boom because it was not needed.

Saajo stressed that the law required the regulator to treat all distribution companies equally. If it did not provide the same rules for all, it would likely have ended up in the Market Court. He stood by the Authority’s estimates that the model would have given network companies a 15 - 20-percent revenue boost -- half of what Yle’s analysis uncovered. Moreover, three major power companies confirmed that Yle’s findings matched their own internal calculations.

"We did not have a crystal ball to know for sure what level of funding would be needed. There was a certain direction and vision as well as expert assessments. There was a certain difficulty," Saajo said.

Electricity distribution companies’ price hikes were perfectly legal as they were acting within the framework laid down by the Energy Authority. Caruna, the firm that imposed the steepest transfer pricing hikes on consumers confirmed that Yle’s calculations corresponded with its own. However it declined an interview on the matter.

Tapani Liuhala CEO of another large network company, Elenia, admitted that the new regulatory model facilitates transfer price increases. However he stressed that the change was urgently needed.

"Network companies would not have been able to invest in the manner required by the law if something hadn’t been done," he said.

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