From Reference Network Model to Economic Ones : First Approach to Electrical Distribution Network Business Total Cost Function in Spain

Current EU legislation establishes that distribution and transmission systems shall be operated through legally separate entities where vertically integrated undertakings exist. At the same time, European Union's Energy Policy promotes generation of electricity from renewable sources which mostly takes the form of Distributed Generation (DG from now on). In the context of a vertically integrated company the development of this business may be easier as its impact on the distribution network segment (connection costs) would be internalized. However, when infrastructure and generation business are separated these costs become externalities that tend to be borne by Distribution System Operators´ (DSO from now on).As a result DSOs usually ask for compensations motivated by connections of Distributed Generation to their networks, while Distributed Generators claim that their impact over network could be positive to the distribution activity. Both groups of interests, DSO's and DG companies are pressing on regulators to guarantee that their positions materialize into each country's energy regulation. Aside from this debate, National Regulatory Agencies should tackle this problem using all available information and technical tools to ensure that they take appropriate regulatory measures to fulfill with their functions. Moreover, this problem will also be affected by the type of regulatory pricing scheme that applies to distribution (there are two general ways to regulate remuneration of DSO´s activity: incentive regulation versus cost of service regulation). Thus the problem should be solved by taking into account both elements: robust estimation of the cost functions of both businesses (in order to properly consider the size of externalities) and the type of regulatory framework of the distribution activity (which usually represent an ex ante constraint for the regulator).This paper is a contribution along this line. It introduces a new estimation for the Network Business Total Cost function for the distribution activity in Spain. This will provide some hints and references about the case study and will allow proposing a new formula to evaluate economies of scale and the sensitivity of this function to the introduction of distributed generation