Supervision of electricity distribution tariffs

Electricity distribution is a natural monopoly, because maintaining parallel electricity networks would be economically unprofitable and would undermine the reliability of electricity distribution. The Energy Authority supervises the reasonableness of electricity distribution tariffs.

The pricing of distribution network companies is supervised as a whole on the basis of the total revenue from their operations. The companies must set the prices of their electricity distribution services in accordance with the Energy Authority’s supervision methods for reasonable pricing. The supervision methods determine a return cap, i.e. the reasonable return allowed on capital tied up in the electricity network. The Energy Authority confirms the methods for eight years at a time.

The Energy Authority assesses the reasonableness of pricing ex post, on a company-by-company basis. After the end of each four-year supervision period, the Energy Authority issues a supervisory decision for each electricity network company on the reasonableness of its pricing. The decision determines whether the company’s pricing has exceeded or fallen short of the reasonable level. This results in either a surplus or a deficit for the company.

If a network company has overcharged during the supervision period, it must return the surplus to customers during the following four-year period through the pricing of distribution charges. The return may also be carried out by increasing investments in the electricity network. Correspondingly, a company that has underpriced its services may increase the prices of its network services in the following supervision period by an amount corresponding to the accumulated deficit.

Any increases in electricity distribution tariffs must always comply with the statutory cap on increases: a network company may not raise the distribution tariff by more than eight per cent compared to the charges collected during the preceding 12 months.

Electricity distribution tariffs vary by region

There are 77 electricity distribution network companies in Finland, each operating within a geographical area of responsibility specified in its electricity network licence issued by the Energy Authority. These areas differ significantly from one another.

Regional differences in electricity distribution tariffs are mainly influenced by the geographical location of the network, the population density of the area, and the level of investments required to develop and maintain the network, such as investments related to security of supply. Distribution charges are generally lowest in the largest cities. In sparsely populated areas, distances can be long and the costs of developing and maintaining the electricity network are spread across a smaller number of customers, which results in higher distribution charges.

Pricing for electricity distribution must be consistent within a network company’s area of responsibility.