Tarrif methodology

The tariff methodology describes how the Flemish electricity and gas distribution network tariffs are determined and set. The VREG decides independently on the tariff methodology, or on an update thereof, after discussion with the network operators and after a public consultation. In doing so, he follows the working method imposed by the Flemish Energy Decree. He must respect certain guidelines mentioned in the decree, such as the need for transparency and non-discrimination.

In the actual tariff methodology 2017-2020, VREG makes a distinction between exogenous and endogenous costs of distribution system operators.

  • Exogenous costs: for certain costs it isn’t possible for the network operator to control them. These costs are therefore considered to be exogenous or unaffectable. They are passed through to the customers.
  • Endogenous costs: they are what we could consider as the true costs of the distribution networks. These are the costs arising from decisions made by the network operator, such as investments, operating resources and financing. To cover these costs, each distribution system operator receives his allowed revenue authorised by the VREG out of his tariffs, as a stimulus for cost efficiency. This income is largely guaranteed by the tariff methodology (small volume risk). The allowed revenue includes a potential profit margin (based on a wacc x RAB approach). The height of the allowed revenues is a result from a mechanism based on real endogenous costs made in the years prior to the regulatory period. Overall, the future allowed revenue follows the observed development of the costs. However, in this process the VREG may ignore historic costs he considers to be unreasonable. The allowed revenues are annually being adjusted for inflation.

Customers do not see the distinction between endogenous and exogenous costs in their tariffs.