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Electricity purchased in the market and transported via high-voltage transmission lines is distributed to final customers through distribution networks. These are typically local infrastructure, but can also comprise some low-voltage regional networks, for example in rural areas. Distribution companies have the responsibility to deliver energy from suppliers to end-users and to maintain and develop the distribution networks. The size of a distribution company can vary. There are thousands of distribution companies in Europe. Some are active on a national level, some in large regions within a country, but most of them operate purely at municipality level.

Since June 2008, the EURELECTRIC Networks Committee has placed the main focus of its work on the needs and issues of Distribution System Operators (DSOs), creating three working groups (WGs) - on distribution customers and operation; distribution regulation and policy and smart grids. These WGs establish the industry's common position on questions relating to: investment needs for the roll out of smart meters, barriers to smart grid development and deployment, the challenge of public acceptance for power lines, charging infrastructure for electric vehicles, distributed generation and grid-integration of renewable energy. In its dialogue with regulators, EURELECTRIC stresses the importance of intelligent regulation that enables DSOs to both recover their capital expenditures and invest in the networks of the future. In addition, as each and every electricity customer has the right to choose his/her supplier in the competitive market, DSOs must accompany this move and act as neutral, transparent and non-discriminatory market facilitators. From a market perspective, electricity distribution, like transmission, is considered to be a 'natural monopoly' activity. Distribution tariffs are therefore regulated by the national regulatory authorities, who define or approve the level of tariffs and/or returns on investment that distributors are allowed to set/make. A forthcoming EURELECTRIC report will reveal that a majority of European DSOs are not allowed adequate tariffs to recover their investment expenses. Our report finds that 72% of the distribution companies are destroying value due to regulatory pressure.

Many European DSOs are part of Vertically Integrated Companies (VICs) which also own subsidiaries or business units active in electricity generation, trading and/or supply. 'Chinese Walls' must therefore be set up to clearly segment and differentiate these various activities. Accordingly, the European Union has over the last dozen years adopted a series of Directives, containing 'unbundling' rules to prevent these integrated companies taking advantage of their favourable situation either in the form of a privileged access to the distribution networks or commercially advantageous information.

Unbundling provisions have been implemented gradually over time. The first legislation adopted by the EU in this regard was the 1st Electricity Market Directive (96/92/EC) which, among other obligations, required VICs to hold separate accounts for their generation, transmission and distribution activities in their internal accounting. This provision is usually referred to as "accounts unbundling". The 2nd Electricity Market Directive (2003/54/EC), adopted in 2003, brought unbundling of VICs to a different level as it prescribed a stricter level of separation between natural monopoly activities (transmission and distribution) and competitive businesses (generation, trading and supply). Accordingly, a requirement for additional "functional unbundling" (organisational and decisional independence), "informational unbundling" (confidentiality of information) and "legal unbundling" requirements were made mandatory by this Directive. The recently-adopted 3rd Electricity Market Directive sets more stringent rules with regard to branding and customer-communication.

EURELECTRIC believes that an effective DSO regime (as set out by the 2nd Electricity Directive) must be both proportionate and efficient in preventing conflicts of interest between regulated and competitive activities as it is a means of removing the risk of privileged treatment of those generation and supply businesses that form part of an integrated electricity group. Provided the existing provisions are properly implemented by national legislative bodies and enforced by national regulators, EURELECTRIC does not see any need to extend the scope of DSO functional and informational unbundling. We advocate using a set of indicators to assess DSO-independence and contribution to smooth market functioning.

In order to assist DSOs in facilitating retail markets, policy makers should focus their attention on the expected increase in the number of customers wishing to switch from one retail supplier to another. This will pose challenges to DSOs in their role of market facilitation. To exploit new functionalities in customer systems, investments in IT systems and customer service resources should be made. However, a level playing field must exist so as to make these IT systems compatible and interoperable between DSO areas. This will facilitate retail market entry by reducing entry costs, contributing ultimately to the regional integration of electricity retail markets.

To finance these new customer systems, DSOs should be allowed adequate returns to recover the investment and related operational expenditure. In this way, DSOs should contribute to the emergence of well-functioning and competitive electricity retail markets. DSOs, together with suppliers, must work out practicable solutions for information exchange on large numbers of customers wishing to switch from one supplier to another.

In the future, European electricity networks will also have to cope increasingly with the ambitious sustainability targets set by the EU policymakers, which add new items to the DSO mission beyond the traditional tasks of securing network reliability and quality. Smart grids are a way to equip system operators with the necessary tools to contribute to the EU's '2020' energy-climate objectives. The European Commission recognised the role of 'smart grids' in reaching the goals of the energy-climate package in its recent Green Paper on Energy Networks.

A smart grid is an electricity network that can intelligently integrate the behaviour and actions of all users connected to it -generators, consumers and those that do both - in order to efficiently ensure sustainable, economic and secure electricity supply. As such, a smart grid, involving a combination of software and hardware allowing more efficient power routing and enabling consumers to manage their demand, is an important part of the solution for the future.

If DSOs are to fulfil their broad mission, a predictable and transparent regulatory framework for the European electricity market is needed. We view an appropriate return as a basic prerequisite for investment, and we also recommend harmonising rules across Europe as far as possible. EURELECTRIC calls upon governments and regulatory authorities to work together towards an optimised business model for all parts of the value chain, from generators to consumers, so as to minimise total costs. A recent EURELECTRIC report on Smart Grids and Networks of the Future argues that the regulators need to provide appropriate incentives to DSOs for their involvement in R&D work and for the development and deployment of new technologies supporting smart grids.

Just as the transmission networks ensure the functioning of the market and the electrical system on a wider scale, distribution networks are particularly important in ensuring faultless delivery of electrical power to the end users. Quality of service is an issue of primary importance for distribution companies, which are also responsible for the key activity of metering the electricity flow to customers. Active monitoring of the voltage quality is therefore essential in maintaining secure and reliable electricity distribution and this central topic will be discussed in a EURELECTRIC event in November 2009 in cooperation with the regulators.

A more and more important technical challenge for the distribution sector is the emergence of 'distributed generation' technologies and renewable energy sources. A large-scale increase in small, dispersed generating units will have a significant impact on the distribution networks in both technical and economic terms. For the many key technical questions on electricity distribution, EURELECTRIC's partner is CIRED.

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