Benchmarking and incentive regulation of quality of service: an application to the UK electricity distribution networks

Quality of service has emerged as an important issue in post-reform regulation of electricity distribution networks. Regulators have employed partial incentive schemes to promote cost saving, investment efficiency, and service quality. This paper presents a quality-incorporated benchmarking study of the electricity distribution utilities in the UK between 1991/92 and 1998/99. We calculate technical efficiency of the utilities using Data Envelopment Analysis technique and productivity change over time using quality-incorporated Malmquist indices. We find that cost-efficient firms do not necessarily exhibit high service quality and that efficiency scores of cost-only models do not show high correlation with those of quality-based models. The results also show that improvements in service quality have made a significant contribution to the sector’s total productivity change. In addition, we show that integrating quality of service in regulatory benchmarking is preferable to cost-only approaches.     

Output-based incentive regulation in electricity distribution: Evidence from Italy

Incentive regulation in electricity distribution is expected to enlarge its scope, from an input-oriented instrument to one that includes additional, output-based incentives. This creates a potential conflict with more traditional concerns for productive efficiency. In the case of Italy, together with input-oriented instruments, output-based incentives have been applied to indicators of quality for over a decade. Using micro-data from the largest Italian distribution company, we conduct an assessment of the effects of this regulatory framework. The aim of this work is threefold. First, we measure performance in terms of cost-efficiency and find that similar cost-reducing efforts were exercised in all distribution units. Second, we measure performance with respect to the overall regulatory framework. Using quality-related rewards and penalties, we find that more cost-efficient areas were also more successful in earning rewards/avoiding penalties: favorable external conditions have similar, positive effects on both cost and quality performance. Using the cost of the energy not supplied, we find no evidence of a conflict between cost efficiency and social cost efficiency. Results indicate, however, that itis preferable to use social costs when measuring a single unit's performance. From these results we derive specific policy indications.     

Motivations for market restructuring: Evidence from U.S. electricity deregulation

The purpose of this paper is to examine whether electricity restructuring was brought about due to the Public Interest Theory (that regulatory changes are undertaken to benefit society) or the Interest Group Theory (that groups hoping to gain from deregulation lobby for regulatory changes). From 1996 to 2002 eighteen states developed restructuring programs targeted at improving efficiency through the use of increased wholesale trading, abolition of ‘cost of service’ regulation, measures to open electricity production to non-utility entities, and the unbundling of transmission and distribution. Results indicate some evidence of the Public Interest Theory and strong evidence of the Interest Group Theory.     

Quality frontier of electricity distribution: Supply security,best practices,and underground cabling in Finland

Electricity distribution is a prime example of local monopoly. In most countries, the costs of electricity distribution operators are regulated by the government. However, the cost regulation may create adverse incentives to compromise the quality of service. To avoid this, cost regulation is often amended with quality incentives. This study applies theory and methods of productivity analysis to model the frontier of service quality. A semi-nonparametric estimation method is developed, which does not assume any particular functional form for the quality frontier, but can accommodate stochastic noise and heteroscedasticity. The empirical part of our paper examines how underground cabling and location affect the interruption costs. As expected, higher proportion of underground cabling decreases the level of interruption costs. The effects of cabling and location on the variance of performance are also considered. Especially the location is found to be a significant source of heteroscedasticity in the interruption costs. Finally, the proposed quality frontier benchmark is compared to the current practice of Finnish regulation system. The proposed quality frontier is found to provide more meaningful and stable basis for setting quality targets than the average practice benchmarks currently in use.     

Reference models and incentive regulation of electricity distribution networks: An evaluation of Sweden's Network Performance Assessment Model (NPAM)

Electricity sector reforms across the world have led to a search for innovative approaches to regulation that promote efficiency in the natural monopoly distribution networks and reduce their service charges. To this aim, a number of countries have adopted incentive regulation models based on efficiency benchmarking. While most regulators have used parametric and non-parametric frontier-based methods of benchmarking some have adopted engineering-designed “reference firm” or “norm” models. This paper examines the incentive properties and related aspects of the reference firm model—NPAM—as used in Sweden and compares this with frontier-based benchmarking methods. We identify a number of important differences between the two approaches that are not readily apparent and discuss their ramifications for the regulatory objectives and process. We conclude that, on balance, the reference models are less appropriate as benchmarks than real firms. Also, the implementation framework based on annual ex-post reviews exacerbates the regulatory problems mainly by increasing uncertainty and reducing the incentive for innovation.     

标尺竞争机制下的配电网增量成本定价模型

配电服务定价是输配分开过程中的重要问题之一,鉴于传统的配电管制正在向激励性管制转变,分析了标尺竞争机制下配电服务定价的相关问题,提出了一种基于标尺竞争机制的配电网增量成本定价模型,该模型基于配电网扩容计划估算增量成本和边际成本,并从每个配网使用者对配网负荷的使用份额来分析推导出配电服务价格。算例分析结果表明,该定价模型能有效促进配电公司之间的竞争,从而激励配电企业采取措施提高效率、降低成本。     

Incentive regulation of electricity distribution networks: Lessons of experience from Britain

This paper reviews the recent experience of the UK electricity distribution sector under incentive regulation. The UK has a significant and transparent history in implementing incentive regulation in the period since 1990. We demonstrate the successes of this period in reducing costs, prices, and energy losses while maintaining quality of service. We also draw out the lessons for other countries in implementing distribution sector reform. We conclude by discussing the place of incentive regulation of networks within the wider reform context, the required legislative framework, the need for appropriate unbundling, the importance of quality of service incentives, the regulatory information requirements, and the role of sector rationalisation.     

Evaluating the regulator: Winners and losers in the regulation of Spanish electricity distribution

The principal aim of this study is to evaluate the regulation of electricity distribution in Spain. To this end, we begin by analyzing whether the changes introduced by the regulator led distribution companies to improve their efficiency; we then address whether the reimbursements paid to the distribution companies are linked to efficiency; lastly, we examine whether consumers benefited from the efficiency improvements. We focus on Spain because the electricity regulator in that country is a longstanding pioneer in the implementation of incentive-based regulatory models. Our analysis was implemented using the regulatory model proposed by Bogetoft (1997) as a benchmark. The results show that the Spanish electricity regulator did not establish a link between efficiency and the reimbursements paid to electricity companies; in addition, the electricity companies benefited to the detriment of consumers.     

Negotiated settlements with a cost of service backstop: The consequences for depreciation

The movement from traditional regulatory hearings to negotiated settlements represents both a departure from cost of service regulation and a relaxation of regulatory oversight. Under negotiation parties are able to renegotiate inclusions in their cost of service while simultaneously creating a profit margin for the regulated firm where none existed under the cost of service outcome of a traditional hearing. This paper constructs a model to illustrate the existence of positive gains to pipeline and shipper from the re-allocation of expenses through time in the regulated pipeline services market in Canada. Behaviour consistent with the model is observable in anecdotal and econometric evidence gathered from the library of the National Energy Board of Canada, responsible for pipeline toll regulation in Canada. Empirical investigation by Littlechild (2009a) into settlement procedures in the Florida electricity market reveals similar findings; however, this analysis represents the first attempt to model the behaviour formally. The econometric analysis uses new data collected and compiled specifically for this exercise.     

Comparing welfare effects of different regulation schemes: An application to the electricity distribution industry

We compare the welfare effects of different regulation schemes of electricity distribution utilities. The compared regulation schemes are Fixed Price regulation, Cost of Service regulation, Menu of Cost-Contingent Contracts and Simple Menu of Contracts. In our calculations we utilize the information of a firm’s potential to improve cost efficiency. The firm-specific cost information of Finnish electricity distribution utilities is obtained by using various Stochastic Frontier models. Our basic result is that welfare can be improved by changing the Cost of Service regulation scheme to the Menu of Contracts regulation. Welfare also increases in the case of Fixed Price regulation and Simple Menu of Contract regulation. There is however, a significant difference among regulation regimes on how this improved welfare is distributed to consumers and producers.     

Quality regulation of electricity distribution in Italy: an evaluation study

The potential dangers of quality degradation under price-cap regulation are well recognised by regulators. In parallel with the price-cap system, the Italian regulator introduced an incentive scheme for electricity continuity of supply to apply during the period 2000–2003. The objective of this paper is to evaluate the effectiveness of this system by studying the effects of regulation on the electricity distribution industry and to identify scope for improvement of the regulation in subsequent regulatory periods. The evaluation shows that designing a regulatory system that was inherently compatible with the internal objectives of the network companies strengthened the acceptance and effectiveness of the system. Spill-over effects of quality from the monopoly to competitive markets have contributed to the effectiveness of the regulation. Quality regulation remains an innovative part of regulation and requires periodic evaluation and verification of its outcomes.     

Negotiated settlements and the National Energy Board in Canada

In Canada, settlements between oil and gas pipelines and users have largely superseded the litigation of major pipeline toll cases since 1995. Quantitatively, from the first half to the second half of the period 1985–2007 the average number of pipeline toll hearing days in Canada fell by three-quarters. On average, settlements last more than twice as long as litigated outcomes and have cut regulatory processing times by about one third for gas pipelines and by about two thirds for oil pipelines, with the result that regulatory processing times per effective toll-year have fallen to 13% and 27% respectively of previous levels. Qualitatively, settlements have been used to determine prices, operating and capital cost projections, return on equity, service quality improvements, risk-sharing investments and information requirements. They were the vehicle by which multi-year incentive agreements developed rapidly for all pipelines. They have also been used to introduce light-handed regulation. They have provided a mechanism for fruitful collaboration between pipelines and their customers and have changed attitudes in the industry. Two key actions of the National Energy Board have facilitated settlements by clarifying expectations and property rights: its generic cost of capital decision that removes the market power of the pipeline and enables effective negotiation with users, and its willingness to judge a settlement by the reasonableness of the process leading up to it instead of imposing the Board's own values on the outcome.     

Towards a future with large penetration of distributed generation: Is the current regulation of electricity distribution ready? Regulatory recommendations under a European perspective

The European Energy Policy promotes renewable energy sources and energy efficiency as means to mitigate environmental impact, increase security of supply and ensure economic competitiveness. As a result, the penetration levels of distributed generation (DG) in electricity networks are bound to increase. Distribution networks and distribution system operators (DSOs) will be especially affected by growing levels of DG. This paper reviews the current regulation of distribution in the European Union Member States, focusing on those aspects that might hinder the future integration of DG. Several regulatory issues that may hinder a successful integration of DG have been identified. Recommendations to improve the current situation are proposed. Regarding economic signals sent to DG, connection charges and cost-reflective use-of-system charges together with incentives to provide ancillary services are the key aspects. Concerning DSOs regulation, unbundling from generation and supply according to the European Electricity Directive, incentives for optimal planning and network operation considering DG, including energy losses and quality of service, and innovation schemes to migrate to active networks are the most relevant topics.     

Incentive mechanisms to promote energy efficiency programs in power distribution companies

Power distribution companies (DISCOs) play an important role in promoting energy efficiency (hereafter EE), mainly due to the fact that they have detailed information regarding their clients' consumption patterns. However, under the traditional regulatory framework, DISCOs have disincentives to promote EE, due to the fact that a reduction in sales also means a reduction in their revenues and profits. Most regulatory policies encouraging EE have some embedded payment schemes that allow financing EE programs. In this paper, we focus on these EE-programs' payment schemes that are embedded into the regulatory policies. Specifically, this paper studies two models of the Principal–Agent bi-level type in order to analyze the economic effects of implementing different payment schemes to foster EE in DISCOs. The main difference between each model is that uncertainty in energy savings is considered by the electricity regulatory institution in only one of the models. In terms of the results, it is observed that, in general terms, it is more convenient for the regulator to adopt a performance-based incentive mechanism than a payment scheme financing only the fixed costs of implementing EE programs. However, if the electricity regulatory institution seeks a higher level of minimum expected utility, it is optimal to adopt a mixed system of compensation, which takes into account the fixed cost compensation and performance-based incentive payments.     

Efficiency analysis of energy networks: An international survey of regulators

Incentive regulation for networks has been an important part of the reform agenda in a number of countries. As part of this regulatory process, incentives are put in place to improve the cost efficiency of network companies by rewarding good performance relative to a pre-defined benchmark. The techniques used to establish benchmarks are central to the efficiency improvements that are ultimately achieved. Much experience has been gained internationally in the application of benchmarking techniques and we now have a solid understanding of the main indicators of best practice. What we are lacking is a more complete understanding of the factors that influence choice of methods by regulators. In this paper, we present the results of an international survey of energy regulators in 40 countries conducted electronically between June and October 2008. Regulators from European, Australasian and Latin American countries are represented in the survey. Our results show that benchmarking techniques are now widespread in the regulation of gas and electricity networks. Best practice, however, is limited to a small number of regulators. We conclude by summarising existing trends and offering some recommendations on overcoming barriers to best practice efficiency analysis.     

Colombian ancillary services and international connections: Current weaknesses and policy challenges

Ancillary services are required to maintain the unity, stability, and quality of power systems. In Colombia these services are required to operate the national power system and the international connections with the neighboring countries. The system is influenced by factors ranging from system's topology to social and political aspects, such as the large number of terrorist attacks. In light of these particularities, we consider Colombia as a learning lab for ancillary services in the region. Colombia's power system relies on three ancillary services for its operation, namely frequency regulation, voltage control, and blackstart service. From 2010 Special Protection Systems were also added. In this paper we first analyze the technical aspects, operational restrictions, financial management, and the most relevant regulatory conditions of these ancillary services of the SIN. We also take into consideration the main regulatory characteristics and statistical data related to energy exchanges that have taken place between Colombia and Venezuela and Ecuador. Thereafter, we depict the main weaknesses and policy challenges that Colombia must address in order to increase the effectiveness and coverage of ancillary services in both the SIN and in the international interconnections. Finally, we propose new market oriented regulations to encourage investments and new tools for international connections.     

A new long term load management model for asset governance of electrical distribution systems

Long term load management (LTLM) is one of the key factors in making decisions regarding new investments in distribution systems. However, none of the previous studies have investigated the effect of external factors such as governance, urban planning and social behavior factors on LTLM. In this paper, a new LTLM model is proposed to determine the influence of external factors on LTLM. Distribution system development indices have been used to obtain asset governance targets; these indices can help Distribution Companies (DISCOs) compromise between reliability and running the system economically. Capacity utilization and the number of maneuver points are used here to do LTLM and improve asset governance. Numerical studies on a real distribution system (city with population about 200,000) have been conducted and sensitivity analysis of maneuver points and capacity utilization level with respect to external factors is studied and analyzed. The results show the feasibility of the proposed LTLM to obtain higher efficiency from the viewpoint of cost and quality service compared to conventional LTLM.     

Teaching an old dog new tricks: Firm learning from environmental regulation

We examine a new mechanism by which environmental regulation can increase efficiency: intra-firm knowledge spillovers due to environmental regulation. County-level non-attainment of the National Ambient Air Quality Standards creates spatial variation in the degree of regulatory stringency, as states impose stronger environmental regulation in non-attainment counties. We use this spatial variation to examine how the efficiency of electricity generators responds to increases in regulation. We show that, in response to increased regulatory stringency, electricity generators find technical efficiency enhancements and then transfer these enhancements to other units within their fleet. We find that a change in regulatory stringency translates to within-firm spillovers of 3–4%, and that these gains occur at least 3 years after the increase in regulatory stringency.     

Stochastic valuation of energy storage in wholesale power markets

Energy storage systems are well poised to mitigate uncertainties of renewable generation outputs. Grid-scale energy storage projects are major investments which call for rigorous valuation and risk analysis. This paper provides a stochastic energy storage valuation framework in wholesale power markets which considers all key revenue streams simultaneously. As part of this framework, an operational optimization model is developed to determine the energy storage system's optimal dispatch sequences. A future curve model is built to capture the volatilities of electricity prices. In addition, a frequency regulation service price forecasting model is developed. Simulation results with a realistic battery storage system reveal that the majority of the market revenues comes from frequency regulation services. Simulation results also show that both round-trip efficiency and power-to-energy ratio are crucial to the cost effectiveness of energy storage systems.     

智能维修决策支持系统的研究

提出了一种将神经网络、专家系统和仿真技术相结合，应用于维修决策的新型综合模型。该模型能以低成本合理利用各种维修资源，提高生产系统的的可靠性，保障维修效率和质量，达到延长设备寿命的目的。