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.     

Why and how to subsidise energy R+D: Lessons from the collapse and recovery of electricity innovation in the UK

The UK electricity sector liberalisation was a pioneer in the worldwide reform trend and its reform model and outcomes have been the subject of many studies. However, lesser known are the effects of privatisation, market based reforms, and incentive regulation of networks on research and development as well as patenting activities in the sector. This paper updates our previous studies of this subject and discusses the recent developments in the innovative activities in the UK electricity sector. We find that, in recent years, the initial absence of support policies and the subsequent decline in innovation efforts in the aftermath of the reform has resulted in efforts towards forming an energy technology and innovation policy. Although we already observe some positive outcomes from these efforts, we discuss whether the balance of the innovation efforts are calibrated appropriately and whether the institutional framework can be further improved to promote long term progress.     

Social cost-efficient service quality—Integrating customer valuation in incentive regulation: Evidence from the case of Norway

In order to overcome the perverse incentives of excessive maintenance reductions and insufficient network investments arising with incentive regulation of electricity distribution companies, regulators throughout Europe have started regulating service quality. In this paper, we explore the impact of incorporating customers’ willingness-to-pay for service quality in benchmarking models on cost efficiency of distribution networks. Therefore, we examine the case of Norway, which features this approach to service quality regulation. We use the data envelopment analysis technique to analyse the effectiveness of such regulatory instruments. Moreover, we discuss the extent to which this indirect regulatory instrument motivates a socially desired service quality level. The results indicate that internalising external or social cost of service quality does not seem to have played an important role in improving cost efficiency in Norwegian distribution utilities.     

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.     

电力市场化改革中的终端电力能源效率问题

提高终端电力能源效率,是实现电力可持续发展的重要保障。然而,从我国电力市场化改革的进程来看,终端电力能源效率问题在很大程度上被忽视,甚至还受到了一定的负面影响。如何将终端电力能源效率问题综合纳入电力改革进程,采取妥善的应对措施促进终端电力能源效率的持续提高,是我国电力改革所面临的一项重大挑战。本文试图分析英、美两国电力市场化改革中针对终端电力能源效率问题所采取的政策措施,并探讨其对我国的启示意义。     

中国新一轮电力改革十问

本文采用了问答的形式,总结了在前三十年的改革开放中,电力部门的市场化改革取得的巨大成绩和经验。本文指出,电力部门需要继续推动新一轮改革,以应对气候变化、环境保护和节约资源的严峻挑战,以及克服市场化所遗留的问题。作者强调,优化结构、提高效率、减低成本、提供消费者可负担起的、绿色低碳的电力服务是新一轮电力改革的目标。本文认为切忌从理论条条出发和迷信市场竞争力为灵丹妙药,分析如何把市场机制和加强监管紧密结合起来,走出一条符合中国国情的电力可持续发展的道路。作者建议在推动"竞价上网"环节,使环境成本价格化,供应端和需求端参与电力服务竞争,满足可再生能源市场份额制,鼓励清洁电源发展和降低煤电比例和控制煤炭消费总量,达到电力结构的清洁、绿色和低碳化。在"输配电"环节,充实和加强国家电监会的价格监管和社会责任监管。电网公司要保障电力供应安全,实施绿色节能调度和完成节电目标。电网公司管理系统要扁平化、分散化、透明化和一体化。大力发展超智能电网和信息通信技术。     

Does environmental heterogeneity affect the productive efficiency of grid utilities in China?

China's electric power industry has experienced a reform whereby the generation sector is being opened up to competition but the transmission and distribution sectors are still under regulation. Efficiency and benchmarking analyses are widely used for improving the performance of regulated segments. The impact of observable environmental factors, together with unobservable characteristics, on efficiency has gained increasing attention in recent years. This study uses alternative stochastic frontier models combined with input distance functions to measure the productive efficiency of 29 grid firms of China over the period of 1993–2014 and investigates whether the observed environmental and unobserved heterogeneity factors affect the productive efficiency. The results indicate that adverse environmental conditions may bring negative influence to the production of grid utilities while the number of customers and the network length have positive impacts on the utilities' efficiency; Besides, the efficiency is sensitive to the model specification, which illustrates the presence of observed and unobserved heterogeneity; Moreover, there is no significant efficiency improvement in the grid utilities after the unbundling reform of 2002; Finally, the regional grids differ significantly in efficiency, and there is room for improvement, which could be achieved by incentive regulation taking due account of environmental heterogeneity.     

Electricity reform in Argentina: Lessons for developing countries

Argentina was one of the first countries in the world to implement a comprehensive reform of its electricity sector. Among developing countries only Chile has had a comparably comprehensive and successful reform. This paper traces the history of the Argentine reform, which began in 1992, and assesses its progress and its lessons. We conclude that the reform was very successful prior to the collapse of the Argentine peso in early 2002. We suggest lessons for the generation, transmission and distribution (and retailing) sectors, as well as the economic regulation of electricity and the general institutional environment. We note that the achievements of the sector have been severely strained by the government's poor energy policy since the crisis.     

Transmission expansion in Argentina 6: Distribution companies, regulation and the Public Contest method

Argentina's 1992 electricity reform introduced the Public Contest method, which made major expansions of the transmission system the responsibility of users rather than the transmission company or regulatory body. It was sometimes said that the incentives and penalties on distribution companies were inadequate, and that they did not support transmission expansions to improve quality of service, notably a reserve transformer in the tourist town of Bariloche. We note that, in practice, the incentives and penalties varied significantly between Federal and provincial jurisdictions. Although the penalties were scheduled to increase over time at the Federal level, the Federal regulator ENRE reduced the severity of their enforcement, thereby reducing the incentive to support expansions. In practice, however, distribution companies supported all but 2 of 14 expansions proposed by the transmission concessionaire. In both these exceptional cases the provincial regulators opposed the expansion. At Bariloche, the provincial regulators argued that there were better ways of providing the quality of service, and refused to allow the distribution companies to pass-through the costs to customers. Later, provincial regulators began to introduce improved arrangements for enabling distribution companies to pay for transmission expansions.     

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。     

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.     

Liberalisation of the UK energy market: An opportunity for green energy

1998 is a year of considerable change and opportunity for the energy sector in the UK, with government policy reviews of generation, renewables, utility regulation and climate change. In addition, the UK electricity market and gas markets will be opened up to full competition. This could boost renewable energy and the formation of Energy Services Companies as environmentally-aware consumers become able to choose ‘green’ energy from more progressive suppliers. Friends of the Earth has researched the environmental performance of the main electricity suppliers in the UK and the potential for consumer pressure. However, competition must exist within a framework of government regulation and additional support mechanisms if environmental and social objectives for the energy sector are to be met     

Post-Soviet gas sector restructuring in the CIS: a political economy approach

This paper analyses progress and obstacles to gas sector reform in the most important CIS-countries (Russia, Turkmenistan, Ukraine, Uzbekistan), taking a political economy perspective. This reform process is embedded in a very specific post-Soviet institutional framework stemming from the legacy of socialism. Firstly, we review the evolution of the gas sector for the period 1992-1998. The paper then identifies the post-Soviet specifics of gas sector restructuring, to which any reform strategy and technical assistance have to be adapted. We derive concrete, process-oriented policy conclusions to accelerate the reform process in a market-oriented way. The paper concludes with an evaluation of the perspectives of gas sector restructuring in this geopolitically strategic area of the world.     

New accountabilities in utilities: fifty years of legal accountability in the gas industry

Privatisation was to have released the nationalised industries from the ‘dead hand of government’. Regulation with a ‘light hand’ was imposed to curb abuse of monopoly power. But as the industries have matured in the private sector we have seen regulation extended to cover a wider area, both in theory and in practice. This paper examines the change in responsibilities and the way they are divided between industry, regulator and government, tracing the legal accountability of the UK gas industry through nationalisation, privatisation and more recent regulation reform as an example. It concludes by questioning the appropriateness of the ‘vertical separation’, instituted by the privatisation and competition legislation, of responsibilities for the public interest and for organisational operations.     

The arguments for and against ownership unbundling of energy transmission networks

The question this paper addresses is: what is the evidence for the superiority of the ownership unbundled transmission models (i.e. UK or Nord Pool hybrid) over other models? We assess the theoretical costs and benefits of ownership unbundling and judge these to be generally positive, though these may be potentially offset by the actual reorganisation costs of the ownership unbundling process. Next, we assess the empirical evidence. This is in two forms—econometric evidence from samples of countries and case studies of reforms in particular jurisdictions. The econometric evidence is weak due to problems with simultaneity of reform steps and a lack of studies, but the case study evidence is compelling. We conclude with a discussion of the issues faced by countries considering implementing ownership unbundling. We conclude that evidence seems to be that ownership unbundling of transmission is a key part of energy market reform in the most successful reform jurisdictions.     

Risk management in safety critical areas

This paper examines the lessons to be learned from recent disasters. From these and other evidence it deduces good practice in managing risk in safety critical areas. It explains some methods which may be used to aid decision-making for implementing risk control measures. The paper uses examples drawn from the UK rail transport sector with specific reference to current BR practice.     

关于当前电力改革的思考——如何积极稳妥地推进电力体制改革

本文阐述了电力体制改革的目的是促进电力工业的发展的基本观点,探讨了根据我国国情进路行电力体制改革的必要,提出了鼓励创新走自己改革之路,同时阐明了电价改革是电力体制改革的核心内容。文章对当前改革的迫切任务作了探讨,认为首要任务是立法,必须补上先立法后改革这一课;在实行厂网分开过程中,要特别强调电力系统的统一规划和电网的统一调度,以实现电力资源的优化配置与利用,保证供电安全。     

Does electricity (and heat) network regulation have anything to learn from fixed line telecoms regulation?

The purpose of this paper is to examine the lessons from the recent history of telecoms deregulation for electricity (and by implication heat) network regulation. We do this in the context of Ofgem's RPI-X@20 Review of energy regulation in the UK, which considers whether RPI-X-based price regulation is fit for purpose after over 20 years of operation in energy networks. We examine the deregulation of fixed line telecoms in the UK and the lessons which it seems to suggest. We then apply the lessons to electricity networks in the context of a possible increase in distributed generation directly connected to local distribution networks. We conclude that there is the possibility of more parallels over time and suggest several implications of this for the regulation of electricity and heat networks.     

Using vehicle-to-grid technology for frequency regulation and peak-load reduction

This paper explores the potential financial return for using plug-in hybrid electric vehicles as a grid resource. While there is little financial incentive for individuals when the vehicle-to-grid (V2G) service is used exclusively for peak reduction, there is a significant potential for financial return when the V2G service is used for frequency regulation. We propose that these two uses for V2G technology are not mutually exclusive, and that there could exist a “dual-use” program that utilizes V2G for multiple uses simultaneously. In our proposition, V2G could be used for regulation on a daily basis to ensure profits, and be used for peak reduction on days with high electricity demand and poor ambient air quality in order to reap the greatest environmental benefits. The profits for the individual in this type of dual-use program are close to or even higher than the profits experienced in either of the single-use programs. More importantly, we argue that the external benefits of this type of program are much greater as well. At higher V2G participation rates, our analysis shows that the market for regulation capacity could become saturated by V2G-based regulation providers. At the same time, there is plenty of potential for widespread use of V2G technology, especially if the demand for regulation, reserves, and storage grows as more intermittent renewable resources are being incorporated into the power systems.     

Electricity restructuring in Turkey

Turkey implemented the electricity sector reform by which the Electricity Market Law no. 4628 passed in February 2001. Recently, all segments of the Turkish electricity sector are dominated by a vertically integrated, public-owned monopoly—Türkiye Elektrik Kurumu—the Turkish electricity institution. The Turkish electricity reform involves vertical deintegration of generation, transmission and distribution, introduction of competition into generation and retail sale, establishment of an independent regulatory authority and privatization of public generation and distribution entities. This article provides an overview of the Turkish electricity sector reform and defines some problems that may affect the reform success.