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Financial Performance Benchmarking In The Electricity Distribution Industry

2680 words - 11 pages

A Review of Research Literature Results on Financial Performance Benchmarking in the Electricity Distribution Industry
Since the late 1980s, there has been significant regulatory reform in the electricity transmission and distribution industries in many countries. Under traditional cost-of-service rate regulation, companies recover their costs under a regulated rate of return, which may provide little incentive to minimize costs. Alternatively, incentive or performance based regimes are designed to incent productive efficiency by compensating the company for achieving costs savings. Joskow [1] and Joskow and Schlalensee [2] discuss a number of economic regulatory models have been proposed in the literature. According to Jamasb and Pollitt [3], incentive regulation usually involves some form of benchmarking or comparison of actual versus some reference level of performance. We will review the literature results on benchmarking methods for electricity distributors.
Jamasb and Pollitt [3] published the results of an international survey on the use of benchmarking in incentive regulation of electricity transmission and distribution utilities. Farsi et al. [4] provide a summary of benchmarking methods used in regulation in several countries. Both of these survey papers cite Corrected Ordinary Least Squares (COLS), Data Envelopment Analysis (DEA) and Stochastic Frontier Analysis (SFA) as methods commonly employed in electricity distribution benchmarking. After briefly describing several models of incentive regulation, we compare the literature results presented in each survey paper ( [3], [4] ) with respect to the techniques mentioned above (COLS, DEA, and SFA). We then present addition results from the literature on these and other methods.
Incentive Regulation
According to Jamasb and Pollitt [3], most reforms in the power sector initially focus on the introduction of price mechanism and competition in generation and supply. Due to their natural monopoly characteristics, transmission and distribution activities are not normally competitive industries. Instead, transmission and distribution rates are typically set by either traditional cost of service (COS) or rate of return (ROR) regulation, performance or incentive based regulation, or both. The most common incentive regulation schemes are price cap, revenue cap and targeted incentive regulation models. Joskow and Schmalensee [2], Comnes et al. [5], Hill [6] and Hall [7] present reviews and comparisons of different incentive regulation models.
Farsi et al. [4] indicate that the main categories of incentive regulation used for electricity utilities are price/revenue cap schemes, sliding scale rate of return, partial cost adjustment, menu of contracts and yardstick competition. One of the most common methods in electricity networks is price cap regulation RPI – X, where the maximum rate of increase for the regulated prices is equal to the inflation rate of retail prices index (RPI)...

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