Regulation of Electrical Distribution Companies via Efficiency Assessments and Reward-Penalty Scheme

Improving performance of electrical distribution companies, as the natural monopoly entities in electric industry, has always been one of the main concerns of the regulators. In this paper, a new incentive regulatory scheme is proposed to improve the performances of electrical distribution companies. The proposed scheme utilizes several efficiency assessments and a 3-dimentional reward-penalty scheme (3DRPS). Through efficiency assessments, economic efficiency and service quality, as two aspects of companies’ performances, are assessed and according to the results of such assessments, reasonable capital expenditure (CAPEX) and operational expenditure (OPEX) for each company are calculated. Then, according to the reasonable CAPEX and OPEX, allowed revenues are calculated for next regulatory period. Moreover, the 3DRPS on quality is used to encourage the companies to maintain and improve their service quality during the regulatory period. The 3DRPS gives the incentive to the companies based on changes in their quality indices. The incentives are added to companies’ allowed revenues. Finally, the proposed scheme is applied to Iranian distribution companies and the results are discussed.