Output-based incentive regulation: Benchmarking with quality of supply in electricity distribution

Incentive regulation is moving towards new schemes where standard efficiency mechanisms are combined with output-based incentives (related to quality of supply, sustainability and innovation). Assessing performance of regulated utilities requires models capable to account for these different regulatory objectives. Benchmarking analysis has been in use for a long time; however, whether these models should incorporate even quality as an additional regulated output is still a matter of debate. In this paper we study how benchmarking DEA models can be designed to correctly accommodate all regulated variables, including continuity of supply. To this end, we discuss different models to measure technical efficiency, using a comprehensive and balanced panel for 115 electricity distribution Zones, that belong to the largest Italian utility. Our results show that, for our data set, quality significantly affects efficiency scores. We thus claim that the effect of additional regulated outputs should always be tested in benchmarking models.