Competition and the Reform of Incentive Schemes in the Regulated Electricity Sector

Through applying performance based yardstick competition, regulator can obtain signals that have correlation with the transmission and distribution Enterprises´ cost style. Using these signals, regulator is able to improve the scheme of incentive regulation. In order to analyze the effect of the improved regulation scheme on incentive level, a model is built. We consider the regulation problem with complete contracting in a principal-agent model with adverse selection and review within this model the channel by which external competition parameters affect incentives within the regulated enterprise. The conclusion of the model shows that effect of improved scheme isn´t always positive. If the correlation between signal and cost style is strong enough, the new scheme of regulation can increase the lever of incentive to enterprises; if not, may decrease. An intuitionistic example confirms this conclusion. So, when regulator wants to use signals to reform the scheme of regulation, she must ensure the strong correlation between signal and cost style rather than cause negative incentive.