Distribution Utilities: Lessons from International Experience

Since the early 1980’s, many countries have implemented electricity sector reforms. Many of these reforms have unbundled the generation, transmission, distribution, and supply activities of the sector and introduced competition in generation and supply. An increasing number of countries are also adopting incentive regulation to promote efficiency improvement in the natural monopoly activities transmission and distribution. Incentive regulation almost invariably involves benchmarking or comparison of actual vs. some reference performance. This paper reviews the main approaches to incentive regulation and discusses various benchmarking methods. We also present the findings of a survey of the use of benchmarking methods in the OECD and few other countries. Our survey finds a variety of methods used by the electricity regulators although with a notable preference for the non-parametric methods. We then draw conclusions based on the findings of the survey highlighting the main outstanding issues and lessons for best practice implementation of benchmarking in electricity regulation.