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. Keyword: Efficiency assessment, Reward-penalty scheme, Distribution company regulation. NOMENCLATURE 3DRPS 3-dimentional reward-penalty scheme AL Average Load (MW) AR Allowed revenue (M$) CAIDI Customer average interruption duration index (min.) CAPEX Capital expenditure CCDF Composite customer damage function CDA Center of dead area of 3DRPS CE Classification entropy DE Capital’s depreciation expense (M$) DEA Data envelopment analysis EC Capital expenditure (M$) ECA Capital expenditure for creating adequacy (M$) ECQ Capital expenditure for improving quality (M$) EO Operational expenditure (M$) FS Fukuyama-Sugeno’s index i Index of company IC Interruption cost (M$) LTEA Long-term efficiency assessment Max. Penalty Maximum penalty of 3DRPS Max. Reward Maximum reward of 3DRPS MTEA Mid-term efficiency assessment OPEX Operational expenditure PC Partition coefficient PL Penalty line of 3DRPS QINC Incentive of 3DRPS rEC Reasonable value of EC (M$) rECA Reasonable value of ECA (M$) rECQ Reasonable value of ECQ (M$) rEO Reasonable value of EO (M$) RL Reward line of 3DRPS RORrefere nce Reference rate of return (%) SAIDI System average interruption duration index (min.) SAIFI System average interruption frequency index SCDF Sector customer damage function SD Standard deviation sECA Slack in ECA (M$) sECQ Slack in ECQ (M$) sEO Slack in EO (M$) WFCM Weighted fuzzy c-means clustering XB Xie-Beni index θCA LTEA score for creating adequacy θCQ LTEA score for improving quality θO MTEA score Received: 25 Oct. 2015 Revised: 10 Feb. 2016 Accepted: 13 Mar. 2016 Corresponding author: E-mail: [email protected] (N. Mostaghim)  2017 University of Mohaghegh Ardabili. All rights reserved. N. Mostaghim, M. R. Haghifam, M. Simab: Regulation of Electrical Distribution Companies ... 20