A reliability insurance scheme for the electricity distribution grid

Under current regulatory structures, all consumers receive a uniform, average reliability regardless of how much they value their electricity service. Distribution companies (DISCOs) have no direct financial incentives to provide reliability. The resulting reliability standards are arbitrarily determined, with no basis in the actual demand for reliability. In this paper, we examine the benefits of a regulatory scheme that allows for differentiated reliability service based upon consumer´s preferences. The proposed scheme involves allowing each customer to choose a type of insurance for reliability based upon their own value for that service. Implementing insurance for reliability will allow consumers to provide economic signals to the distribution provider. These signals enable the distribution provider to make economically efficient investment decisions. The insurance also allocates the risk of outages to the distribution provider (who has control of the system), rather than to the consumers (who have no control). The implementation of reliability insurance provides a relatively simple method for unbundling the delivery and reliability services and enables consumers to receive differentiated reliability service based upon how much they value this service. This paper elaborates upon the proposed reliability insurance scheme and shows how it improves overall social welfare.