Decision-making and Policy Implications of Performance-based Regulation

There has been a growing interest worldwide in an alternative form of regulation, called performance based regulation (PBR) for electric distribution. PBR is a form of regulation that relies on financial incentives and penalties to induce desired behavior and it simulates competition better than the traditional rate of return regulation. PBR also requires explicit supply quality regulation, as supply quality investments are left to the discretion of the utility. This paper deals with the decision-making aspects of supply quality regulation under PBR. Such an analysis is key to the utility in order to determine the investment plan and portfolio of projects to invest. This is equally important for the regulator as well to determine the sensitivities and right settings of the PBR parameters. The utility´s approach to the above decision making problem is modeled as a portfolio maximization problem. Interesting insights are drawn regarding the effect of different PBR regimes on utility investments, societal costs and policy implications through this analysis