Regulation of Quality of Service in Electricity Distribution Networks

Abstract

It has been commonly recognised that incentive regulation provides strong incentives for cost reduction. However, the incentives for cost reduction may lead to degradation of service quality. Quality of service is becoming regulated; service quality incentive schemes, service quality targets, guaranteed service level, and information disclosure are the most popular forms of service quality regulation. However, little empirical research has been done in relation to the impact of service quality regulation on the quality of service. The primary objective of this study is to understand the development of service quality regulation schemes in the electricity distribution network. The second objective is to examine how the regulation of quality of service has been structured and applied to electricity distribution networks, primarily in the UK where the application of incentive mechanisms is most advanced, and also to evaluate the effectiveness of the service quality incentive scheme in that country. The third objective is to investigate the effectiveness of the service quality targets regime under targeted control regime in New Zealand and to explore the scope for improvement. A theoretical model of quality choice under incentive regulation is formulated in order to develop testable hypotheses regarding the expected signs of regression coefficients. Two empirical studies are undertaken to provide empirical evidence: one analyses the effectiveness of the service quality incentive scheme in electricity distribution networks in the UK; the other examines the impact of service quality standards on the actual quality of service in electricity distribution networks in New Zealand. The econometric analysis uses panel data. Empirical results are as follows: (1) There is strong evidence to support the hypothesis that the information and incentive project (IIP) in the UK has had a statistically significant effect on service quality. (2) There is evidence that outage duration has been affected by regulatory regimes in New Zealand. However, there is no conclusive evidence that the interruption frequency has been reduced.