Integration of price cap and yardstick competition schemes in electrical distribution regulation

Abstract

The disadvantages of traditional "rate of return" regulation for distribution tariffs have led to he development of new regulatory schemes to stimulate efficiency in the provision of the service, under what has been called "benchmark regulation". The paper assesses the Chilean "model company" regulation that aims at making the private distribution monopoly compete with a reference efficient model company, through a "yardstick competition" approach. It compares it with the "price cap" scheme used in electricity distribution in England and Wales. It contributes with a proposal to integrate both schemes. The proposed hybrid methodology is developed and evaluated, capturing the best characteristics of both regulatory schemes. Mathematical models to relate operational costs with electrical variables are developed.