Improving distribution reliability through electricity tariff and their financial implications

Abstract

Under price and revenue cap regulations, utilities are encouraged to minimize their costs which may even result low reliability. As the reliability of electricity supply has a very high impact on the country‟s economy as well as quality of life of people, regulators are required to address reliability at electricity tariff setting. The objective of this study is to identify different approaches the other countries use to provide incentives for distribution reliability improvement through electricity tariff and also to identify potential financial implications such mechanisms may have on the distribution utilities. These aspects are morefully described in Chapter 1. Chapter 2, 3 and 4, respectively includes an extensive literature review including the distribution reliability regulation mechanisms adopted by India, Philippine, Australia, Hungary and Great Britain, the mechanism identified in the Distribution Performance Standards Regulations (DPSR) of Sri Lanka and a mathematical reliability based pricing model called „Joint Pricing Model‟. Most of the countries use two incentive mechanisms, to provide incentives to improve the overall reliability of the utility and to compensate individual customers for poor service. Further, incentive mechanism is based on reliability target setting and measuring the utilities performance relative to the targets, where most of the countries set targets based on the historical performance of the utility. Based on overall reliability, most countries have mechanisms to provide a bonus for achieving the performance targets and a penalty otherwise and to compensate individual customers, all the countries studied use Guaranteed Service Levels (GSL) mechanism, where the customers are entitled to a direct payment if the reliability of their supply is poorer than the GSL. Further, the GSL payment rates are specified in the regulatory instrument (eg. regulation) itself. Chapter 5 gives the study methodology, which is formulated based on the findings of Chapter 2, 3 and 4. Further, based on the study methodology the financial implications on the distribution utilities under different incentive mechanisms are estimated, using distribution areas of Lanka Electricity Company as an example. The calculations of financial implications are given in Chapter 6. Chapter 7 gives a summary of the financial impact under each incentive mechanism and a further discussion on the incentive mechanisms. Chapter 8 gives the recommendations based on the study and the future work required in the area of study is given in Chapter 8.