ECN publication
Firm behaviour under incentive regulation: the inefficiencies of benchmarking.
Cunningham, S.W.; Joode, J. de
Published by: Publication date:
ECN Policy Studies 7-6-2006
ECN report number: Document type:
ECN-M--06-082 Conference Paper
Number of pages: Full text:
15 Download PDF  

Presented at: 29th IAEE International Energy Conference, Potsdam, Germany, 7-10 juni 2006.

This paper challenges the general idea that incentive regulation of distribution system operators (DSOs) in energy markets leads to optimal investment and operational decisions. We show, using a model of incentive regulation based on benchmarking and data envelopment analysis (DEA) that, under certain conditions, DSOs will not have sufficient incentives to move forward to the industry’s efficiency frontier. Furthermore, allowing DSOs to choose simple linear contracts of input will result in distortion allocations.

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