Incentive Regulation And The Application To Electricity In China

This paper discusses the application of incentive regulation to electricity in China.Historically, Power Industry is operated in vertical monopoly utilities that supply electricity to customers within their franchised areas of service. Since the early 1980's, many countries have implemented electricity sector reforms. Many of these reforms have unbundled generation, transmission, distribution, and retail activities of the sector and introduced competition in generation and retail. While transmission and distribution network owners in charge of grid operation, maintenance, and investment, will continue being regulation because of the natural monopoly characteristics of this type of business. In order to obtain effective competition in generation and retail access, it is necessary that regulation ensure open access to the grid connection points to generators, final customers and other market participants. Consequently, transmission and distribution network activities must be unbundled from generation and retail activities and adequately regulated. An increasing number of countries are also adopting incentive regulation to promote efficiency improvement in the natural monopoly activities - transmission and distribution. The regulation of distribution is evolving from the traditional approach based on cost-of service or rate-of-return (COS/ROR) regulation, where distribution was bundled to the rest of utilities activities, to a more competitive unbundled regulation based on incentives for improving efficiency, which known as performance-based regulation (or performance-based ratemaking, PBR). This new regulation retains strict control over service tariffs by establishing price or revenue caps during the regulatory period. Utility have the opportunity to earn higher profits by cost reductions and efficient management.In this paper we focus on the regulation of distribution network activities under the future competitive framework in China.In China, the restructure of power industry had unbundled the generation and network. But the transmission, distribution and detail activities are still bundled in the power grid company. We believe distribution will be unbundled from transmission and retail activities in future, and it is important to implement incentive regulation on distribution. So we propose to build a compatible regulation mechanism on distribution. This paper gives an introduction to incentive regulation, and analyses the experiences and lessons of price and revenue caps, which are applied widely in these reforms.According to the analyses, we design a hybrid regulation scheme, which combines yardstick competition and benchmarking technique. After giving some introduction about the econometrical technique, especially the method of data envelopment analyses (DEA), an empiricist analysis to the efficiency of Chongqing distribution is done. At the end, we give some suggestions and advice to the deregulation of electricity industry in China.