In reregulated and restructured electricity markets the production and retail of
electricity is conducted on competitive markets, the transmission and
distribution on the other hand can be considered as natural monopolies. The
financial regulation of Distribution System Operators (DSOs) has in many
countries, partly as a consequence of the restructuring in ownership, gone
through a major switch in regulatory policy. From applying regulatory regimes
were the DSOs were allowed to charge their customers according to their actual
cost plus some profit, i.e. cost-based regulation, to regulatory models in which
the DSOs performance are valued in order to set the allowable revenue, i.e.
Performance-Based Regulation (PBR). In regulatory regimes that value
performance, the direct link between cost and income is weakened or sometimes
removed. This give the regulated DSOs strong cost cutting incentives and there
is consequently a risk of system reliability deterioration due to postponed
maintenance and investments in order to save costs. To balance this risk the
PBR-framework is normally complemented with some kind of quality regulation
(QR). How both the PBR and QR frameworks are constructed determines the
incentive that the DSO will act on and will therefore influence the system
reliability development.
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