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Implementing incentive compatible menus of contracts to regulate electricity distribution investments

R. Cossent, T. Gómez

Investment regulation constitutes one of the major difficulties in regulating monopolistic activities such as electricity distribution. Information asymmetries and uncertainties over technology and demand especially hamper the evaluation of the efficiency of network investments. In this context, ex-ante regulatory schemes with ex-post corrections such as profit sharing contracts can be particularly useful. Moreover, menu regulation could encourage distribution firms to provide regulators with more accurate information. However, such a mechanism is rarely applied in electricity distribution. In order to facilitate its diffusion, this paper provides clear guidelines to construct incentive compatible menus of profit-sharing contracts and discusses its possible implementation in Spain.

Keywords: Investment regulation; Menu of contracts; Profit-sharing; Electricity distribution

Utilities Policy. Volume: 27 Pages: 28-38

Journal Impact Factor: JCR impact factor 2.098 (2017)

DOI reference: DOI icon 10.1016/j.jup.2013.09.002    

Published on paper: December 2013.

    Topics research:
  • *Smart grids
  • *Regulation of energy network infrastructures

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