Impact of penalty–reward mechanism on the performance of electric distribution systems and regulator budget
As a part of the ongoing debate about competition in the electricity industry, regulators are increasingly considering performance-based regulation (PBR) as an alternative to improve the service quality. The fundamental principle behind PBR is that good performance should lead to higher profits, and poor performance should result in lower profits. A penalty–reward structure (PRS) in a PBR mechanism can enhance utility performance to align utility interests with customer's interests. During the implementation of PBR, regulators should spend or receive money to reward good performed utilities or penalised poor performed utilities, respectively. A technique is proposed, in this study, to not only motivate the utilities to improve their service quality but also equalise the total rewards paid and the total penalties received by regulators. This approach not only reduces the implementation cost of PBR for regulators but also removes any doubt from utilities that regulators apply PBR for money making. In addition, in order to achieve an efficient PBR for enhancing service reliability, more than one reliability index can be incorporated in PRS. Reward or penalty arisen from each index is weighted based on its impacts on the consumers and are combined to make a PBR cost for each utility. A comprehensive numerical study is accomplished to examine the applicability of the proposed approach. The results indicate that implementing the proposed method can effectively improve the service reliability and zero the implementation cost of PBR.
