Integration of Price Cap and Yardstick Competition Schemes in Electrical Distribution Regulation

Abstract—Disadvantages of traditional “rate of return ” regu-lation for distribution tariffs have led to he development of new regulatory schemes to stimulate efficiency in the provision of the service, under what has been called “benchmark regulation. ” The paper assesses the Chilean “model company ” regulation that aims at making the private distribution monopoly compete with a refer-ence efficient model company, through a “yardstick competition” approach. It compares it with the “price cap ” scheme used in elec-tricity distribution in England and Wales. It contributes with a proposal to integrate both schemes. The proposed hybrid method-ology is developed and evaluated, capturing the best characteristics of both regulatory schemes. Mathematical models to relate opera-tional costs with electrical variables are developed. Index Terms—Distribution costs, distribution pricing, distribu-tion regulation, power distribution economics, price cap, tariffs. I