Abstract
The widespread use of incentive regulation in telecom, electricity, and other industries in the U.S. and elsewhere has raised questions about its possible adverse effect on the quality of service. This paper examines U.S. electricity distribution utilities in the years 1993–1999, several of which were subject to incentive regulation. Controlling for other possible influences, including possible endogeneity of the regulatory regime, the data and model indicate that incentive regulation is indeed associated with significantly longer duration of service outages, although not necessarily more frequent outages. Importantly, this quality reduction is offset in cases where regulation incorporates service quality standards. We also examine the causal chain connecting incentive regulation, cost expenditures, and service quality. We conclude that careful design of quality standards can allow incentive regulation to achieve cost savings without quality degradation.
Similar content being viewed by others
References
Ai C., Sappington D. (2002) The impact of state incentive regulation on the U.S. telecommunication industry. Journal of Regulatory Economics 22: 133–160
Ai C., Martinez S., Sappington D. (2004) Incentive regulation and telecommunications service quality. Journal of Regulatory Economics 26: 263–285
Ajodhia V., Hakvoort R. (2005) Economic regulation of quality in electricity distribution networks. Utilities Policy 13: 211–226
Amemiya T. (1978) The estimation of a simultaneous equation generalized probit model. Econometrica 46: 1193–1205
American Public Power Association. (1996). The relative system reliability of publicly owned and privately owned electric utilities.
Berg S.V., Jeong J. (1991) An evaluation of incentive regulation for electric utilities. Journal of Regulatory Economics 3: 45–55
Canada–United States Power System Outage Task Force. (2004). Final Report.
Chao H.-P., Oren S., Wilson R. (2008) Reevaluation of vertical integration and unbundling in restructured electricity markets. In: Sioshansi F. (ed.) Competitive electricity markets: design, implementation, performance. Elsevier, Amsterdam
Clements, M. (2001). Local telephone quality-of-service: The impact of regulation and competition. Ph.D. Dissertation, The Ohio State University, Commission Engineers.
CPB Netherlands Bureau for Economic Policy Analysis. (2004). Better safe than sorry? Reliability Policy in Network Industries.
Donald S., Sappington D. (1997) Choosing among regulatory options in the united states telecommunications industry. Journal of Regulatory Economics 12: 227–243
Fraser R. (1994) Price, quality and regulation. Energy Economics 16: 175–183
Giannakis D., Jamasb T., Pollitt M. (2005) Benchmarking and incentive regulation of quality of service: An application to the UK electricity distribution networks. Energy Policy 33: 2256–2276
Greene W. H. (1993) Econometric analysis (2nd ed.). Macmillan Publishing Company, New York
Heckmam J.J. (1978) Dummy endogenous variables in a simultaneous equation system. Econometrica 46: 931–959
Hemphill R., Meitzen M., Schoech P. (2003) Incentive regulation in network industries: Experience and prospects in the U.S. telecommunications, electricity, and natural gas industries. Review of Network Economics 2: 316–337
Jamasb T., Pollitt M. (2007) Incentive regulation of electricity distribution networks: Lessons of experience from Britain. Energy Policy 35: 6163–6187
Joskow, Paul (2005). “Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks.” CEEPR 05-014.
Kidokoro Y. (2002) The effects of regulatory reform on quality. Journal of the Japanese and International Economics 16: 135–146
Massachusetts Department of Telecommunications and Energy. (2001). Investigation to establish guidelines for service quality standards for electric distribution companies with local gas distribution companies.
National Association of Regulatory Utility Commissioners. (1997). Performance based regulation in a restructured electric industry.
National Regulatory Research Institute. (2001). NARUC/NRRI electric reliability survey results. In 79th national conference of regulatory utility.
Ofgem. (2008). Electricity distribution price control review. Policy Paper, 159/08.
Oregon Public Utility Commission. (1997). Electric service reliability study, 1992–1996.
Pacific Economics Group. (2007). Service quality regulation for Detroit Edison: A critical assessment. Michigan Public Service Commission.
Sappington D. (2005) Regulating service quality: A survey. Journal of Regulatory Economics 27: 123–154
Sappington D., Weisman D.L. (1996) Revenue sharing in incentive regulation plans. Information Economics and Policy 8: 229–248
Sappington D., Pfeifenberger J.P., Hanser P., Basheda G.N. (2001) The state of performance-based regulation in the U.S. electric utility industry. The Electricity Journal 14: 71–79
Sheshinski E. (1976) Price, quality and quantity regulation in monopoly situations. Economica 43: 127–137
Spence M. (1975) Monopoly, quality and regulation. The Bell Journal of Economics 6: 417–429
Tardiff, T., & Taylor, W. (1993). Telephone company performance under alternative forms of regulation in the US. National Economic Research Associates.
United States Department of Energy. (2000). Interim report of the power outage study team.
Waddams Price, C., Brigham, B., & Fitzgerald, L. (2002). Service quality in regulated monopolies. CCR Working Paper 02–4.
Weisman, D. L. (2002). Price regulation and quality. Working Paper, Kansas State University.
Williamson, B. (2001). Incentives for service quality: Getting the framework right. Electricity Journal, 62–70.
Yu, W., Jamasb, T., & Pollitt, M. (2007). Incorporating the price of quality in efficiency analysis: The case of electricity distribution regulation in the UK. Cambridge University EPRG Working Paper 0713.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Ter-Martirosyan, A., Kwoka, J. Incentive regulation, service quality, and standards in U.S. electricity distribution. J Regul Econ 38, 258–273 (2010). https://doi.org/10.1007/s11149-010-9126-z
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11149-010-9126-z