Step 6: Determine role of incentives

While cost of service is the foundation for rate-setting in many parts of the world, many jurisdictions have been experimenting with ways to incorporate better incentives for utilities into rates. The implementation of PBR, coupled with specific service quality standards, is seen in some jurisdictions as a way to encourage efficiency while guiding utilities to focus on areas of greatest priority to policymakers.

Productivity/efficiency incentives: productivity/efficiency incentives seek to incentivize the utility to pursue efficiency improvements by tying its profits to performance relative to expectations. Thus, if the utility is not able to meet expectations, it will make less than it would have under the traditional cost of service approach. Conversely, if the utility performs better than expected, it will be more profitable than it otherwise would have been. While regulators sometimes rely on international benchmarks to set expectations, doing so may put the utility at a disadvantage, since it may face different operating conditions than its international peers. In the initial stages of an incentive regime, it may be more appropriate to put in place mechanisms to appropriately assess the utility’s own productivity performance, and then use that performance to set future productivity targets.

Line loss provisions: line losses reflect a genuine and, to some extent, unavoidable cost of performing a transmission and distribution service that must be recognized in the revenue requirement. Line loss provisions can be implemented if electricity transmission and distribution line losses are deemed to be at unacceptably high levels. These provisions can specify a multi-year price schedule of allowed levels of (technical and commercial) losses, where the utility is provided the opportunity to earn additional profits if it exceeds expectations with respect to loss reduction, and is exposed to the threat of financial losses if it is unable to meet the expectations.

Performance standards: performance standards are often used concurrently with efficiency incentives, to ensure any cost reductions implemented by the utility do not lead to deteriorating service quality. Generally, performance standards can usefully supplement any incentive-based tariff system by indicating very clearly to a utility the range of issues that are of concern to customers and the regulator. Worldwide, the measures of reliability and service that are tracked depend greatly on the specific concerns that arise in particular jurisdictions.

Common performance indicators
Technical reliability
  • System Average Interruption Duration Index (“SAIDI”)
  • System Average Interruption Frequency Index (“SAIFI”)
  • Customer Average Interruption Duration Index (“CAIDI”)
Customer service
  • Percentage of population served
  • Percentage increase in domestic connections over the year
  • Reduced or delayed connections to low-income households
  • Availability of electricity (hours per day)
  • Customer complaints
Asset condition
  • Percentage planned and unplanned maintenance
  • Maintenance costs as a percentage of total operating costs
  • Percentage of meters replaced per year
  • Rate of capital replacement
Operating efficiency
  • Generation capacity utilization
  • Staff per 1,000 connections
  • Staff per 1,000 MW of electricity delivered
  • Training costs as a percentage of total payroll
  • Percentage days lost due to accidents
  • Revenue collection efficiency
  • Average debtor days
  • Percentage of customers metered
  • Debt service ratio
  • Current liquidity ratio
Copyright © 2023 Asian Development Bank. All rights reserved.
linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram