Table of Contents

INTRODUCTION ………………………………………………………………………………………………….1

1.1 BACKGROUND ……………………………………………………………………………………………….1
1.1.1 Power Sector Reform ………………………………………………………………………………1
1.1.2 The Network Quality Problem ………………………………………………………………….2
1.2 RESEARCH OBJECTIVE AND QUESTIONS …………………………………………………………….3
1.2.1 Scope and Definitions ……………………………………………………………………………..3
1.2.2 Research Objectives ……………………………………………………………………………….6
1.2.3 Research Questions ………………………………………………………………………………..7
1.3 RESEARCH APPROACH …………………………………………………………………………………….8
1.3.1 Multidisciplinary Nature …………………………………………………………………………8
1.3.2 Research Methods ………………………………………………………………………………….8
1.4 OUTLINE OF THE THESIS ………………………………………………………………………………….9

PRICE, QUALITY, AND REGULATION …………………………………………………………….13

2.1 INTRODUCTION …………………………………………………………………………………………….13
2.1.1 Background ………………………………………………………………………………………….13
2.1.2 Chapter Outline ……………………………………………………………………………………13
2.2 PRICE AND QUALITY UNDER MONOPOLY …………………………………………………………14
2.2.1 Natural Monopoly …………………………………………………………………………………14
2.2.2 Monopoly and Efficiency ……………………………………………………………………….16
2.2.3 Monopoly and Quality …………………………………………………………………………..18
2.3 REGULATION OF MONOPOLY ………………………………………………………………………….21
2.3.1 The Regulatory Problem ………………………………………………………………………..21
2.3.2 Franchise Bidding ………………………………………………………………………………..23
2.3.3 Capture Theory …………………………………………………………………………………….24
2.4 RATE-OF-RETURN REGULATION ……………………………………………………………………..26
2.4.1 Limited Efficiency Incentives ………………………………………………………………….27
2.4.2 Administrative Burden …………………………………………………………………………..30
2.4.3 Rate-of-Return Regulation and Quality ……………………………………………………31
2.5 PRICE-CAP REGULATION ……………………………………………………………………………….32
2.5.1 Incentive Regulation …………………………………………………………………………….32
2.5.2 New Regulatory Economics ……………………………………………………………………33
2.5.3 Evaluation of the New Regulatory Economics …………………………………………..36
2.5.4 Price-Cap Regulation and Quality ………………………………………………………….37
2.6 CONCLUSIONS ……………………………………………………………………………………………..39
2.6.1 Synthesis ……………………………………………………………………………………………..39
2.6.2 The Way Forward …………………………………………………………………………………41

PRICE-CAP REGULATION ………………………………………………………………………………..43

3.1 INTRODUCTION …………………………………………………………………………………………….43
3.1.1 Background ………………………………………………………………………………………….43
3.1.2 Chapter Outline ……………………………………………………………………………………44
3.2 PRICE-CAP ELEMENTS …………………………………………………………………………………..44
3.2.1 Price-Cap Formula ……………………………………………………………………………….44
3.2.2 Benchmarking ………………………………………………………………………………………46
3.3 PRICE-CAP STRATEGIES ………………………………………………………………………………..49
3.3.1 Classification ……………………………………………………………………………………….49
3.3.2 Yardstick Competition …………………………………………………………………………..51
3.3.3 Related Caps ………………………………………………………………………………………..52
3.3.4 Isolated Caps ……………………………………………………………………………………….54
3.3.5 Sliding Scales ………………………………………………………………………………………54
3.3.6 Evaluation ……………………………………………………………………………………………55
3.4 PRICE-CAP APPROACHES ……………………………………………………………………………….57
3.4.1 Calculating the X-factor ………………………………………………………………………..57
3.4.2 Building Blocks Approach ……………………………………………………………………..60
3.4.3 Totex Approach …………………………………………………………………………………….64
3.4.4 Integrating Quality into the Price-Cap ……………………………………………………66
3.5 CONCLUSIONS ……………………………………………………………………………………………..68
3.5.1 Synthesis ……………………………………………………………………………………………..68
3.5.2 The Way Forward …………………………………………………………………………………69

QUALITY REGULATION …………………………………………………………………………………..71

4.1 INTRODUCTION …………………………………………………………………………………………….71
4.1.1 Background ………………………………………………………………………………………….71
4.1.2 Chapter Outline ……………………………………………………………………………………72
4.2 QUALITY REGULATION CONTROLS ………………………………………………………………….72
4.2.1 Indirect Quality Controls ……………………………………………………………………….73
4.2.2 Minimum Standards ………………………………………………………………………………74
4.2.3 Quality Incentive Schemes ……………………………………………………………………..76
4.2.4 Optimal Quality Incentive Schemes …………………………………………………………78
4.3 MEASURING DEMAND FOR QUALITY ……………………………………………………………….79
4.3.1 Optimal Network Reliability …………………………………………………………………..79
4.3.2 Interruption Costs ………………………………………………………………………………….83
4.3.3 Measurement Techniques ……………………………………………………………………..84
4.3.4 Cost Influence Factors ………………………………………………………………………….87
4.3.5 Cross-Comparison of Interruption Cost Studies ……………………………………….89
4.4 COST AND QUALITY RELATION ……………………………………………………………………..92
4.4.1 Setting the Quality Target ………………………………………………………………………92
4.4.2 Spatial Variations …………………………………………………………………………………..94
4.4.3 Quality Feedback Time ………………………………………………………………………….97
4.5 CONCLUSIONS ……………………………………………………………………………………………..98
4.5.1 Synthesis ……………………………………………………………………………………………..98
4.5.2 The Way Forward …………………………………………………………………………………99

INTEGRATED PRICE-QUALITY BENCHMARKING ……………………………………..101

5.1 INTRODUCTION …………………………………………………………………………………………..101
5.1.1 Background ………………………………………………………………………………………..101
5.1.2 Chapter Outline ………………………………………………………………………………….101
5.2 INTEGRATED BENCHMARKING ………………………………………………………………………102
5.2.1 Data Envelopment Analysis (DEA) ……………………………………………………….102
5.2.2 DEA as a Linear Program ……………………………………………………………………103
5.2.3 Incorporating Quality into DEA ……………………………………………………………107
5.2.4 Technical Model …………………………………………………………………………………110
5.2.5 Sotex Model ……………………………………………………………………………………….112
5.3 EMPIRICAL ANALYSIS ………………………………………………………………………………….114
5.3.1 Data and Model Specification ………………………………………………………………114
5.3.2 Modelling Results ……………………………………………………………………………….117
5.4 INTEGRATED PRICE-CAP REGULATION …………………………………………………………..121
5.4.1 From Efficiency Score to X-factor …………………………………………………………121
5.4.2 Evaluation ………………………………………………………………………………………….123
5.5 CONCLUSIONS ……………………………………………………………………………………………127
5.5.1 Synthesis ……………………………………………………………………………………………127
5.5.2 The Way Forward ……………………………………………………………………………….129

NETWORK SIMULATION TOOL …………………………………………………………………….131

6.1 INTRODUCTION …………………………………………………………………………………………..131
6.1.1 Background ………………………………………………………………………………………..131
6.1.2 Chapter Outline ………………………………………………………………………………….133
6.2 GENERAL DESIGN ………………………………………………………………………………………133
6.2.1 Alternative Network Construction …………………………………………………………133
6.2.2 Experiences with Network Models ………………………………………………………..135
6.2.3 Network Simulation Tool versus Traditional Models ……………………………….138
6.3 DETAILED DESIGN …………………………………………………………………………………….139
6.3.1 Construction of Initial Networks …………………………………………………………..139
6.3.2 Genetic Crossover and Mutation …………………………………………………………..141
6.3.3 Reliability Analysis ………………………………………………………………………………142
6.3.4 Cost Analysis ……………………………………………………………………………………..145
6.4 CASE STUDY ………………………………………………………………………………………………147
6.4.1 Input Data ………………………………………………………………………………………….147
6.4.2 Simulation Results ………………………………………………………………………………149
6.4.3 Sensitivity Analysis ……………………………………………………………………………..153
6.5 CONCLUSIONS ……………………………………………………………………………………………158

CONCLUSIONS AND RECOMMENDATIONS …………………………………………………161

7.1 INTRODUCTION …………………………………………………………………………………………..161
7.2 RESEARCH SYNTHESIS ………………………………………………………………………………..162
7.2.1 Research Question 1: Optimal Price and Quality ………………………………………162
7.2.2 Research Question 2: Integrated Price-Quality Regulation ………………………..163
7.2.3 Research Question 3: Integrated Price-Quality Benchmarking …………………..165
7.3 POLICY IMPLICATIONS …………………………………………………………………………………166
7.3.1 Privatisation of Distribution Networks ………………………………………………………166
7.3.2 Applicability of Benchmarking Tools ………………………………………………………..167
7.4 RECOMMENDATIONS AND FUTURE WORK ………………………………………………………168
7.4.1 Further Development of the Network Simulation Tool ………………………………168
7.4.2 Regulation of Power Quality ………………………………………………………………..169

REFERENCES ……………………………………………………………………………………………….171

LIST OF SYMBOLS ………………………………………………………………………………………..183

ANNEX I. QUALITY INDICATORS …………………………………………………………………187

ANNEX II. BENCHMARKING TECHNIQUES …………………………………………………….195

ANNEX III. QUALITY AND DENSITY DATA ……………………………………………………..199

ANNEX IV. CASE STUDY: ITALY …………………………………………………………………..201

ANNEX V. CASE STUDY: NORWAY ……………………………………………………………….215

ANNEX VI. CASE STUDY: THE NETHERLANDS ……………………………………………….223

ANNEX VII. DATASET DEA SAMPLE …………………………………………………………….231

ANNEX VIII. BINARY ENCODING OF NETWORKS ……………………………………….233

ANNEX IX. BRANCH REPLACEMENT ALGORITHMS ………………………………………235

SUMMARY ……………………………………………………………………………………………………237

SAMENVATTING ……………………………………………………………………………………………241

CURRICULUM VITAE ……………………………………………………………………………………..245

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