
Contents
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5.1 Introduction 5.1 Introduction
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5.2 Theoretical and Conceptual Foundations 5.2 Theoretical and Conceptual Foundations
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5.2.1 Overview 5.2.1 Overview
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5.2.2 Incentive Regulation Theory Typology 5.2.2 Incentive Regulation Theory Typology
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5.3 Practical Implementation Issues 5.3 Practical Implementation Issues
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5.4 Implementation in Practice to Electricity and Gas Networks 5.4 Implementation in Practice to Electricity and Gas Networks
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5.4.1 Early Applications 5.4.1 Early Applications
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5.4.2 Price Cap Mechanisms: General Considerations 5.4.2 Price Cap Mechanisms: General Considerations
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5.4.3 The Basic Price Cap Mechanism for Electric Distribution Companies: The UK Implementation 5.4.3 The Basic Price Cap Mechanism for Electric Distribution Companies: The UK Implementation
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5.4.4 Service Quality Incentives for Electric Distribution Companies in the United Kingdom and the United States 5.4.4 Service Quality Incentives for Electric Distribution Companies in the United Kingdom and the United States
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5.4.5 Electricity Transmission: Regulation of the National Grid Company (NGC) in England and Wales 5.4.5 Electricity Transmission: Regulation of the National Grid Company (NGC) in England and Wales
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5.4.6 Reflections on Price-Cap Regulation versus Cost-of-Service Regulation in Practice 5.4.6 Reflections on Price-Cap Regulation versus Cost-of-Service Regulation in Practice
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5.5 Performance Of Incentive Regulation Mechanisms For Electric Distribution And Transmission Network 5.5 Performance Of Incentive Regulation Mechanisms For Electric Distribution And Transmission Network
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5.6 Discussion 5.6 Discussion
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References References
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5 Incentive Regulationin Theory and PracticeElectricity Distribution and Transmission Networks
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Published:June 2014
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Abstract
Public utility network industries historically evolved as either state-owned or private regulated vertically integrated monopolies. Many countries have privatized and restructured these sectors. Reforms typically involve the vertical separation of potentially competitive segments, which are gradually deregulated, from remaining network segments, which are assumed to have natural monopoly characteristics and remain subject to price, network access, service quality, and entry regulations. Reforms frequently include the introduction of “incentive regulation” mechanisms for the remaining regulated segments, as opposed to traditional “cost of service” or “rate of return” regulation. Although significant research has focused on the performance of potentially competitive segments that have been deregulated, the performance of new incentive regulation mechanisms in the segments subject to ongoing regulation is economically important. This chapter reviews the theoretical and conceptual foundations of incentive regulation theory, discusses practical implementation issues, and examines how incentive regulation mechanisms have been structured and applied. Its implementation in United Kingdom electric distribution and transmission networks, where the application of these mechanisms is most advanced, is examined. The implementation of incentive regulation concepts is more complex than it seems and has implications for regulatory resources devoted to information collection, monitoring, and dynamic regulatory adjustments.
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