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Dealing with Asymmetric Risk

Improving performance through graduated conditional ROE incentives.

Fortnightly Magazine - May 2009

Policies: Designing Markets with Biased Costs and Efficiency Benchmarks,” Review of Industrial Organization, Vol.31, No. 1, Aug 2007.

17. Ironically, had the Government’s original schedule been even a bit more conservative, sufficient time would have been available to deal with these and other analytical challenges.

18. See Report Of the OEB, PBR Implementation Task Force , May 1999 .

19. See Chapter 4, “Rate Adjustment Mechanism,” 2000 Draft Rate Handbook .

20. As noted below, in subsequent research we found that over the 1988-1997 decade, annual TFP growth among the most efficient utilities averaged about 1.6 percent. During the higher incented 1994 to 1997 period, TFP growth among these firms on the efficiency frontier averaged about 2.8 percent.

21. This information was communicated by NVE to the OEB staff in private correspondence. In 1997, the range was 2 to 4.5.

22. For a discussion, see OEB, Staff Discussion Paper on 3rd Generation Incentive Regulation for Ontario’s Electric Distributors .

23. See, Cronin, F.J. and Motluk, S., “Reviewing Electric Distribution Restructuring in Ontario: Policy without Substance or Commitment.” Utility Policy , March, 2006.

24. This research has its genesis in a paper originally prepared as a kickoff to a potential research program for the OEB for a yardstick regulation regime for Ontario LDCs, presented at the Canadian Economics Association 35th Annual Meeting at McGill University, Montreal, Quebec in June 2001: Cronin, F. J., Motluk, S. A., Inter-Utility Differences in Efficiency, presented at the Canadian Economics Association Meeting, McGill University, Montreal, 2001. Follow-on research was presented at the North American Productivity Workshop II, Union College, N.Y., 2002.

25. This recommendation assumed that the LDC budgets going into IR had been in a steady-state mode and provided sufficient funds for capital refurbishment, growth, and necessary additions induced by wholesale price increases or conservation, and that the operational side of OM&A is receiving a similarly sufficient budget. However, this seems not to be the case for some LDCs. Information on declining reliability, budget shortfalls and falling ROE would all seem to indicate that there may be an operational budget gap. No doubt, many LDCs have seen increases in OM&A but our expectation is that the LDCs have had to substantially increase the “A” ( i.e., administration) portion of that to meet the substantial increase in regulatory/operating burdens (third party billing, etc.) imposed on them over the past 10 years.

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