Aligning Quality Incentives and Tariff Adjustments: The Case of the Brazilian Electricity Distribution Sector

摘要

This study investigates the role of aligning tariff adjustments and qualityincentives in a Price cap regulatory regime. According to theory costs and qualityare positively related. If additional resources are needed to improve service quality,a high cost high quality utility could be at a disadvantage when tariffs areadjusted by an X-factor that does not include quality. The regulator of the electricitydistribution sector of Brazil has set up a public ranking of utilities accordingto quality compliance at the same time that a quality component is added to theX-factor, in 2013.We develop a stochastic cost frontier integrating all componentsof the X-factor to rank the utilities based on this integrated efficiency. Comparingthis rank with the regulator’s public rank we argue that the resulting differenceshighlight the importance of using the same factors to rank and adjust tariffs inthe sector. Otherwise, incentives would be misplaced with respect to factors usedin cost adjustments. In addition, our findings reveal that the utilities’ cost behaviorwith respect to quality depends on the volume of energy delivered.We believethese results could be considered by the regulator when setting incentives andconsidering factors to adjust tariffs.