Quality of service provision in electric power distribution systems through reliability insurance

Traditional methods for regulating electricity distribution grids have several weaknesses in terms of incentives, risk allocation, consumer preferences, and the value of reliability. Rate of Return and Performance Based Regulation do not provide incentives for both cost efficiency and quality of service. These regulatory structures also allocate the risk of outages almost entirely to consumers and fail to incorporate consumer preferences for reliability/service quality. Additionally, investments in system reliability are not explicitly valued. This paper proposes an insurance scheme for reliability as a possible solution. Reliability insurance provides economically efficient investment incentives and alleviates consumers' reliability risk. Consumers provide economic signals to the distribution provider for their desired quality of service through insurance contracts. The value of reliability to consumers is thereby made transparent, allowing Distribution Companies (DisCo's) to make efficient investment decisions. Insurance also allocates outage risk to the DisCo (which controls the system), instead of consumers (who have little or no control over reliability). Reliability insurance effectively unbundles delivery and reliability services and enables consumers to receive differentiated reliability based upon their value for this service. This paper describes the potential for reliability insurance to improve both efficiency and risk allocation compared to conventional regulatory structures.