Quality regulation based on yardstick competition

The aim of the restructuring process of the electrical sector in many countries is the introduction of competition in a vital economic activity for modern society. The segment of electricity generation and trading are driving to market forces whereas transmission and distribution are keeping economic regulation due to monopoly characteristics. One of the challenges in this new environment is the creation of some regulation that tries to incorporate competition between transmission and distribution companies. This pseudo competition could induce the monopolistic companies to optimize costs keeping the supply qualitative to satisfactory levels. The incentive regulation is a general trend in attempting to reach such a goal. This paper presents a methodology based on yardstick regulation to establish quality targets measure by continuity indices. The distribution companies are induced to compete with each other because these targets are set based on comparison among the utilities. Given that the improvement of quality indices usually implies new investments, a transition process is suggested to follow the needs of company economic equilibrium.