International benchmarking of electricity transmission by regulators: A contrast between theory and practice?

Benchmarking of electricity networks has a key role in sharing the benefits of efficiency improvements with consumers and ensuring regulated companies earn a fair return on their investments. This paper analyses and contrasts the theory and practice of international benchmarking of electricity transmission by regulators. We examine the literature relevant to electricity transmission benchmarking and discuss the results of a survey of 25 national electricity regulators. While new panel data techniques aimed at dealing with unobserved heterogeneity and the validity of the comparator group look intellectually promising, our survey suggests that they are in their infancy for regulatory purposes. In electricity transmission, relative to electricity distribution, choosing variables is particularly difficult, because of the large number of potential variables to choose from. Failure to apply benchmarking appropriately may negatively affect investors' willingness to invest in the future. While few of our surveyed regulators acknowledge that regulatory risk is currently an issue in transmission benchmarking, many more concede it might be. In the meantime new regulatory approaches - such as those based on tendering, negotiated settlements, a wider range of outputs or longer term grid planning - are emerging and will necessarily involve a reduced role for benchmarking.