Strategic behaviour under regulatory benchmarking

Abstract

In order to improve the efficiency of electricity distribution networks, some regulators have adopted incentive regulation schemes that rely on performance benchmarking. Although regulation benchmarking can influence the "regulation game," the subject has received limited attention. This paper discusses how strategic behaviour can result in inefficient behaviour by firms. We then use the Data Envelopment Analysis (DEA) method with US utility data to examine implications of illustrative cases of strategic behaviour reported by regulators. The results show that gaming can have significant effects on the measured performance and profitability of firms. © 2004 Elsevier B.V. All rights reserved.