Revenue cap regulation in a deregulated electricity market : effects on a grid company

Abstract

In Norway, an incentive-based regulation of electricity distribution companies, based on revenue caps, was introduced in 1997. The revenues are adjusted annually, and the new revenue cap is determined on the basis of last year’s revenue cap, adjusting for inflation, productivity improvement, and load growth. The idea behind the load growth compensation factor is that the grid companies should be compensated for increased costs due to grid expansion. Load growth was chosen, partly because it was considered to be an exogenously determined variable, however, in this paper, we will examine some investment incentives due to the load growth factor of the adjustment formula of the Norwegian regulation.