Incorporating reliability index probability distributions in financial risk assessment with performance based regulation

Regulatory authorities are increasingly adopting performance based regulations (PBR) in the new electric power utility environment. A PBR regime is intended to provide distribution utilities with economic incentives. It could also introduce potential financial risk due to the integration of a reward/penalty structure into the PBR plan. In this new environment, distribution utilities will need to adjust their reliability performance strategy to avoid possible financial risk, and could decide to invest in new capital projects to improve system reliability and be financially rewarded. This article illustrates the utilization of Monte Carlo simulation to develop the relevant reliability indices and their distributions due to reliability improvements in an electric distribution system. Quantitative consideration of the effect of system reliability improvements on the financial risk under imposed reward/penalty structures is presented. This work should be useful for electric power utilities working to reduce their risk and raise their profit in the new regulatory environment.