Benchmark regulation in Brazil

Purpose - The regulation model used by Agência Nacional de Energia Elétrica (ANEEL) (Brazilian National Agency of Electric Energy) brings together the incentive regulation approach (price cap) and benchmarking practices to establish the "efficient" operational costs of regulated companies using a "shadow" or "reference" firm. The specific objective is to evaluate in what extent the adoption of the "reference firm" would condition the strategic goals of the regulated firms.Design methodology approach - The paper analyses the correlation between the efficient operational costs set by the reference firm and operational variables of actual utilities during the first cycle of the periodic price revisions conducted by ANEEL from 2003 to 2006, for utilities with more than 400,000 consumer units.Findings - The analysis shows that the use of the reference firm promotes short-term efficiency goals for regulated utilities (thus promoting the maintenance of their existent structure). However, it would restrain their technological updating (long-term efficiency) and their adjustment to meet future demand growth (both vertical and horizontal).Research limitations implications - The analysis comprises a sample of 28 utilities with more than 400,000 consumer units and a limited set of physical and economic variables. The study could be improved with the inclusion a number of additional economic and physical variables coupled with the use of additional statistical tools to further test its results for the next cycle of periodic price reviews (2007-2010).Originality value - The study is a first quantitative attempt to analyze the relationship between economic regulation and its consequences upon the strategic management of the utilities conducted in the energy distribution industry in Brazil.