Yardstick Competition and Reliability of Supply in Public Utilities

In regulation of network services such as the distribution of electricity, gas and water prices have traditionally been based on own costs of companies. Recently a few regulatory bodies in Europe started to use yardstick competition, a scheme that links prices to the performance of other companies. This has a beneficial impact on costs over the short run, but might have an adverse effect on the reliability of services in the long run. To curb these undesirable effects yardstick competition should be enhanced with some mechanism regulating quality. We show how forms of yardstick competition can be extended to incorporate the aspect of reliability