Principal-agent theory based incentive mechanism for the electricity universal service

Abstract

From the characteristics of the electricity universal service, this paper studies the problems within the incentive mechanism of the electricity universal service in the market environment. Based on the principal-agent theory, the paper takes into account the cost compensation and economic incentives factors for the power supply enterprises when implementing the electricity universal service, develops a new principal-agent relationship model between the electricity regulatory institutions and power supply enterprises under the asymmetric information situation, designs an optimal incentive contact, analyzes the problems of parameters' assignment in incentive contracts, as well as the influence of incentive contracts towards effort level, mutual earnings, etc. Examples prove that the proposed incentive mechanism could improve the self-earnings while the effort level of electricity universal service provided by power supply enterprises is upgraded, and together with it is the increase of electricity regulatory institutions' utility and social welfare, which in turn stimulates the power supply enterprises to improve the electricity universal service and achieves multilateral wins and the "Pareto Optimality" condition for the electricity universal service.