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Monte Carlo simulations of Ofgem incentive scheme for electricity interruptions (2003-2004)
At a previous employer, Franck Latrémolière and Geoffrey Randall undertook a series of assignments for a UK electricity distribution company on financial incentive schemes proposed by its regulator Ofgem to encourage a reduction in the amount and duration of power cuts. (This was terms the "information and incentives project" for a time.)
Part of our work was to quantify the financial risks arising from Ofgem's proposals for financial incentive regimes based on customer interruptions and customer minutes lost; and to help the client develop its position towards options for caps on liability or severe weather exclusions.
We developed and used a Monte Carlo simulation tool based on a large database of fault events supplied by the client, and estimated probabilities of extreme combinations of events and their corresponding financial implications under the incentive scheme.