UK RIIO Model

The UK's RIIO framework (Revenue = Incentives + Innovation + Outputs) is the most developed performance-based regulation model in the world. It replaced cost-of-service regulation for British network companies in 2013, and its design choices reveal both the promise and the difficulty of paying utilities for results instead of spending.

Under RIIO, the regulator (Ofgem) sets allowed revenue based on a business plan the network company submits for an 8-year price control period. The company keeps (or loses) money based on performance against output targets: customer satisfaction, connection times, reliability metrics, and carbon reduction. If it delivers outputs below the allowed cost, it keeps the savings. If it overspends, shareholders absorb the loss.

RIIO-ED1 results (2015-2023). Distribution network operators cut costs roughly 8% below allowances during the first RIIO period, pocketing the savings. Customer satisfaction scores improved. Critics argued the savings proved Ofgem set allowances too generously, giving companies easy targets.

Is the incentive to underspend always good for customers?

Not necessarily. A network company that defers maintenance to reduce costs today may degrade asset condition over time. RIIO attempts to counter this with asset health metrics that penalize deterioration. But measuring long-term asset health is difficult; the consequences of underinvestment may not appear for decades. The tension between short-term efficiency incentives and long-term infrastructure investment is the central unresolved challenge of performance-based regulation worldwide.

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