In addition, the quality of output may rise if RORR encourages capital intensity, and if capital is normally required to increase service quality, the result may be excessive quality (Baldwin & Cave, 1999; Sappington, 2005).
The difficulties are informational, and without the necessary information, the RORR may be attractive as a second-best.
Thus, RORR leads to higher levels of quality of service because the rate base includes the investments and allowances for maintaining and operating the electric installations.
Regulation by incentives is a form of utility regulation that strengthens the financial incentives to lower rates, lower costs, or improve nonprice performance compared with traditional RORR.
The difficulty of effective quality regulation becomes evident if one moves from RORR toward stricter price-cap regulation.
Two systems of price regulation exist: (a) RORR and (b) regulation by incentives; the former known as the traditional scheme, and the latter known as the new or modern scheme of regulation.
The former countries use RORR (or cost-plus regulation), which induces the utility to provide a high quality of service because the tariff permanently includes the investment and maintenance costs.
To summarize, the electric distribution utilities in developed countries traditionally provide a good quality of service because of the extensive use of RORR (or cost-plus regulation).