When determining a productivity target or X factor, regulators must predict

achievable
efficiency gains for the future. Generally, X factors are company-specific based on
relative
efficiency levels today and expectations for industry-wide productivity gains in the
future. The
first step in establishing such measures is to look at achieved historical productivity
gains and
likely future efficiency levels for the specific firm(s) and the industry. In addition to
peer group
benchmarking, X factors can also be derived using benchmarking techniques based
on an
hypothetical efficient firm or an average firm in the peer group; this form of PBR
regulation is
also known as yardstick competition. Under this method, the average firm will
earn the base
return, super-performers will earn higher returns, and under-performers will suffer
financially