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Finding the right yardstick: regulation of electricity networks under heterogeneous environments

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journal contribution
posted on 30.08.2017, 11:01 by Endre Bjorndal, Mette Bjorndal, Astrid Cullmann, Maria Nieswand
Revenue cap regulation is often combined with systematic benchmarking to reveal the managerial inefficiencies when regulating natural monopolies. One example is the European energy sector, where benchmarking is based on actual cost data, which are influenced by managerial inefficiency as well as operational heterogeneity. This paper demonstrates how a conditional nonparametric method, which allows comparison of firms operating under heterogeneous technologies, can be used to estimate managerial inefficiency. A dataset of 123 distribution firms in Norway is used to show aggregate and firm-specific effects of conditioning. We compare the models presently used by the Norwegian regulator to a suggested conditional model, thus providing a viable alternative to distinguish between managerial inefficiency and operational heterogeneity. The use of the conditional model in this regulatory context leads, first, to a decrease in aggregate efficient costs and, second, to a reallocation effect that affects the relative profitability of firms and relative customer prices, thus providing a fairer basis for setting revenue caps.

Funding

This paper is produced as part of the project Municipal Infrastructure Companies against the Background of Energy Policy and Demographic Change (KOMIED) funded by the Leibniz Commission (SAW-2013-DIW-5)

History

School

  • Business and Economics

Department

  • Economics

Published in

European Journal of Operational Research

Volume

265

Issue

2

Pages

710-722

Citation

BJORNDAL, E. ... et al, 2018. Finding the right yardstick: regulation of electricity networks under heterogeneous environments. European Journal of Operational Research, 265(2), pp.710-722.

Publisher

© Elsevier

Version

AM (Accepted Manuscript)

Publisher statement

This paper was accepted for publication in the journal European Journal of Operational Research and the definitive published version is available at https://doi.org/10.1016/j.ejor.2017.07.059

Acceptance date

26/07/2017

Publication date

2017-08-04

ISSN

0377-2217

Language

en

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