Incorporating the Price of Quality in Efficiency Analysis: the Case of Electricity Distribution Regulation in the UK

William Yu, Tooraj Jamasb and Michael Pollitt

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: Efficiency analysis of electricity distribution networks is often limited to technical or cost efficiency measures. However, some important non-tradable aspects of their service such as quality of service and network energy losses are generally not part of the analysis. A regulatory concern is that technical efficiency can be achieved at the expense of these measures as well as allocative efficiency. Valuation of service quality for inclusion in regulatory models is particularly difficult. This paper presents an approach to measure and incorporate service quality and energy losses in analysis of technical and allocative efficiency of the utilities. We calculate technical and allocative efficiency of the 14 distribution networks in the UK between 1990/91 and 2003/04 using the Data Envelopment Analysis technique. We find that efficiency measures improved during the first (1990/91-1994/95) and second (1995/96-1999/00) distribution price control reviews and exhibited a slight decline during the third (2000/01-2004/05) review period. We find relatively low allocative efficiency - i.e. a mismatch in allocating resources among expenditures, service quality, and energy losses. The results suggest that the utilities may not be sufficiently incentivised to achieve socially optimal input bundles under the current incentive scheme.

Keywords: Data Envelopment Analysis; electricity; quality of service; willingness-to-pay (search for similar items in EconPapers)
JEL-codes: L15 L51 L94 (search for similar items in EconPapers)
Pages: 24
Date: 2007-07
New Economics Papers: this item is included in nep-eff, nep-ene, nep-net and nep-reg
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Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Incorporating the Price of Quality in Efficiency Analysis: the Case of Electricity Distribution Regulation in the UK (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0736

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