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Dynamic Efficiency and Incentive Regulation: An Application to Electricity Distribution Networks

Author

Listed:
  • Rahmatallah Poudineh
  • Grigorios Emvalomatis
  • Tooraj Jamasb
Abstract
Efficiency and productivity analysis is a central concept in incentive-based regulation of network utilities. However, the efficiency measures obtained from benchmarking predominantly reflect short term performance and hence, provide only a snapshot of the firm's path towards its long run equilibrium. On the other hand, the factors affecting the short run behaviour of firms may not be adjusted instantaneously when firms undertake investment. In these instances, short run inefficiency caused by investments will be transmitted to subsequent periods. This effect, which arises from costs associated with the adjustment of capital stock or production capacity, is problematic under incentive regulation with ex-post regulatory treatment of capital expenditure. This is because it adversely affects the firms' short term efficiency and, consequently, regulated revenue. This paper analyses the dynamic behaviour of inefficiency for a balanced panel of 128 Norwegian electricity distribution companies from 2004 to 2010. We show that, in a given period, inefficiency is a combination of period-specific effects (shocks) plus a carry-over component from previous periods due to adjustment costs. Also, we estimate these two components of inefficiency along with the rate of inefficiency transmission between periods.

Suggested Citation

  • Rahmatallah Poudineh & Grigorios Emvalomatis & Tooraj Jamasb, 2014. "Dynamic Efficiency and Incentive Regulation: An Application to Electricity Distribution Networks," Cambridge Working Papers in Economics 1422, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:1422
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    References listed on IDEAS

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    1. Kaoru Tone, 2011. "Slacks-Based Measure of Efficiency," International Series in Operations Research & Management Science, in: William W. Cooper & Lawrence M. Seiford & Joe Zhu (ed.), Handbook on Data Envelopment Analysis, chapter 0, pages 195-209, Springer.
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    4. Rahmatallah Poudineh & Tooraj Jamasb, 2013. "Investment and Efficiency under Incentive Regulation: The Case of the Norwegian Electricity Distribution Networks," Cambridge Working Papers in Economics 1310, Faculty of Economics, University of Cambridge.
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    Cited by:

    1. Jorge E. Galán & Michael G. Pollitt, 2014. "Inefficiency persistence and heterogeneity in Colombian electricity distribution utilities," Cambridge Working Papers in Economics 1423, Faculty of Economics, University of Cambridge.
    2. Remy Tehero & Emmanuel Brou Aka & Murat Cokgezen, 2020. "Drivers of the Quality of Electricity Supply," International Journal of Energy Economics and Policy, Econjournals, vol. 10(5), pages 183-195.

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    More about this item

    Keywords

    Dynamic efficiency; innovation; investment incentives; benchmarking; electricity;
    All these keywords.

    JEL classification:

    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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