Benchmarking in Regulation of Electricity Networks in Norway: An Overview

Cullmann

et al. 2016

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 methods are 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 the 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. By comparing the unconditional model to our proposed conditional model and the model presently used by the Norwegian regulator, we see that the use of conditional benchmarking methods in revenue cap regulation may effectively distinguish between managerial inefficiency and operational heterogeneity. This distinction 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.JEL-Classification: L94, C44, L51

Section: Managerial Inefficiency Versus Operational Heterogeneitymentioning

confidence: 99%

Section: Datamentioning

confidence: 99%

Section: Effects For Regulationmentioning

confidence: 99%

See 1 more Smart Citation

Finding the Right Yardstick: Regulation Under Heterogeneous Environments

Cullmann

et al. 2016

“…(2014, and they can be important in a regulation framework since the current yardstick incentive regulation estimates the revenue caps based on the efficiency scores (Bjørndal et al, 2010). In the Norwegian context, however, the calibration methodology applied by the regulator reduces the importance of the efficiency score levels, although the combination of calibration and differences in level may lead to some redistribution effects.…”

Section: Efficiency Scoresmentioning

confidence: 99%

Optimal Scale in Different Environments The Case of Norwegian Electricity Distribution Companies

Cheng

2015

“…The electricity network companies are regulated by the Norwegian Water Resources and Energy Directorate (NVE). Incentive regulation was introduced in 1997, and a yardstick regulation model has been used since 2007 [3]. Revenue caps for all network companies are based on a combination of actual cost and the optimal cost.…”

Section: Introductionmentioning

confidence: 99%

Cost Efficiency Analysis Based on the DEA and StoNED Models: Case of Norwegian Electricity Distribution Companies

Cheng

2014

Abstract-Our paper applies data envelopment analysis (DEA) and stochastic non-parametric envelopment of data (StoNED) to measure cost efficiency of electricity distribution companies. The data cover 123 Norwegian electricity distribution companies during 2004-2010, and the performance of these companies is compared across the two models with and without environmental variables, i.e., variables that account for local conditions that affect the companies' costs. The results indicate that the cost efficiency estimates with the StoNED approach are much higher than with the DEA method when we do not consider environmental variables. It shows that the choice of estimation methods is important with respect to the estimated impact of environmental variables on the performance. In addition, the inclusion of the environmental variables has considerable effect on the classification of companies with respect to local returns to scale.