Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks

Joskow, Paul L.

doi:10.2139/ssrn.848325

Cited by 136 publications

(139 citation statements)

References 77 publications

(59 reference statements)

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“…Within this framework, investments are encumbered indirectly such that overinvestment can result in partial disallowance of investment costs. The Norwegian regulator computes the allowed revenue ( ) of the networks using Equation (1), which, in essence, is a generic incentive regulation formula representing the trade-off between cost reduction incentive and rent transfer to the consumers, given the presence of asymmetric information between the firm and the regulator (Newbery, 2002;Joskow, 2005). (1) Where is the actual (own) costs of a network company, is the norm cost obtained by using the frontier-based benchmarking method Data Envelopment Analysis (DEA), and is the power of incentive in terms of the weight given to benchmarked costs vs. actual costs in setting the allowed revenue.…”

Section: Modelling Incentive Regulationmentioning

confidence: 99%

A New Perspective: Investment and Efficiency under Incentive Regulation

Poudineh¹,

Jamasb²

2016

The Energy Journal

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The full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-prot purposes provided that:• a full bibliographic reference is made to the original source • a link is made to the metadata record in DRO • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders.Please consult the full DRO policy for further details. AbstractFollowing the liberalisation of the electricity industry since the early 1990s, many sector regulators have recognised the potential for cost efficiency improvement in the networks through incentive regulation aided by benchmarking and productivity analysis. This approach has often resulted in cost efficiency and quality of service improvement. However, there remains a growing concern as to whether the utilities invest sufficiently and efficiently in maintaining and modernising the networks to ensure long term reliability and to meet their future challenges. This paper studies the relationship between investments and cost efficiency in the context of incentive regulation with ex-post regulatory treatment of investments using a panel dataset of 129 Norwegian distribution companies from 2004 to 2010. We introduce the concept of "no impact efficiency" as a revenue-neutral efficiency effect of investment under incentive regulation that makes a firm "investment efficient" in cost benchmarking. Also, we estimate the observed efficiency effect of investments and compare these with the no impact efficiency. Finally, we discuss some implications of incentive regulation and cost benchmarking for investment behaviour of network companies.

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Section: Modelling Incentive Regulationmentioning

confidence: 99%

A New Perspective: Investment and Efficiency under Incentive Regulation

Poudineh¹,

Jamasb²

2016

The Energy Journal

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“…Utility benchmarking under incentive regulation aims to promote economic efficiency (cost, allocative, and dynamic efficiencies) by reducing the regulated firm's information advantage with its inputs and demand. It can thus be viewed as a second best solution to competitive markets (Newbery, 2002;Joskow, 2013).…”

Section: Relevant Literature Reviewmentioning

confidence: 99%

Incentive regulation and utility benchmarking for electricity network security

Nepal

Jamasb

2015

Economic Analysis and Policy

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Use policyThe full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-prot purposes provided that:• a full bibliographic reference is made to the original source • a link is made to the metadata record in DRO • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders.Please consult the full DRO policy for further details. AbstractThe incentive regulation of costs related to physical and cyber security in electricity networks is an important but relatively unexplored and ambiguous issue. These costs can be part of cost efficiency benchmarking or, alternatively, dealt with separately. This paper discusses the issues and proposes options for incorporating network security costs within incentive regulation in a benchmarking framework. The relevant concerns and limitations associated with the accounting and classification of network security costs, choice of cost drivers, data adequacy and quality and the relevant benchmarking methodologies are discussed. The analysis suggests that the present regulatory treatment of network security costs using benchmarking is limited to being an informative regulatory tool rather than being deterministic. We discuss how alternative approaches outside the benchmarking framework, such as the use of stochastic cost-benefit analysis and cost-effectiveness analysis of network security investments can complement the results obtained from benchmarking.Keywords: benchmarking; network security; incentive regulation; exceptional events JEL Classification: L94, L51, L98 *Corresponding author. School of Business, Charles Darwin University, Email: rabindra.nepal@cdu.edu.au, Phone: +61 (0)

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“…6 Clearly, the main benefits of the pro-2 The information asymmetries in regulation mainly result from adverse selection and moral hazard problems (Joskow, 2006).…”

Section: A Need For Specification Analysesmentioning

confidence: 99%

Estimating alternative technology sets in nonparametric efficiency analysis: restriction tests for panel and clustered data

2015

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract Nonparametric efficiency analysis has become a widely applied technique to support industrial benchmarking as well as a variety of incentive-based regulation policies. In practice such exercises are often plagued by incomplete knowledge about the correct specifications of inputs and outputs. Simar and Wilson (2001) and Schubert and Simar (2011) propose restriction tests to support such specification decisions for cross-section data. However, the typical oligopolized market structure pertinent to regulation contexts often leads to low numbers of cross-section observations, rendering reliable estimation based on these tests practically unfeasible. This small-sample problem could often be avoided with the use of panel data, which would in any case require an extension of the cross-section restriction tests to handle panel data. In this paper we derive these tests. We prove the consistency of the proposed method and apply it to a sample of US natural gas transmission companies from 2003 through 2007. We find that the total quantity of gas delivered and gas delivered in peak periods measure essentially the same output. Therefore only one needs to be included. We also show that the length of mains as a measure of transportation service is non-redundant and therefore must be included. Terms of use: Documents in

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Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks

Cited by 136 publications

References 77 publications

A New Perspective: Investment and Efficiency under Incentive Regulation

A New Perspective: Investment and Efficiency under Incentive Regulation

Incentive regulation and utility benchmarking for electricity network security

Estimating alternative technology sets in nonparametric efficiency analysis: restriction tests for panel and clustered data

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