Ownership Unbundling in Electricity Distribution: Empirical Evidence from New Zealand

Abstract

New Zealand is the only country to date to have implemented forced ownership unbundling of electricity distribution from the rest of the electricity supply industry (in 1998). This paper examines the impact of this policy on electricity prices, quality of service and costs. We find that ownership unbundling did not achieve its objectives of facilitating greater competition in the electricity supply industry but that it did lead to lower costs and higher quality of service. We suggest that this experience indicates the potential benefits of ownership unbundling in Europe but also the danger of unintended consequences.

The impact of ownership unbundling on cost efficiency: Empirical evidence from the New Zealand electricity distribution sector

“…Finally, our results are based on a greater amount of actual data with observations available up to the year 2011. Therefore, our study may be interpreted as an in-depth analysis of the study by Nillesen and Pollitt (2011). The results of our study are relevant for practitioners and theorists.…”

“…Our approach differs from the approach used by Nillesen and Pollitt (2011) in several aspects. First, we use a more flexible functional form.…”

“…The second study by Nillesen and Pollitt (2011) analyzes the impact of the introduction of ownership unbundling on electricity prices, quality of service and costs using a sample of electricity distribution companies operating in New Zealand. For this purpose, they propose a relatively simple empirical method based on the estimation of a Cobb-Douglas variable cost function, using data from 1995 to 2007 for 28 electricity distribution companies, and applying a fixed effects as well as a random effects model.…”

“…For this purpose, they propose a relatively simple empirical method based on the estimation of a Cobb-Douglas variable cost function, using data from 1995 to 2007 for 28 electricity distribution companies, and applying a fixed effects as well as a random effects model. The variable cost model specification used by Nillesen and Pollitt (2011) includes the explanatory variables: output, a variable on the customer density, a variable on the quality of the service, a time trend and a dummy variable related to the introduction of the ownership unbundling. The results of this study show that ownership unbundling has an impact on unit operational costs.…”

“…This is an interesting study, however with some limitations. First, the variable cost model specification used by Nillesen and Pollitt (2011) does not include in the explanatory variables, contrary to what is suggested in microeconomic theory of production, a variable representing the capital. Second, a relatively rigid functional form of the Cobb-Douglas is used.…”