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Reference models and incentive regulation of electricity distribution networks: An evaluation of Sweden's Network Performance Assessment Model (NPAM)

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  • Jamasb, Tooraj
  • Pollitt, Michael

Abstract

Electricity sector reforms across the world have led to a search for innovative approaches to regulation that promote efficiency in the natural monopoly distribution networks and reduce their service charges. To this aim, a number of countries have adopted incentive regulation models based on efficiency benchmarking. While most regulators have used parametric and non-parametric frontier-based methods of benchmarking some have adopted engineering-designed "reference firm" or "norm" models. This paper examines the incentive properties and related aspects of the reference firm model--NPAM--as used in Sweden and compares this with frontier-based benchmarking methods. We identify a number of important differences between the two approaches that are not readily apparent and discuss their ramifications for the regulatory objectives and process. We conclude that, on balance, the reference models are less appropriate as benchmarks than real firms. Also, the implementation framework based on annual ex-post reviews exacerbates the regulatory problems mainly by increasing uncertainty and reducing the incentive for innovation.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Policy.

Volume (Year): 36 (2008)
Issue (Month): 5 (May)
Pages: 1788-1801

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Handle: RePEc:eee:enepol:v:36:y:2008:i:5:p:1788-1801

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References

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  1. Jamasb, Tooraj & Nillesen, Paul & Pollitt, Michael, 2003. "Gaming the Regulator: A Survey," The Electricity Journal, Elsevier, vol. 16(10), pages 68-80, December.
  2. Massimo Filippini & Jörg Wild, 2000. "Regional Differences in Electricity Distribution Costs and their Consequences for Yardstick Regulation of Access Prices," CEPE Working paper series 00-05, CEPE Center for Energy Policy and Economics, ETH Zurich.
  3. Jamasb, T. & Pollitt, M., 2004. "Electricity Market Reform in the European Union: Review of progress towards liberalisation and integration," Cambridge Working Papers in Economics 0471, Faculty of Economics, University of Cambridge.
  4. Pollitt, Michael, 2005. "The role of efficiency estimates in regulatory price reviews: Ofgem's approach to benchmarking electricity networks," Utilities Policy, Elsevier, vol. 13(4), pages 279-288, December.
  5. Jamasb, Tooraj & Nillesen, Paul & Pollitt, Michael, 2004. "Strategic behaviour under regulatory benchmarking," Energy Economics, Elsevier, vol. 26(5), pages 825-843, September.
  6. Paul W. Bauer & Allen N. Berger & Gary D. Ferrier & David B. Humphrey, 1997. "Consistency conditions for regulatory analysis of financial institutions: a comparison of frontier efficiency methods," Finance and Economics Discussion Series 1997-50, Board of Governors of the Federal Reserve System (U.S.).
  7. Weisman, Dennis L. & Pfeifenberger, Johannes P., 2003. "Efficiency as a Discovery Process: Why Enhanced Incentives Outperform Regulatory Mandates," The Electricity Journal, Elsevier, vol. 16(1), pages 55-62.
  8. Jamasb,Tooraj & Nuttall,William J. & Pollitt,Michael G. (ed.), 2006. "Future Electricity Technologies and Systems," Cambridge Books, Cambridge University Press, number 9780521860499, October.
  9. Giannakis, D. & T. Jamasb & Pollitt, M.G., 2004. "Benchmarking and incentive regulation of quality of service: an application to the UK electricity distribution utilities," Cambridge Working Papers in Economics 0408, Faculty of Economics, University of Cambridge.
  10. David Sappington, 2005. "Regulating Service Quality: A Survey," Journal of Regulatory Economics, Springer, vol. 27(2), pages 123-154, November.
  11. Giannakis, Dimitrios & Jamasb, Tooraj & Pollitt, Michael, 2005. "Benchmarking and incentive regulation of quality of service: an application to the UK electricity distribution networks," Energy Policy, Elsevier, vol. 33(17), pages 2256-2271, November.
  12. Dag Morten Dalen, 1998. "Yardstick Competition and Investment Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(1), pages 105-126, 03.
  13. Turvey, Ralph, 2006. "On network efficiency comparisons: Electricity distribution," Utilities Policy, Elsevier, vol. 14(2), pages 103-113, June.
  14. Jamasb, T. & Pollitt, M., 2001. "Benchmarking and Regulation of Electricity Transmission and Distribution Utilities: Lessons from International Experience," Cambridge Working Papers in Economics 0101, Faculty of Economics, University of Cambridge.
  15. Jamasb, T. & Neuhoff, K. & Newbery, D. & Pollitt, M., 2005. "Long-term Framework for Electricity Distribution Access Charges," Cambridge Working Papers in Economics 0551, Faculty of Economics, University of Cambridge.
  16. Jamasb, T. & Pollitt, M., 2000. "Benchmarking and regulation: international electricity experience," Utilities Policy, Elsevier, vol. 9(3), pages 107-130, September.
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Citations

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Cited by:
  1. Gómez, Tomás & Mateo, Carlos & Sánchez, Álvaro & Reneses, Javier & Rivier, Michel, 2011. "La retribución de la distribución de electricidad en España y el modelo de red de referencia/The Remuneration of Electricity Distribution in Spain and the Reference Network Model," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 29, pages 661 (24 pag, Agosto.
  2. Jamasb, T. & Söderberg, M., 2009. "Yardstick and Ex-post Regulation by Norm Model: Empirical Equivalence, Pricing Effect, and Performance in Sweeden," Cambridge Working Papers in Economics 0908, Faculty of Economics, University of Cambridge.
  3. Tooraj Jamasb & Magnus Söderberg, 2010. "The Effects of Average Norm Model Regulation: The Case of Electricity Distribution in Sweden," Review of Industrial Organization, Springer, vol. 36(3), pages 249-269, May.
  4. Keirstead, James, 2013. "Benchmarking urban energy efficiency in the UK," Energy Policy, Elsevier, vol. 63(C), pages 575-587.
  5. van der Welle, Adriaan J. & de Joode, Jeroen, 2011. "Regulatory road maps for the integration of intermittent electricity generation: Methodology development and the case of The Netherlands," Energy Policy, Elsevier, vol. 39(10), pages 5829-5839, October.

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