Incorporating the Price of Quality in Efficiency Analysis: the Case of Electricity Distribution Regulation in the UK
AbstractEfficiency analysis of electricity distribution networks is often limited to technical or cost efficiency measures. However, some important non-tradable aspects of their service such as quality of service and network energy losses are generally not part of the analysis. A regulatory concern is that technical efficiency can be achieved at the expense of these measures as well as allocative efficiency. Valuation of service quality for inclusion in regulatory models is particularly difficult. This paper presents an approach to measure and incorporate service quality and energy losses in analysis of technical and allocative efficiency of the utilities. We calculate technical and allocative efficiency of the 14 distribution networks in the UK between 1990/91 and 2003/04 using the Data Envelopment Analysis technique. We find that efficiency measures improved during the first (1990/91-1994/95) and second (1995/96-1999/00) distribution price control reviews and exhibited a slight decline during the third (2000/01-2004/05) review period. We find relatively low allocative efficiency - i.e. a mismatch in allocating resources among expenditures, service quality, and energy losses. The results suggest that the utilities may not be sufficiently incentivised to achieve socially optimal input bundles under the current incentive scheme.
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Bibliographic InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0736.
Date of creation: Jul 2007
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Data Envelopment Analysis; electricity; quality of service; willingness-to-pay;
Find related papers by JEL classification:
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-08-14 (All new papers)
- NEP-EFF-2007-08-14 (Efficiency & Productivity)
- NEP-ENE-2007-08-14 (Energy Economics)
- NEP-NET-2007-08-14 (Network Economics)
- NEP-REG-2007-08-14 (Regulation)
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