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Incorporating the Price of Quality in Efficiency Analysis: the Case of Electricity Distribution Regulation in the UK

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  • Yu, W.
  • Jamasb, T.
  • Pollitt, M.

Abstract

Efficiency 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 Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0736.

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Length: 24
Date of creation: Jul 2007
Date of revision:
Handle: RePEc:cam:camdae:0736

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Web page: http://www.econ.cam.ac.uk/index.htm

Related research

Keywords: Data Envelopment Analysis; electricity; quality of service; willingness-to-pay;

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References

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  1. R. D. Banker & A. Charnes & W. W. Cooper, 1984. "Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis," Management Science, INFORMS, INFORMS, vol. 30(9), pages 1078-1092, September.
  2. Herriges, Joseph A. & Caves, Douglas W. & Windle, R. J., 1990. "Customer Demand for Service Reliability in the Electric Power Industry: A Synthesis of the Outage Cost Literature," Staff General Research Papers 10790, Iowa State University, Department of Economics.
  3. Antonio Estache & Tim Coelli & Sergio Perelman & Lourdes Trujillo, 2003. "A Primer on Efficiency Measurement for Utilities and Transport Regulators," ULB Institutional Repository 2013/44106, ULB -- Universite Libre de Bruxelles.
  4. Benjamin Bental & S. Abraham Ravid, 1982. "A Simple Method for Evaluating the Marginal Cost of Unsupplied Electricity," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 13(1), pages 249-253, Spring.
  5. Fredrik Carlsson & Peter Martinsson, 2007. "Willingness to Pay among Swedish Households to Avoid Power Outages: A Random Parameter Tobit Model Approach," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 1), pages 75-90.
  6. Ajodhia, Virendra & Hakvoort, Rudi, 2005. "Economic regulation of quality in electricity distribution networks," Utilities Policy, Elsevier, Elsevier, vol. 13(3), pages 211-221, September.
  7. Beenstock, Michael & Goldin, Ephraim & Haitovsky, Yoel, 1998. "Response bias in a conjoint analysis of power outages," Energy Economics, Elsevier, Elsevier, vol. 20(2), pages 135-156, April.
  8. Astrid Cullmann & Christian von Hirschhausen, 2007. "From Transition to Competition: Dynamic Efficiency Analysis of Polish Electricity Distribution Companies," Discussion Papers of DIW Berlin 716, DIW Berlin, German Institute for Economic Research.
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Cited by:
  1. Reichl, Johannes & Kollmann, Andrea & Tichler, Robert & Schneider, Friedrich, 2008. "The importance of incorporating reliability of supply criteria in a regulatory system of electricity distribution: An empirical analysis for Austria," Energy Policy, Elsevier, Elsevier, vol. 36(10), pages 3862-3871, October.
  2. Anna Ter-Martirosyan & John Kwoka, 2010. "Incentive regulation, service quality, and standards in U.S. electricity distribution," Journal of Regulatory Economics, Springer, Springer, vol. 38(3), pages 258-273, December.
  3. Yu, W. & Jamasb, T. & Pollitt, M.G., 2008. "Does Weather Explain the Cost and Quality? An Analysis of UK Electricity Distribution Companies," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0858, Faculty of Economics, University of Cambridge.
  4. Yu, William & Jamasb, Tooraj & Pollitt, Michael, 2009. "Does weather explain cost and quality performance? An analysis of UK electricity distribution companies," Energy Policy, Elsevier, Elsevier, vol. 37(11), pages 4177-4188, November.
  5. Pérez-Reyes, Raúl & Tovar, Beatriz, 2009. "Measuring efficiency and productivity change (PTF) in the Peruvian electricity distribution companies after reforms," Energy Policy, Elsevier, Elsevier, vol. 37(6), pages 2249-2261, June.
  6. Hyman, Leonard S., 2010. "Restructuring electricity policy and financial models," Energy Economics, Elsevier, Elsevier, vol. 32(4), pages 751-757, July.

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