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Using regulatory benchmarking techniques to set company performance targets: the case of US electricity

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  • Nillesen, P.
  • Pollitt, M.G.

Abstract

Consolidation in many sectors has lead to the formation of “groups of companies”. Extracting all the potential cost savings from these independent or separate operating units is a challenge given asymmetric information. We develop a step-by-step approach that applies regulatory benchmarking techniques to set efficiency targets for operating units. Holding company management – like a regulator – will want to set targets to encourage efficient operation but in the absence of full information on effort, costs and environmental conditions. Our approach using the parallel with regulation incorporates issues such as measurement error and potential environmental factors that could influence the underlying efficiency score. We demonstrate the approach using data from the US electricity distribution sector and show that substantial savings can be extracted using this approach that was originally developed for regulatory purposes.

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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 0834.

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Date of creation: Aug 2008
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Handle: RePEc:cam:camdae:0834

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

Related research

Keywords: benchmarking; regulation; operating companies; electricity distribution;

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Cited by:
  1. Jaunky, Vishal Chandr, 2013. "Divergence in technical efficiency of electric utilities: Evidence from the SAPP," Energy Policy, Elsevier, vol. 62(C), pages 419-430.
  2. Paul Nillesen & Michael Pollitt, 2011. "Ownership Unbundling in Electricity Distribution: Empirical Evidence from New Zealand," Review of Industrial Organization, Springer, vol. 38(1), pages 61-93, January.
  3. Yu, William & Jamasb, Tooraj & Pollitt, Michael, 2009. "Does weather explain cost and quality performance? An analysis of UK electricity distribution companies," Energy Policy, Elsevier, vol. 37(11), pages 4177-4188, November.
  4. 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 0858, Faculty of Economics, University of Cambridge.
  5. Llorca, Manuel & Orea, Luis & Pollitt, Michael, 2013. "Efficiency and Environmental Factors in the US Electricity Transmission Industry," Cambridge Working Papers in Economics 1318, Faculty of Economics, University of Cambridge.
  6. Pollitt, Michael G. & Steer, Steven J., 2012. "Economies of scale and scope in network industries: Lessons for the UK water and sewerage sectors," Utilities Policy, Elsevier, vol. 21(C), pages 17-31.

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