Unobserved heterogeneous effects in the cost efficiency analysis of electricity distribution systems
AbstractThe purpose of this study is to analyze the cost efficiency of electricity distribution systems in order to enable regulatory authorities to establish price- or revenue cap regulation regimes. The increasing use of efficiency analysis in the last decades has raised serious concerns among regulators and companies regarding the reliability of efficiency estimates. One important dimension affecting the reliability is the presence of unobserved factors. Since these factors are treated differently in various models, the resulting estimates can vary across methods. Therefore, we decompose the benchmarking process into two steps. In the first step, we identify classes of similar companies with comparable network and structural characteristics using a latent class cost model. We obtain cost best practice within each class in the second step, based on deterministic and stochastic cost frontier models. The results of this analysis show that the decomposition of the benchmarking process into two steps has reduced unobserved heterogeneity within classes and, hence, reduced the unexplained variance previously claimed as inefficiency.
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Bibliographic InfoPaper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 13/171.
Length: 23 pages
Date of creation: Jan 2013
Date of revision:
Efficiency analysis; cost function; electricity sector; incentive regulation;
Other versions of this item:
- Per J. Agrell & Mehdi Farsi & Massimo Filippini & Martin Koller, 2013. "Unobserved heterogeneous effects in the cost efficiency analysis of electricity distribution systems," Working Papers 0038, Swiss Economics.
- L92 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Railroads and Other Surface Transportation
- L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
- L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-01-26 (All new papers)
- NEP-EFF-2013-01-26 (Efficiency & Productivity)
- NEP-ENE-2013-01-26 (Energy Economics)
- NEP-REG-2013-01-26 (Regulation)
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