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Incentive Regulation and the Role of Convexity in Benchmarking Electricity Distribution: Economists versus Engineers

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  • Emili Grifell-Tatjé

    (Universitat Autònoma de Barcelona, Spain)

  • Kristiaan Kerstens

    ()
    (CNRS-LEM, IESEG School of Management)

Abstract

This note illustrates the potential impact of the specification of a convex production technology on establishing minimal costs compared to the use of a non-convex technology when benchmarking electricity distributors. This methodological reflection is mainly motivated by recent engineering literature providing evidence for non-convexities in electricity distribution. An empirical illustration using non-parametric specifications of technology illustrates this main point using a sample of Spanish electricity distribution firms earlier analysed in Grifell-Tatjé and Lovell (2003).

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File URL: http://my.ieseg.fr/bienvenue/DownloadDoc.asp?Fich=910908507_2007-ECO-1-Grifell_Kerstens.pdf
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Bibliographic Info

Paper provided by IESEG School of Management in its series Working Papers with number 2007-ECO-01.

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Length: 16 pages
Date of creation: Oct 2007
Date of revision:
Publication status: Published in Annals of Public and Cooperative Economics, June 2008, 79(2), pp. 227-248
Handle: RePEc:ies:wpaper:e200701

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Keywords: Convexity; incentive regulation; benchmarking; engineering;

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References

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  2. Brunekreeft, G. & Neuhoff, K. & Newbery, D., 2004. "Electricity transmission: an overview of the current debate," Cambridge Working Papers in Economics 0463, Faculty of Economics, University of Cambridge.
  3. O'Neill, Richard P. & Sotkiewicz, Paul M. & Hobbs, Benjamin F. & Rothkopf, Michael H. & Stewart, William R., 2005. "Efficient market-clearing prices in markets with nonconvexities," European Journal of Operational Research, Elsevier, vol. 164(1), pages 269-285, July.
  4. Smith, V Kerry, 1986. "Another View of the State of Engineering Production Functions," Economica, London School of Economics and Political Science, vol. 53(212), pages 529-32, November.
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  8. Jamasb, Tooraj & Pollitt, Michael, 2003. "International benchmarking and regulation: an application to European electricity distribution utilities," Energy Policy, Elsevier, vol. 31(15), pages 1609-1622, December.
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  11. Makkonen, Simo & Lahdelma, Risto, 2006. "Non-convex power plant modelling in energy optimisation," European Journal of Operational Research, Elsevier, vol. 171(3), pages 1113-1126, June.
  12. Subodh Kumar & R. Robert Russell, 2002. "Technological Change, Technological Catch-up, and Capital Deepening: Relative Contributions to Growth and Convergence," American Economic Review, American Economic Association, vol. 92(3), pages 527-548, June.
  13. Ventosa, Mariano & Baillo, Alvaro & Ramos, Andres & Rivier, Michel, 2005. "Electricity market modeling trends," Energy Policy, Elsevier, vol. 33(7), pages 897-913, May.
  14. Marsden, James R & Pingry, David E, 1986. "Engineering Production Functions and the Testing of Quantitative Economic Hypotheses," Economica, London School of Economics and Political Science, vol. 53(212), pages 533-34, November.
  15. Jamasb, Tooraj & Nillesen, Paul & Pollitt, Michael, 2004. "Strategic behaviour under regulatory benchmarking," Energy Economics, Elsevier, vol. 26(5), pages 825-843, September.
  16. Herbert E. Scarf, 1994. "The Allocation of Resources in the Presence of Indivisibilities," Cowles Foundation Discussion Papers 1068, Cowles Foundation for Research in Economics, Yale University.
  17. Walter Briec & Kristiaan Kerstens & Philippe Vanden Eeckaut, 2006. "Non-convex Technologies and Cost Functions: Definitions, Duality and Nonparametric Tests of Convexity (Journal of Economics 81(2):155–192)," Journal of Economics, Springer, vol. 87(3), pages 307-308, 04.
  18. Mehdi Farsi & Massimo Filippini & William Greene, 2006. "Application Of Panel Data Models In Benchmarking Analysis Of The Electricity Distribution Sector ," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 77(3), pages 271-290, 09.
  19. 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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