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Quality of Service, Efficiency, and Scale in Network Industries: An Analysis of European Electricity Distribution

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Christian Growitsch

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Abstract

Quality of service is of major economic significance in natural monopoly infrastructure industries and is increasingly addressed in regulatory schemes. However, this important aspect is generally not reflected in efficiency analysis of these industries. In this paper we present an efficiency analysis of electricity distribution networks using a sample of about 500 electricity distribution utilities from seven European countries. We apply the stochastic frontier analysis (SFA) method on multi-output translog input distance function models to estimate cost and scale efficiency with and without incorporating quality of service. We show that introducing the quality dimension into the analysis affects estimated efficiency significantly. In contrast to previous research, smaller utilities seem to indicate lower technical efficiency when incorporating quality. We also show that incorporating quality of service does not alter scale economy measures. Our results emphasise that quality of service should be an integrated part of efficiency analysis and incentive regulation regimes, as well as in the economic review of market concentration in regulated natural monopolies.

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Paper provided by Halle Institute for Economic Research in its series IWH Discussion Papers with number 3-05.

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Date of creation: Jul 2005
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Handle: RePEc:iwh:dispap:3-05

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Related research
Keywords: efficiency; quality of service; scale economies; input distance function; stochastic frontier analysis;

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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

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Baumol, William J, 1977. "On the Proper Cost Tests for Natural Monopoly in a Multiproduct Industry," American Economic Review, American Economic Association, vol. 67(5), pages 809-22, December. [Downloadable!] (restricted)
  2. Jamasb, T. & Pollitt, M., 2000. "Benchmarking and regulation: international electricity experience," Utilities Policy, Elsevier, vol. 9(3), pages 107-130, September. [Downloadable!] (restricted)
  3. Giannakis, D. & T. Jamasb & Pollitt, M.G., 2004. "Benchmarking and incentive regulation of quality of service: an application to the UK electricity distribution utilities," Cambridge Working Papers in Economics 0408, Faculty of Economics, University of Cambridge. [Downloadable!]
  4. Battese, G E & Coelli, T J, 1995. "A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data," Empirical Economics, Springer, vol. 20(2), pages 325-32.
  5. Gilsdorf, Keith, 1994. "Vertical integration efficiencies and electric utilities: A cost complementarity perspective," The Quarterly Review of Economics and Finance, Elsevier, vol. 34(3), pages 261-282. [Downloadable!] (restricted)
  6. William C. Horrace & Peter Schmidt, 2002. "Confidence Statements for Efficiency Estimates from Stochastic Frontier Models," Econometrics 0206006, EconWPA. [Downloadable!]
  7. 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. [Downloadable!] (restricted)
  8. Dixit, Avinash, 1997. "Power of Incentives in Private versus Public Organizations," American Economic Review, American Economic Association, vol. 87(2), pages 378-82, May. [Downloadable!] (restricted)
  9. Meeusen, Wim & van den Broeck, Julien, 1977. "Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 435-44, June. [Downloadable!] (restricted)
  10. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July. [Downloadable!] (restricted)
  11. Filippini, Massimo & Wild, Jorg, 2001. "Regional differences in electricity distribution costs and their consequences for yardstick regulation of access prices," Energy Economics, Elsevier, vol. 23(4), pages 477-488, July. [Downloadable!] (restricted)
  12. Kridel, Donald J & Sappington, David E M & Weisman, Dennis L, 1996. "The Effects of Incentive Regulation in the Telecommunications Industry: A Survey," Journal of Regulatory Economics, Springer, vol. 9(3), pages 269-306, May.
  13. Denny, Michael & Pinto, Cheryl, 1978. "An Aggregate Model with Multi-Product Technologies," Histoy of Economic Thought Chapters, in: Fuss, Melvyn & McFadden, Daniel (ed.), Production Economics: A Dual Approach to Theory and Applications, volume 2, chapter 9 McMaster University Archive for the History of Economic Thought. [Downloadable!]
  14. Edvardsen, Dag Fjeld & Forsund, Finn R., 2003. "International benchmarking of electricity distribution utilities," Resource and Energy Economics, Elsevier, vol. 25(4), pages 353-371, October. [Downloadable!] (restricted)
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  15. Jamasb, T. & Pollitt, M., 2001. "International Benchmarking and Yardstick Regulation: An Application to European Electricity Utilities," Cambridge Working Papers in Economics 0115, Faculty of Economics, University of Cambridge. [Downloadable!]
  16. Antonio Estache & MartÌn A. Rossi & Christian A. Ruzzier, 2004. "The Case for International Coordination of Electricity Regulation: Evidence from the Measurement of Efficiency in South America," Journal of Regulatory Economics, Springer, vol. 25(3), pages 271-295, 05. [Downloadable!]
    Other versions:
  17. Filippini, Massimo, 1996. "Economies of Scale and Utilization in the Swiss Electric Power Distribution Industry," Applied Economics, Taylor and Francis Journals, vol. 28(5), pages 543-50, May. [Downloadable!] (restricted)
  18. Ai, Chunrong & Sappington, David E M, 2002. "The Impact of State Incentive Regulation on the U.S. Telecommunications Industry," Journal of Regulatory Economics, Springer, vol. 22(2), pages 133-59, September. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jamasb, T. & Pollitt, M., 2007. "Incentive Regulation of Electricity Distribution Networks: Lessons of Experience from Britain," Cambridge Working Papers in Economics 0709, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  2. Astrid Cullmann & Hélène Crespo & Marie-Anne Plagnet, 2008. "International Benchmarking in Electricity Distribution: A Comparison of French and German Utilities," Discussion Papers of DIW Berlin 830, DIW Berlin, German Institute for Economic Research. [Downloadable!]
  3. Astrid Cullmann & Jürgen Apfelbeck & Christian von Hirschhausen, 2006. "Efficiency Analysis of East European Electricity Distribution in Transition: Legacy of the Past?," Discussion Papers of DIW Berlin 553, DIW Berlin, German Institute for Economic Research. [Downloadable!]
    Other versions:
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