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Testing for cross-subsidisation in the combined heat and power generation sector: A comparison of three tests

  • Amundsen, Eirik S.
  • Andersen, Per
  • Jensen, Frank

In this paper we examine cross-subsidisation among combined heat and power producers in Denmark. Information on stand-alone costs for heat generation allows us to empirically compare the Faulhaber tests, tests with an upper bound on stand-alone costs (the Palmer tests) and the fully distributed cost test (FDC). All tests indicate a substantial amount of cross-subsidisation from heat generation to power generation. It is shown that the FDC test is closer to that of the Faulhaber tests in its results than the Palmer tests. Thus as the Faulhaber tests are considered in the literature to be the theoretically correct tests, the FDC test is shown to be the best approximation for tests of cross-subsidisation for this specific sector.

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Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 33 (2011)
Issue (Month): 5 (September)
Pages: 750-757

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Handle: RePEc:eee:eneeco:v:33:y:2011:i:5:p:750-757
Contact details of provider: Web page: http://www.elsevier.com/locate/eneco

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  1. Palmer, Karen, 1991. "Using an upper bound on stand-alone cost in tests of cross subsidy," Economics Letters, Elsevier, vol. 35(4), pages 457-460, April.
  2. Faulhaber, Gerald R, 1975. "Cross-Subsidization: Pricing in Public Enterprises," American Economic Review, American Economic Association, vol. 65(5), pages 966-77, December.
  3. Brennan, Timothy J, 1990. "Cross-Subsidization and Cost Misallocation by Regulated Monopolists," Journal of Regulatory Economics, Springer, vol. 2(1), pages 37-51, March.
  4. Kenneth C. Baseman, 1981. "Open Entry and Cross-Subsidization in Regulated Markets," NBER Chapters, in: Studies in Public Regulation, pages 329-370 National Bureau of Economic Research, Inc.
  5. Jorg Borrmann & Klaus Zauner, 2004. "Cross-subsidization when Firms Are Allowed to make Non-zero Profits," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 11(2), pages 241-247.
  6. Daniel F. Spulber, 1989. "Regulation and Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262192756, June.
  7. Nils-Henrik M. von der Fehr, Eirik S. Amundsen and Lars Bergman, 2005. "The Nordic Market: Signs of Stress?," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 71-98.
  8. Amundsen, Eirik S. & Bergman, Lars, 2006. "Why has the Nordic electricity market worked so well?," Utilities Policy, Elsevier, vol. 14(3), pages 148-157, September.
  9. Lindsay, Cotton M, 1976. "A Theory of Government Enterprise," Journal of Political Economy, University of Chicago Press, vol. 84(5), pages 1061-77, October.
  10. Sherman, Roger, 1983. "Pricing behavior of the budget-constrained public enterprise," Journal of Economic Behavior & Organization, Elsevier, vol. 4(4), pages 381-393, December.
  11. Bogetoft, Peter & Nielsen, Kurt, 2008. "DEA based auctions," European Journal of Operational Research, Elsevier, vol. 184(2), pages 685-700, January.
  12. Eirik S. Amundsen & Lars Bergman, 2002. "Will Cross-Ownership Re-Establish Market Power in the Nordic Power Market?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 73-95.
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