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Estimating the marginal cost of quality improvements: The case of the UK electricity distribution companies

  • Jamasb, Tooraj
  • Orea, Luis
  • Pollitt, Michael

The main aim of this paper is to develop an econometric approach to the estimation of marginal costs of improving quality of service. Estimating marginal costs of quality can help energy regulators to design more effective incentive mechanisms for network utilities to achieve optimal quality levels and reduce welfare losses due to sub-optimal quality. We implement this methodology by way of applying it to the case of the UK electricity distribution networks. The proposed method allows us to measure the welfare effect of the observed quality improvements in the UK between 1995 and 2003. Our results suggest that the regulatory incentives to reduce service interruptions have not been strong enough to achieve economically efficient levels of service quality. We, find that the incentives to encourage utilities to reduce network energy losses have led to to performance improvement. We estimate that the observed improvements in quality during the period of the study only represented about 20% of the potential customer welfare gains, hence leaving considerable scope for further economically efficient improvements in service quality.

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Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 34 (2012)
Issue (Month): 5 ()
Pages: 1498-1506

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Handle: RePEc:eee:eneeco:v:34:y:2012:i:5:p:1498-1506
Contact details of provider: Web page: http://www.elsevier.com/locate/eneco

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  1. Massimo Filippini, 1998. "Are Municipal Electricity Distribution Utilities Natural Monopolies?," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 69(2), pages 157-174, 06.
  2. Joskow, P.L., 2006. "Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks," Cambridge Working Papers in Economics 0607, Faculty of Economics, University of Cambridge.
  3. William Yu & Tooraj Jamasb & Michael Pollitt, 2009. "Willingness-to-Pay for Quality of Service: An Application to Efficiency Analysis of the UK Electricity Distribution Utilities," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 1-48.
  4. 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.
  5. Guldmann, Jean-Michel, 1985. "A disaggregate econometric analysis of electricity distribution capital costs," Energy, Elsevier, vol. 10(5), pages 601-612.
  6. Jamasb, T. & Pollitt, M., 2000. "Benchmarking and regulation: international electricity experience," Utilities Policy, Elsevier, vol. 9(3), pages 107-130, September.
  7. A. Yatchew, 2000. "Scale economies in electricity distribution: a semiparametric analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(2), pages 187-210.
  8. Kjell G. Salvanes & Sigve Tjøtta, 1998. "A Test for Natural Monopoly with Application to Norwegian Electricity Distribution," Review of Industrial Organization, Springer, vol. 13(6), pages 669-685, December.
  9. Jamasb, Tooraj & Pollitt, Michael, 2007. "Incentive regulation of electricity distribution networks: Lessons of experience from Britain," Energy Policy, Elsevier, vol. 35(12), pages 6163-6187, December.
  10. Huang, Yi-Ju & Chen, Ku-Hsieh & Yang, Chih-Hai, 2010. "Cost efficiency and optimal scale of electricity distribution firms in Taiwan: An application of metafrontier analysis," Energy Economics, Elsevier, vol. 32(1), pages 15-23, January.
  11. Giannakis, Dimitrios & Jamasb, Tooraj & Pollitt, Michael, 2005. "Benchmarking and incentive regulation of quality of service: an application to the UK electricity distribution networks," Energy Policy, Elsevier, vol. 33(17), pages 2256-2271, November.
  12. Cronin, Frank J. & Motluk, Stephen A., 2007. "How Effective Are M&As in Distribution? Evaluating the Government's Policy of Using Mergers and Amalgamations to Drive Efficiencies into Ontario's LDCs," The Electricity Journal, Elsevier, vol. 20(3), pages 60-68, April.
  13. David Sappington, 2005. "Regulating Service Quality: A Survey," Journal of Regulatory Economics, Springer, vol. 27(2), pages 123-154, November.
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