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The low cost of quality improvements in the electricity distribution sector of Brazil

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  • Corton, Maria Luisa
  • Zimmermann, Aneliese
  • Phillips, Michelle Andrea

Abstract

We analyze the impact of introducing output-based incentives in the price-cap regulatory regime of the Brazilian electricity distribution sector. We focus on the trade-off between operating costs and quality improvement, hypothesizing a positive relationship. Operating costs include maintenance and repair expenses. The regulator sets limits for service continuity and non-technical energy losses in each regulatory period. Service continuity refers to the average length of interruptions in electricity distribution. Non-technical losses refer to losses due to factors specific to the distribution segment. Quality incentives include peer-pressure and penalties/rewards for compliance with minimum quality standards. We model operating costs using a GMM framework to acknowledge endogeneity of variables. The model is dynamic given the inclusion of regulatory lags to recognize past cost behavior. Findings reveal a small trade-off between costs and quality. We conclude that quality improvements are not costly relative to the potential savings from complying with quality standards. We also find that the impact on operating costs is larger when energy losses increase compared to the cost effect due to increases in duration of outages. These findings suggest areas of attention in managerial decision making, and serve as valuable information to the regulator in tailoring quality incentives for this sector.

Suggested Citation

  • Corton, Maria Luisa & Zimmermann, Aneliese & Phillips, Michelle Andrea, 2016. "The low cost of quality improvements in the electricity distribution sector of Brazil," Energy Policy, Elsevier, vol. 97(C), pages 485-493.
  • Handle: RePEc:eee:enepol:v:97:y:2016:i:c:p:485-493
    DOI: 10.1016/j.enpol.2016.07.052
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    References listed on IDEAS

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    Cited by:

    1. Daniel de Abreu Pereira Uhr & Júlia Gallego Ziero Uhr, André Luis Squarize Chagas, 2017. "Estimation of price and income elasticities for the Brazilian household electricity demand," Working Papers, Department of Economics 2017_12, University of São Paulo (FEA-USP).

    More about this item

    Keywords

    Quality regulation; Stakeholder feedback; Dynamic cost model; GMM estimation;

    JEL classification:

    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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