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Weather Factors and Performance of Network Utilities: A Methodology and Application to Electricity Distribution

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  • Jamasb, T.
  • Orea, L.
  • Pollitt, M.G.

Abstract

Incentive regulation and efficiency analysis of network utilities often need to take the effect of important external factors, such as the weather conditions, into account. This paper presents a method for estimating the effect of weather conditions on the costs of electricity distribution networks using parametric techniques. It examines whether the use of popular statistical variable reduction techniques is conceptually and econometrically sound for analyzing the effect of weather on the network costs. In this paper we estimate cost functions with the whole set of weather variables, identifying, when necessary, a subset of variables that can accurately reflect the effects of weather conditions. We show that weather conditions significantly affect distribution costs and the absence of weather variables has a downward biased impact on the effect of quality on costs. Also, the performance of statistical weather composites to capture this effect is poor. Finally, we show that there is a distinction between the effects of persistent and time varying weather conditions.

Suggested Citation

  • Jamasb, T. & Orea, L. & Pollitt, M.G., 2010. "Weather Factors and Performance of Network Utilities: A Methodology and Application to Electricity Distribution," Cambridge Working Papers in Economics 1042, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:1042
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    1. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    2. 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.
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    8. P. Nillesen & M. Pollitt, 2010. "Using Regulatory Benchmarking Techniques to Set Company Performance Targets: The Case of Us Electricity," Competition and Regulation in Network Industries, Intersentia, pages 50-85.
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    11. 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.
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    Cited by:

    1. Andaluz-Alcazar, Alvaro, 2012. "Choix d'investissement sous incertitude des gestionnaires des réseaux de distribution (GRD) en Europe à l'horizon 2030," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/10862 edited by Keppler, Jan Horst, March.
    2. Karim L. Anaya & Michael G. Pollitt, 2014. "Does Weather Have an Impact on Electricity Distribution Efficiency? Evidence from South America," Cambridge Working Papers in Economics 1424, Faculty of Economics, University of Cambridge.
    3. Greene, William & Orea, Luis & Wall, Alan, 2011. "A one-stage random effect counterpart of the fixed-effect vector decomposition model with an application to UK electricity distribution utilities," Efficiency Series Papers 2011/01, University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG).
    4. Rahmatallah Poudineh & Tooraj Jamasb, 2013. "Investment and Efficiency under Incentive Regulation: The Case of the Norwegian Electricity Distribution Networks," Cambridge Working Papers in Economics 1310, Faculty of Economics, University of Cambridge.

    More about this item

    Keywords

    Electricity distribution cost; separability; weather composites; instrumental variable estimator;

    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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