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Estimating Marginal Cost of Quality Improvements: The Case of the UK Electricity Distribution Companies

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

The main aim of this paper is to develop an econometric approach to estimation of marginal costs of improving quality of service. We implement this methodology by way of applying it to the case of the UK electricity distribution networks. The estimated marginal costs allow us to shed light on the effectiveness of the current UK incentive regulation to improve quality, and to derive optimal quality levels and welfare losses due to sub-optimal quality levels. The proposed method also allows us to measure the welfare effect of the observed quality improvements in the UK between 1995 and 2003. Our results suggest that while the incentive schemes established by the regulator to encourage utilities to reduce network energy losses leads to improvement in sector performance, they do not provide utilities with sufficient incentives to avoid power interruptions. We find that the observed improvements in quality during the period of this study only represented 30% of the potential customer welfare gains, and hence there was still significant scope for quality improvements.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe1052.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1052.

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Date of creation: 01 Oct 2010
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Handle: RePEc:cam:camdae:1052
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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