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

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

Abstract

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.

Suggested Citation

  • Jamasb, T. & Orea, L. & Pollitt, M.G., 2010. "Estimating Marginal Cost of Quality Improvements: The Case of the UK Electricity Distribution Companies," Cambridge Working Papers in Economics 1052, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:1052
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    References listed on IDEAS

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    1. Guldmann, Jean-Michel, 1985. "A disaggregate econometric analysis of electricity distribution capital costs," Energy, Elsevier, vol. 10(5), pages 601-612.
    2. Plümper, Thomas & Troeger, Vera E., 2007. "Efficient Estimation of Time-Invariant and Rarely Changing Variables in Finite Sample Panel Analyses with Unit Fixed Effects," Political Analysis, Cambridge University Press, vol. 15(02), pages 124-139, March.
    3. Massimo Filippini, 1998. "Are Municipal Electricity Distribution Utilities Natural Monopolies?," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 69(2), pages 157-174, June.
    4. 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.
    5. 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.
    6. David Sappington, 2005. "Regulating Service Quality: A Survey," Journal of Regulatory Economics, Springer, vol. 27(2), pages 123-154, November.
    7. 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.
    8. 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.
    9. Ajodhia, Virendra & Hakvoort, Rudi, 2005. "Economic regulation of quality in electricity distribution networks," Utilities Policy, Elsevier, vol. 13(3), pages 211-221, September.
    10. 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.
    11. Kjell G. Salvanes & Sigve Tjøtta, 1998. "A Test for Natural Monopoly with Application to Norwegian Electricity Distribution," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 13(6), pages 669-685, December.
    12. 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.
    13. Jamasb, T. & Pollitt, M., 2000. "Benchmarking and regulation: international electricity experience," Utilities Policy, Elsevier, vol. 9(3), pages 107-130, September.
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    Cited by:

    1. Tim Coelli & Axel Gautier & Sergio Perelman & Roxana Saplacan-Pop, 2012. "Estimating the cost of improving quality in electric distribution: a parametruc distance function approach," CREPP Working Papers 1202, Centre de Recherche en Economie Publique et de la Population (CREPP) (Research Center on Public and Population Economics) HEC-Management School, University of Liège.
    2. Coelli, Tim J. & Gautier, Axel & Perelman, Sergio & Saplacan-Pop, Roxana, 2013. "Estimating the cost of improving quality in electricity distribution: A parametric distance function approach," Energy Policy, Elsevier, vol. 53(C), pages 287-297.
    3. repec:cam:camdae:1324 is not listed on IDEAS
    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; marginal cost; quality service; and social welfare;

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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