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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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  1. 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.
  2. 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.
  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, 06.
  4. David Sappington, 2005. "Regulating Service Quality: A Survey," Journal of Regulatory Economics, Springer, vol. 27(2), pages 123-154, November.
  5. 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.
  6. Jamasb, T. & Pollitt, M., 2000. "Benchmarking and regulation: international electricity experience," Utilities Policy, Elsevier, vol. 9(3), pages 107-130, September.
  7. Jamasb, T. & Pollitt, M., 2007. "Incentive Regulation of Electricity Distribution Networks: Lessons of Experience from Britain," Cambridge Working Papers in Economics 0709, Faculty of Economics, University of Cambridge.
  8. 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.
  9. 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.
  10. Ajodhia, Virendra & Hakvoort, Rudi, 2005. "Economic regulation of quality in electricity distribution networks," Utilities Policy, Elsevier, vol. 13(3), pages 211-221, September.
  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.
  12. Guldmann, Jean-Michel, 1985. "A disaggregate econometric analysis of electricity distribution capital costs," Energy, Elsevier, vol. 10(5), pages 601-612.
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