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Investment and Efficiency under Incentive Regulation: The Case of the Norwegian Electricity Distribution Networks

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  • Rahmatallah Poudineh
  • Tooraj Jamasb

Abstract

Following the liberalisation of the electricity industry since the early 1990s, many sector regulators have recognised the potential for cost efficiency improvement in the networks through incentive regulation aided by benchmarking and productivity analysis. This approach has often resulted in cost efficiency and quality of service improvement. However, there remains a growing concern as to whether the utilities invest sufficiently and efficiently in maintaining and modernising the networks to ensure long term reliability and also to meet future challenges of the grid. This paper analyses the relationship between investments and cost efficiency in the context of incentive regulation with ex-post regulatory treatment of investments using a panel dataset of 126 Norwegian distribution companies from 2004 to 2010. We introduce the concept of “no impact efficiency” as a revenue-neutral efficiency effect of investment under incentive regulation which makes a firm “investment efficient” in cost benchmarking practice. Also, we estimate the observed efficiency effect of investments in order to compare with no impact efficiency and discuss the implication of cost benchmarking for investment behaviour of network companies.

Suggested Citation

  • 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.
  • Handle: RePEc:cam:camdae:1310
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    References listed on IDEAS

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    1. Christian Growitsch & Tooraj Jamasb & Michael Pollitt, 2009. "Quality of service, efficiency and scale in network industries: an analysis of European electricity distribution," Applied Economics, Taylor & Francis Journals, vol. 41(20), pages 2555-2570.
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    Citations

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    Cited by:

    1. Cullmann, Astrid & Nieswand, Maria, 2016. "Regulation and investment incentives in electricity distribution: An empirical assessment," Energy Economics, Elsevier, vol. 57(C), pages 192-203.
    2. Michael Schmidthaler & Jed Cohen & Johannes Reichl & Stefan Schmidinger, 2015. "The effects of network regulation on electricity supply security: a European analysis," Journal of Regulatory Economics, Springer, vol. 48(3), pages 285-316, December.
    3. Astrid Cullmann & Maria Nieswand, 2015. "Regulierung und Investitionen in der leitungsgebundenen Energieversorgung," DIW Roundup: Politik im Fokus 54, DIW Berlin, German Institute for Economic Research.
    4. Anna Pechan, 2014. "Which Incentives Does Regulation Give to Adapt Network Infrastructure to Climate Change? - A German Case Study," Working Papers V-365-14, University of Oldenburg, Department of Economics, revised May 2014.
    5. Rahmatallah Poudineh & Grigorios Emvalomatis & Tooraj Jamasb, 2014. "Dynamic Efficiency and Incentive Regulation: An Application to Electricity Distribution Networks," Cambridge Working Papers in Economics 1422, Faculty of Economics, University of Cambridge.
    6. Cullmann, Astrid & Nieswand, Maria, 2015. "Regulation and Investment Incentives in Electricity Distribution," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113090, Verein für Socialpolitik / German Economic Association.
    7. Poudineh, Rahmatallah & Jamasb, Tooraj, 2016. "Determinants of investment under incentive regulation: The case of the Norwegian electricity distribution networks," Energy Economics, Elsevier, vol. 53(C), pages 193-202.
    8. repec:cam:camdae:1324 is not listed on IDEAS

    More about this item

    Keywords

    Investments; cost efficiency; incentive regulation; distribution network;

    JEL classification:

    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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