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Benchmarking and Regulation in the Electricity Distribution Sector

  • Mehdi Farsi

    ()

    (Center for Energy Policy and Economics CEPE, Department of Management, Technology and Economics, ETH Zurich, Switzerland)

  • Aurelio Fetz

    ()

    (Center for Energy Policy and Economics CEPE, Department of Management, Technology and Economics, ETH Zurich, Switzerland)

  • Massimo Filippini

    ()

    (Center for Energy Policy and Economics CEPE, Department of Management, Technology and Economics, ETH Zurich, Switzerland)

In the last two decades electricity distribution sector have witnessed a wave of regulatory reforms aimed at improving efficiency through incentive regulation. Most of these regulation schemes use benchmarking namely measuring a company’s efficiency and rewarding them accordingly. The reliability of efficiency estimates is crucial for an effective implementation of those incentive mechanisms. A main problem faced by the regulators is the choice among several legitimate benchmarking models that usually produce different results. After a brief overview of the benchmarking methodologies, this paper summarizes the methods used in the regulation practice in several OECD countries, in which the benchmarking practice is relatively widespread. Repeated observation of similar companies over time namely panel data, allows a better understanding of unobserved firm-specific factors and disentangling them from efficiency estimates. Focusing on parametric cost frontier models, this paper presents two alternative approaches that could be used to improve the reliability of benchmarking methods, and based on recent empirical evidence, draws some recommendations for regulatory practice in power distribution networks.

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Paper provided by CEPE Center for Energy Policy and Economics, ETH Zurich in its series CEPE Working paper series with number 07-54.

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Length: 25 pages
Date of creation: Jan 2007
Date of revision:
Handle: RePEc:cee:wpcepe:07-54
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