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Unobserved heterogeneous effects in the cost efficiency analysis of electricity distribution systems

Author

Listed:
  • AGRELL, Per

    () (Université catholique de Louvain, CORE and Louvain School of Management, Belgium)

  • FARSI, Mehdi

    (University of Neuchatel)

  • FILIPPINI, Massimo

    () (ETH Zurich and University of Lugano)

  • KOLLER, Martin

    (ETH Zurich)

Abstract

The purpose of this study is to analyze the cost efficiency of electricity distribution systems in order to enable regulatory authorities to establish price- or revenue cap regulation regimes. The increasing use of efficiency analysis in the last decades has raised serious concerns among regulators and companies regarding the reliability of efficiency estimates. One important dimension affecting the reliability is the presence of unobserved factors. Since these factors are treated differently in various models, the resulting estimates can vary across methods. Therefore, we decompose the benchmarking process into two steps. In the first step, we identify classes of similar companies with comparable network and structural characteristics using a latent class cost model. We obtain cost best practice within each class in the second step, based on deterministic and stochastic cost frontier models. The results of this analysis show that the decomposition of the benchmarking process into two steps has reduced unobserved heterogeneity within classes and, hence, reduced the unexplained variance previously claimed as inefficiency.

Suggested Citation

  • AGRELL, Per & FARSI, Mehdi & FILIPPINI, Massimo & KOLLER, Martin, 2013. "Unobserved heterogeneous effects in the cost efficiency analysis of electricity distribution systems," CORE Discussion Papers 2013003, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2013003
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Massimo Filippini & Luis Orea, 2014. "Applications of the stochastic frontier approach in Energy Economics," Economics and Business Letters, Oviedo University Press, vol. 3(1), pages 35-42.
    2. repec:eee:enepol:v:108:y:2017:i:c:p:606-616 is not listed on IDEAS
    3. Haney, Aoife Brophy & Pollitt, Michael G., 2013. "International benchmarking of electricity transmission by regulators: A contrast between theory and practice?," Energy Policy, Elsevier, vol. 62(C), pages 267-281.
    4. Agrell, P & Brea-Solís, H., 2015. "Stationarity of Heterogeneity in Production Technology using Latent Class Modelling," CORE Discussion Papers 2015047, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Llorca, Manuel & Orea, Luis & Pollitt, Michael G., 2014. "Using the latent class approach to cluster firms in benchmarking: An application to the US electricity transmission industry," Operations Research Perspectives, Elsevier, vol. 1(1), pages 6-17.
    6. Llorca, Manuel & Orea, Luis & Pollit, Michael G., 2013. "Using in the latent class approach as a supervised method to cluster firms in DEA: An application to the US electricity transmission industry," Efficiency Series Papers 2013/03, University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG).

    More about this item

    Keywords

    efficiency analysis; cost function; electricity sector; incentive regulation;

    JEL classification:

    • L92 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Railroads and Other Surface Transportation
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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