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

Tooraj Jamasb, Luis Orea and Michael Pollitt

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

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.

Keywords: Electricity distribution cost; marginal cost; quality service; and social welfare (search for similar items in EconPapers)
JEL-codes: L51 L94 (search for similar items in EconPapers)
Date: 2010-10-01
New Economics Papers: this item is included in nep-ene and nep-reg
References: View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Estimating the marginal cost of quality improvements: The case of the UK electricity distribution companies (2012)
Working Paper: Estimating Marginal Cost of Quality Improvements: The Case of the UK Electricity Distribution Companies (2010)
Working Paper: Estimating Marginal Cost of Quality Improvements: The Case of the UK Electricity Distribution Companies (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1052

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