Benchmarking Heterogeneous Distribution System Operators: Evidence from Norway

George Elias

Diskussionsschriften from Universitaet Bern, Departement Volkswirtschaft

Abstract: Regulatory authorities in the European electricity sector use benchmarking techniques to determine the cost-e_cient production level for an incentive regulation of distribution system operators (DSOs). With nearly 900 DSOs operating in the German electricity sector, of which 200 subject to incentive regulation, the issue of heterogeneity of DSOs has to be addressed. Using publicly available data of 133 Norwegian DSOs and replicating the model employed by the German regulator (who refuses access to the data), I show its assumption of homogeneous technology cannot be maintained. Quantile regressions (QR) across the cost distribution reveal heterogeneity in the coe_cients of the explanatory variables, resulting in biased e_ciency scores derived from stochastic frontier analysis. To correct for this heterogeneity in coe_cients, I propose a Bayesian estimation of a more flexible SFA with latent classes for selected parameters that reflect variation in technologies. This estimation has better goodness of fit, reduced variance of all coe_cients, and higher e_ciency scores for nearly all DSOs, compared to the conventional alternative.

Keywords: E_ciency measurement; cost function; incentive regulation; electricity sector (search for similar items in EconPapers)
JEL-codes: C11 C21 D24 L94 (search for similar items in EconPapers)
Date: 2016-03
New Economics Papers: this item is included in nep-eff, nep-ene, nep-eur, nep-ore and nep-reg
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