Stochastic semi-nonparametric frontier estimation of electricity distribution networks: Application of the StoNED method in the Finnish regulatory model

Timo Kuosmanen

Energy Economics, 2012, vol. 34, issue 6, 2189-2199

Abstract: Electricity distribution network is a prime example of a natural local monopoly. In many countries, electricity distribution is regulated by the government. Many regulators apply frontier estimation techniques such as data envelopment analysis (DEA) or stochastic frontier analysis (SFA) as an integral part of their regulatory framework. While more advanced methods that combine nonparametric frontier with stochastic error term are known in the literature, in practice, regulators continue to apply simplistic methods. This paper reports the main results of the project commissioned by the Finnish regulator for further development of the cost frontier estimation in their regulatory framework. The key objectives of the project were to integrate a stochastic SFA-style noise term to the nonparametric, axiomatic DEA-style cost frontier, and to take the heterogeneity of firms and their operating environments better into account. To achieve these objectives, a new method called stochastic nonparametric envelopment of data (StoNED) was examined. Based on the insights and experiences gained in the empirical analysis using the real data of the regulated networks, the Finnish regulator adopted the StoNED method in use from 2012 onwards.

Keywords: Energy markets; Heterogeneity; Nonparametric production analysis; Productive efficiency (search for similar items in EconPapers)
JEL-codes: C14 D24 L52 L94 Q48 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (77)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:34:y:2012:i:6:p:2189-2199

DOI: 10.1016/j.eneco.2012.03.005

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