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

Tooraj Jamasb, Luis Orea () and Michael G. Pollit
Authors registered in the RePEc Author Service: Michael Gerald Pollitt ()

No 2010/03, Efficiency Series Papers from University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG)

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 a 30% of the potential customer welfare gains, and hence there is still a large range for quality improvements.

Keywords: Electricity distribution cost; marginal cost; quality service; social welfare (search for similar items in EconPapers)
JEL-codes: L51 L94 (search for similar items in EconPapers)
Date: 2010
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Related works:
Journal Article: Estimating the marginal cost of quality improvements: The case of the UK electricity distribution companies (2012) Downloads
Working Paper: Estimating Marginal Cost of Quality Improvements: The Case of the UK Electricity Distribution Companies (2010) Downloads
Working Paper: Estimating Marginal Cost of Quality Improvements: The Case of the UK Electricity Distribution Companies (2010) Downloads
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