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Quality of Service, Efficiency, and Scale in Network Industries: An Analysis of European Electricity Distribution

Christian Growitsch (), Tooraj Jamasb () and Michael Pollitt ()

No 3/2005, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: Quality of service is of major economic significance in natural monopoly infrastructure industries and is increasingly addressed in regulatory schemes. However, this important aspect is generally not reflected in efficiency analysis of these industries. In this paper we present an efficiency analysis of electricity distribution networks using a sample of about 500 electricity distribution utilities from seven European countries. We apply the stochastic frontier analysis (SFA) method on multi-output translog input distance function models to estimate cost and scale efficiency with and without incorporating quality of service. We show that introducing the quality dimension into the analysis affects estimated efficiency significantly. In contrast to previous research, smaller utilities seem to indicate lower technical efficiency when incorporating quality. We also show that incorporating quality of service does not alter scale economy measures. Our results emphasise that quality of service should be an integrated part of efficiency analysis and incentive regulation regimes, as well as in the economic review of market concentration in regulated natural monopolies.

Keywords: efficiency; quality of service; scale economies; input distance function; stochastic frontier analysis (search for similar items in EconPapers)
JEL-codes: L94 L51 L15 (search for similar items in EconPapers)
Date: 2005
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Related works:
Journal Article: Quality of service, efficiency and scale in network industries: an analysis of European electricity distribution (2009) Downloads
Working Paper: Quality of Service, Efficiency and Scale in Network Industries: An analysis of European electricity distribution (2005) Downloads
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