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Willingness-to-Pay for Quality of Service: An Application to Efficiency Analysis of the UK Electricity Distribution Utilities

Efficiency analysis of electricity distribution networks is often limited to technical or cost efficiency measures. However, some important non-tradable aspects of their service such as quality of service and network energy losses are often not part of the analysis. Moreover, technical or cost efficiency should not be achieved at the expense of allocative and economic efficiency. Valuation of service quality for regulatory models is particularly difficult. This paper presents an empirical approach to measure and incorporate service quality and energy losses into the analysis of technical and allocative efficiency of the utilities. We apply our method to the case of the distribution networks in the UK between 1990/91 and 2003/04 using the data envelopment analysis technique. We find that the efficiency of the utilities improved during the first and second five-year distribution price control reviews but exhibited a slight decline during the third review period. We find relatively low allocative efficiency � i.e. a mismatch in allocating resources among expenditures, service quality, and network energy losses. The results suggest that currently the utilities may not be correctly incentivised to achieve socially optimal trade-offs between these.

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Energy Specializations: Electricity – Local Distribution; Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes:
D44 - Auctions
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Efficiency, Data Envelopment Analysis, electricity, quality of service, willingness-to-pay, UK

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-No4-1

Published in Volume 30, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.