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Yardstick Regulation of Electricity Distribution – Disentangling Short-run and Long-run Inefficiencies

Abstract:
In this paper we estimate the short-run, long-run and overall efficiency of Norwegian electricity distribution companies for the period 2000-2013 controlling for both noise and company effects. Short-run inefficiency is the part of inefficiency that is allowed to adjust freely over time for each company, but long-run (persistent) inefficiency remains constant over time, although it is allowed to vary across companies. For robustness check we also consider two additional models in which either company effects are not controlled or these are treated as inefficiency. The production technology is represented by a translog input distance function in all three models. We find that technical change and returns to scale are quite robust across the models. However, the efficiency scores across the three models we consider are not correlated strongly. We conclude that the regulators and practitioners should take extra caution in using the proper model in practice, especially when the efficiency measures are used to reward/punish companies through incentives for better performance.

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Keywords: Short-run efficiency, Long-run efficiency, Returns to scale, Technical change, Input distance function, Electricity distribution

DOI: https://doi.org/10.5547/01956574.38.5.skum

References: View References


Published in Volume 38, Number 5 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.