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

Subal C. Kumbhakar and Gudbrand Lien

Year: 2017
Volume: Volume 38
Number: Number 5
DOI: https://doi.org/10.5547/01956574.38.5.skum
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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.



Disentangling Costs of Persistent and Transient Technical Inefficiency and Input Misallocation: The Case of Norwegian Electricity Distribution Firms

Subal C. Kumbhakar, Orjan Mydland, Andrew Musau, and Gudbrand Lien

Year: 2020
Volume: Volume 41
Number: Number 3
DOI: 10.5547/01956574.41.3.skum
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Abstract:
Numerous studies have focused on estimating technical inefficiency in electricity distribution firms. However, most of these studies did not distinguish between persistent and transient technical inefficiency. Furthermore, almost none of the studies estimated the cost of input misallocation arising from non-optimal use of inputs. One reason is that the cost function (input distance function) typically used in the literature does not allow for the separation of technical inefficiency and allocative inefficiency. In this study, we estimate both the persistent and transient components of technical inefficiency and input misallocation of Norwegian electricity distribution firms, using panel data from 2000 to 2016. Our modeling and estimation strategy is to use a system approach, consisting of the production function and the first-order conditions of cost minimization. Input misallocation for each pair of inputs is modeled via the first-order conditions of cost minimization. We also estimate the costs of each component of technical inefficiency and input misallocation by deriving the cost function for a multi-output separable production technology. Our modeling and estimation strategy handles endogeneity of inputs. Finally, we allow for inclusion of determinants of persistent and transient technical inefficiency. Our results show that the costs of input misallocation of Norwegian electricity distribution firms are non-negligible.



Riding the Nordic German Power-Spread: The Einar Aas Experiment

Christian-Oliver Ewald, Erik Haugom, Gudbrand Lien, Pengcheng Song, and Ståle Størdal

Year: 2022
Volume: Volume 43
Number: Number 5
DOI: 10.5547/01956574.43.5.cewa
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Abstract:
Inspired by the initial success and eventual failure of Einar Aas' trading strategy exploiting dynamical patterns in the spread between Nordic and German electricity futures, we investigate the question whether there is evidence for possible arbitrage from engaging in both markets simultaneously and the possibility of constructing a trading strategy that ultimately beats the markets. To do this, we first assess the risk premium and relevant Sharpe values for the two markets and observe significant differences. This is followed by a discussion as to how far the different risk premia and Sharpe values alone are evidence of arbitrage. The answer is, they are not. However, we then show that an intelligently chosen long-short strategy constructed in the Einar Aas spirit can generate a positive alpha in the CAPM sense, hence providing evidence of arbitrage.





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