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Impact of High-Powered Incentive Regulations on Efficiency and Productivity Growth of Norwegian Electricity Utilities

Abstract:
This study examines the hypothesis that changes to high-powered incentive regulations have a positive efficiency and productivity growth effects in a regulated electricity distribution industry. We estimate an input distance function using the stochastic frontier analysis method to compute technical efficiency scores for 121 Norwegian utilities over the period 2004-2012. We explore sources of productivity growth by parametrically decomposing the Malmquist productivity index into efficiency change, technical change, and scale change. Unlike previous studies, we examine the difference in performance across two regulatory regimes: yardstick competition (2007-2012) and RPI-X incentive regulation (2004-2006). Results show significant efficiency and productivity growth improvements with embodied technical change as the main driver.Keywords: Yardstick competition, Productivity growth, Efficiency, Input distance function, Stochastic frontier analysis, Electricity distribution, True fixed effects model

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Energy Specializations: Electricity – Policy and Regulation; Energy Efficiency –  Policy Issues; Electricity – Distributed Generation

JEL Codes: Q41: Energy: Demand and Supply; Prices, D24: Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity, Q40: Energy: General, Q56: Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth, L98: Industry Studies: Utilities and Transportation: Government Policy, D22: Firm Behavior: Empirical Analysis

Keywords: Yardstick competition, Productivity growth, Efficiency, Input distance function, Stochastic frontier analysis, Electricity distribution, True fixed effects model

DOI: 10.5547/01956574.39.5.lsen

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Published in Volume 39, Number 5 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.