Strategic Behaviour under Regulation Benchmarking

Liberalisation of generation and supply activities in the electricity sectors is often followed by regulatory reform of distribution networks. In order to improve the efficiency of distribution utilities, some regulators have adopted incentive regulation schemes that rely on performance benchmarking. Although regulation benchmarking can influence the �regulation game�, the subject has received limited attention. This paper discusses how strategic behaviour can result in inefficient behaviour by firms. We also present a survey of issues encountered by electricity regulators. We then use the Data Envelopment Analysis (DEA) method with US utility data to examine implications of selected cases of strategic behaviour. The results show that gaming can have significant effects on the measured performance and profitability of firms

A conditional full frontier approach for investigating the Averch-Johnson effect

This paper applies a probabilistic approach in order to develop conditional and unconditional Data Envelopment Analysis (DEA) models for the measurement of sectors’ input oriented technical and scale efficiency levels for a sample of 23 Greek manufacturing sectors. In order to capture the Averch and Johnson effect (A-J effect), we measure sectors’ efficiency levels conditioned on the number of companies competing within the sectors. Particularly, various DEA models have been applied alongside with bootstrap techniques in order to determine the effect of competition conditions on sectors’ inefficiency levels. Additionally, this study illustrates how the recent developments in efficiency analysis and statistical inference can be applied when evaluating the effect of regulations in an industry. The results reveal that sectors with fewer numbers of companies appear to have greater scale and technical inefficiencies due to the existence of the A-J effect.Averch-Johnson effect; Industry regulations; Manufacturing sectors; Nonparametric analysis

Reducing the Asymmetry of Information Through the comparison of the Relative Efficiency of Several Regional Monopolies

Following the process initiated by Chile in the early 1980s, most countries in South America have undergone deep transformations in their electric industries. In this new playing field, the comparison of the relative efficiency of several regional monopolies seems to be a potentially valuable tool to reduce the asymmetry of information that is involved in the regulator-firm relationship. However, to be useful in the regulatory process, productive frontier estimates require a broad set of comparable firms and detailed information about them. This availability of data, although a necessary condition, is far from sufficient. One must also count on adequate techniques. In this paper we carry out an efficiency analysis in the electricity distribution sector in South America using different techniques, stating the conditions under which they become a useful tool in crafting an efficient regulation of the firms in that sector. Despite the particular results found here, the paper underscores the importance of conducting a consistency analysis whenever using efficiency measures in applied regulation.electric industries; efficiency; regional monopolies; asymmetry of information

Productivity and Efficiency of US Gas Transmission Companies: A European Regulatory Perspective

Keywords JEL Classification On both sides of the Atlantic the regulation of gas transmission networks has undergone major changes since the early 1990’s. Whereas in the US the long-standing regime of cost-plus regulation was complemented by increasing pipe-to-pipe competition, most European countries moved towards incentive regulation complemented by market integration. We study the impact of US regulatory reform using a Malmquist-based productivity analysis for a panel of US interstate companies. Results are presented for changes in productivity, as well as for several convergence tests. The results indicate that taking productivity and convergence as performance indicators, regulation has been rather successful, in particular during a period where overall demand was flat. Lessons for European regulators are twofold. First, the US analysis shows that benchmarking of European transmission operators would be possible if data were available. Second, our results suggest that, in the long-run, market integration and competition are alternatives to the current European model. Natural gas transmission; utility regulation; data envelopment analysis; total factor productivity; convergenc

The case for international coordination of electricity regulation : evidence from the measurement of efficiency in South America

A decade long experience shows that monitoring the performance of public and private monopolies in South America is proving to be the hard part of the reform process. The operators who control most of the information needed for regulatory purposes have little interest in volunteering their dissemination unless they have an incentive to do so. The authors argue that, in spite of, and maybe because of, a much weaker information base and governance structure, South America's electricity sector could pursue an approach that relies on performance rankings based on comparative efficiency measures. The authors show that with the rather modest data currently available publicly, such an approach could yield useful results. They provide estimates of efficiency levels in South America's main distribution companies between 1994 and 2000. Moreover, the authors show how relatively simple tests can be used by regulators to check the robustness of their results and strengthen their position at regulatory hearings.Economic Theory&Research,Environmental Economics&Policies,Enterprise Development&Reform,Labor Policies,Health Monitoring&Evaluation,Environmental Economics&Policies,Economic Theory&Research,Geographical Information Systems,Health Monitoring&Evaluation,Educational Technology and Distance Education

Quality of Service, Efficiency and Scale in Network Industries: An analysis of European electricity distribution

Quality of service is of major economic significance in natural monopoly infrastructure industries but is generally not reflected in efficiency analysis. 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. 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

Comparison of Frontier Efficiency Methods: An Application to the U.S. Life Insurance Industry

The objective of this paper is to provide new information on the performance of efficiency estimation methods by applying a wide range of econometric and mathematical programming techniques to a sample of U.S. life insurers. Average efficiencies differ significantly across methods. The efficiency rankings are well-preserved among the econometric methods; but the rankings are less consistent between the econometric and mathematical programming methods and between the data envelopment analysis and free disposal hull techniques. Thus, the choice of estimation method can have a significant effect on the conclusions of an efficiency study. Most of the insurers in the sample display either increasing or decreasing returns to scale, and stock and mutual insurers are found to be equally efficient after controlling for firm size. Key words: Efficiency estimation, stochastic frontiers, data envelopment analysis, free disposal hull, life insurance industry, organizational form.

The Use of Parametric and Non Parametric Frontier Methods to Measure the Productive Efficiency in the Industrial Sector. A Comparative Study

Parametric frontier models and non-parametric methods have monopolised the recent literature on productive efficiency measurement. Empirical applications have usually dealt with either one or the other group of techniques. This paper applies a range of both types of approaches to an industrial organisation setup. The joint use can improve the accuracy of both, although some methodological difficulties can arise. The robustness of different methods in ranking productive units allows us to make an comparative analysis of them. Empirical results concern productive and market demand structure, returns-to-scale, and productive inefficiency sources. The techniques are illustrated using data from the US electric power industry.Productive efficiency; parametric frontiers; DEA; industrial sector

A Benchmarking Exercise on Latin American Water Util

The aim of this study is to estimate both stochastic and mathematical programming cost functions and frontier studies with the ADERASA’s database. ADERASA is a Latin American association of water regulators, which has done a systematic effort on data collection. Econometric and DEA techniques were employed here. This study fills a gap on the understanding of relative efficiency in the Latin American water sector., through a consistent database. Firstly we present a survey of the empirical literature related with cost and production frontiers in the water and sanitation sector. The survey shed light in order to determine the variables to choose in the models to be estimated. Secondly, some models were estimated, differing each other on the specification, and the environmental variables included. The results are satisfactory, with the expected signs and plausible values for the coefficients. Some consistency between methodologies was found.Benchmarking; cost functions; frontier; stochastic model; ADERASA

DEA-Based Incentive Regimes in Health-Care Provision

A major challenge to legislators, insurance providers and municipalities will be how to manage the reimbursement of health-care on partially open markets under increasing fiscal pressure and an aging population. Although efficiency theoretically can be obtained by private solutions using fixed-payment schemes, the informational rents and production distortions may limit their implementation. The healthcare agency problem is characterized by (i) a complex multi-input multi-output technology, (ii) information uncertainty and asymmetry, and (iii) fuzzy social preferences. First, the technology, inherently nonlinear and with externalities between factors, yield parametric estimation difficult. However, the flexible production structure in Data Envelopment Analysis (DEA) offers a solution that allows for the gradual and successive refinement of potentially nonconvex technologies. Second, the information structure of healthcare suggests a context of considerable asymmetric information and considerable uncertainty about the underlying technology, but limited uncertainty or noise in the registration of the outcome. Again, we shall argue that the DEA dynamic yardsticks (Bogetoft, 1994, 1997, Agrell and Bogetoft, 2001) are suitable for such contexts. A third important characteristic of the health sector is the somewhat fuzzy social priorities and the numerous potential conflicts between the stakeholders in the health system. Social preferences are likely dynamic and contingent on the disclosed information. Similarly, there are several potential hidden action (moral hazard) and hidden information (adverse selection) conflicts between the different agents in the health system. The flexible and transparent response to preferential ambiguity is one of the strongest justifications for a DEA-approach. DEA yardstick regimes have been successfully implemented in other sectors (electricity distribution) and we present an operalization of the power-parameter p in an pseudo-competitive setting that both limits the informational rents and incites the truthful revelation of information. Recent work (Agrell and Bogetoft, 2002) on strategic implementation of DEA yardsticks is commented in the healthcare context, where social priorities change the tradeoff between the motivation and coordination functions of the yardstick. The paper is closed with policy recommendations and some areas of further work.Data Envelopment Analysis, regulation, health care systems, efficiency, Health Economics and Policy,