Efficiency Effects of Quality of Service and Environmental Factors: Experience from Norwegian Electricity Distribution

Since the 1990s, efficiency and benchmarking analysis has increasingly been used in network utilities research and regulation. A recurrent concern is the effect of environmental factors that are beyond the influence of firms (observable heterogeneity) and factors that are not identifiable (unobserved heterogeneity) on measured cost and quality performance of firms. This paper analyses the effect of geographic and weather factors and unobserved heterogeneity on a set of 128 Norwegian electricity distribution utilities for the 2001-2004 period. We utilize data on almost 100 geographic and weather variables to identify real economic inefficiency while controlling for observable and unobserved heterogeneity. We use the factor analysis technique to reduce the number of environmental factors into few composite variables and to avoid the problem of multi-collinearity. We then estimate the established stochastic frontier models of Battese and Coelli (1992; 1995) and the recent true fixed effects models of Greene (2004; 2005) without and with environmental variables. In the former models some composite environmental variables have a significant effect on the performance of utilities. These effects vanish in the true fixed effects models. However, the latter models capture the entire unobserved heterogeneity and therefore show significantly higher average efficiency scores

Using Supervised Environmental Composites in Production and Efficiency Analyses: An Application to Norwegian Electricity Networks

Although supervised dimension reduction methods have been extensively applied in different scientific fields, they have hardly ever been used in production economics. Nonetheless, these methods can also be useful in regulation of natural monopolies, where firms’ cost and performance are affected by a large number of environmental factors. As economic theory suggests, at the presence of other relevant production or cost drivers, the traditional all-inclusive assumption is not satisfied. This paper shows that purging the data allows us to address this issue when analyzing the effect of weather and geography on efficiency in the context of the Norwegian electricity distribution networks

Welfare effects of unbundling under different regulatory regimes in natural gas markets

In this paper, we develop a theoretical model that enriches the literature on the pros and cons of ownership unbundling vis-a`-vis lighter unbundling frameworks in the natural gas markets. For each regulatory framework, we compute equilibrium outcomes when an incumbent firm and a new entrant compete a` la Cournot in the final gas market. We find that the entrant’s contracting conditions in the upstream market and the transmission tariff are key determinants of the market structure in the downstream gas market (both with ownership and with legal unbundling). We also study how the regulator must optimally set transmission tariffs in each of the two unbundling regimes. We conclude that welfare maximizing tariffs often require free access to the transmission network (in both regulatoy regimes). However, when the regulator aims at promoting the break-even of the regulated transmission system operator, the first-best tariff is unfeasible in both regimes. Hence, we study a more realistic set-up, in which the regulator’s action is constrained by the break-even of the regulated firm (the transmission system operator). In this set-up, we find that, for a given transmission tariff, final prices in the downstream market are always higher with ownership unbundling than with legal unbundling.info:eu-repo/semantics/publishedVersio

Competition and Market Strategies in the Swiss Fixed Telephony Market. An estimation of Swisscom’s dynamic residual demand curve.

Fixed telephony has long been a fundamentally important market for European telecommunications operators. The liberalisation and the introduction of regulation in the end of the 1990s, however, allowed new entrants to compete with incumbents at the retail level. A rapid price decline and a decline in revenues followed. Increased retail competition consequently led a number of national regulators to deregulate this market. In 2013, however, many European countries (including Switzerland) continued to have partially binding retail price regulation. More than a decade after liberalisation and the introduction of wholesale and retail price regulation, sufficient data is available to empirically measure the success of regulation and assess its continued necessity. This paper develops a market model based on a generalised version of the traditional “dominant firm – competitive fringe” model allowing the incumbent also more competitive conduct than that of a dominant firm. A system of simultaneous equations is developed and direct estimation of the incumbent‟s residual demand function is performed by instrumenting the market price by incumbent-specific cost shifting variables as well as other variables. Unlike earlier papers that assess market power in this market, this paper also adjusts the market model to ensure a sufficient level of cointegration and avoid spurious regression results. This necessitates introducing intertemporal effects. While the incumbent's conduct cannot be directly estimated using this framework, the concrete estimates show that residual demand is inelastic (long run price elasticity of residual demand of -0.12). Such a level of elasticity is, however, only compatible with a profit maximising incumbent in the case of largely competitive conduct (conduct parameter below 0.12 and therefore close to zero). It is therefore found that the Swiss incumbent acted rather competitively in the fixed telephony retail market in the period under review (2004-2012) and that (partial) retail price caps in place can no longer be justified on the basis of a lack of competition