A New Perspective: Investment and Efficiency under Incentive Regulation

Poudineh, R.; Jamasb, T.

Abstract

Following the liberalisation of the electricity industry since the early 1990s, many sector regulators have adopted incentive regulation aided by benchmarking and productivity analysis. This approach has often resulted in efficiency and quality of service improvement. However, there remains a growing concern as to whether the utilities invest sufficiently and efficiently in maintaining and modernising their networks. This paper studies the relationship between investments and cost efficiency in the context of incentive regulation with ex-post regulatory treatment of investments using a panel dataset of 129 Norwegian distribution companies from 2004 to 2010. We introduce the concept of "no impact efficiency" as a revenue-neutral efficiency effect of investment under incentive regulation that makes a firm "investment efficient" in cost benchmarking. Also, we estimate the observed efficiency effect of investments and compare these with the no impact efficiency. Finally, we discuss the implications of cost benchmarking for investment behaviour of network companies.

Citation

Poudineh, R., & Jamasb, T. (2015). A New Perspective: Investment and Efficiency under Incentive Regulation. The Energy Journal, 36(4), 241-263. https://doi.org/10.5547/01956574.36.4.rpou

• Journal Article Type: Article
• Publication Date: Oct 1, 2015
• Deposit Date: Jun 9, 2014
• Publicly Available Date: Jul 25, 2014
• Journal: Energy Journal
• Print ISSN: 0195-6574
• Electronic ISSN: 1944-9089
• Publisher: International Association for Energy Economics
• Peer Reviewed: Peer Reviewed
• Volume: 36
• Issue: 4
• Pages: 241-263
• DOI: https://doi.org/10.5547/01956574.36.4.rpou
• Keywords: Investments, Cost efficiency, Incentive regulation, Distribution network, No impact efficiency.
• Public URL: https://durham-repository.worktribe.com/output/1428760