Productivity and Regulatory Reform of Norwegian Electricity Distribution Utilities
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Edvardsen, Dag Fjeld, Finn R. Førsund, Wiljar Hansen, Sverre A.C. Kittelsen and Thor Neurauter
The purpose of the paper is to investigate the productivity development of the electricity distribution utilities for the last decade covering both pre- and post periods of the different regulatory regimes since 1991, and both for the individual utilities and for the sector as a whole. The regulatory reform of the Norwegian electricity sector in 1991 separated production and supply on the one hand and transmission and distribution on the other hand. Distribution utilities remain natural monopolies and are subject to a regulatory regime designed to give incentives to productivity improvements. The basic mechanism is based on the RPI-X formula. Costs (or maximal price) are allowed to increase according to the costs of inputs measured by the most relevant index, but not to a full extent; a productivity factor X has to be subtracted. Calibrating the X factor was partly based on an investigation of productivity development of utilities before the change of the regulatory regime. The X-factor was gradually introduced and increased to give the utilities some years to adjust. The full regulation took place in 1998 with both a general and individual efficiency requirement on all grid levels. A Malmquist cost productivity index approach is used based on non-parametric frontiers. The decomposition of productivity change into technical shift and catching up reveal the nature of the utilities’ effort to benefit from the regulation. Bootstrapping techniques are applied in order to give a better statistical basis for the results.
C43, C61, D24, L94
Electricity distribution utility, Malmquist productivity index, bootstrapping
Project:Oppdragsgiver: Norges forskningsråd
Frisch prosjekt: 2102 - Quality and efficiency analysis in the public sector