Using stochastic frontier analysis for the access price regulation of electricity networks

Abstract

The deregulation of the electricity industry is currently on the political agenda in many countries. In most countries, the deregulation of the sector is combined with a (re-) regulation of the electricity networks in most of the countries. In many countries incentive-based regulation – e.g. price-cap regulation, yardstick regulation – was introduced to promote efficiency improvements in electricity networks. However, with information asymmetry between regulator and network owners, companies who are subject to an incentive-based regulation will be able to obtain an information rent. Benchmarking can help to address this regulator’s concern that it does not have good information about the scope for a company to make cost efficiencies (an asymmetry of information). In this paper, we analyze the costs structure of Swiss electricity distribution network operators with respect to cost and scale efficiency of the industry. A stochastic frontier model is applied to estimate the average costs of efficient network operators as a benchmark for the industry.