Maximum entropy: a stochastic frontier approach for electricity distribution regulation

The literature on incentive-based regulation in the electricity sector indicates that the size of this sector in a country constrains the choice of frontier methods as well as the model specification itself to measure economic efficiency of regulated firms. The aim of this study is to propose a stochastic frontier approach with maximum entropy estimation, which is designed to extract information from limited and noisy data with minimal statements on the data generation process. Stochastic frontier analysis with generalized maximum entropy and data envelopment analysis—the latter one has been widely used by national regulators—are applied to a cross-section data on thirteen European electricity distribution companies. Technical efficiency scores and rankings of the distribution companies generated by both approaches are sensitive to model specification. Nevertheless, the stochastic frontier analysis with generalized maximum entropy results indicate that technical efficiency scores have similar distributional properties and these scores as well as the rankings of the companies are not very sensitive to the prior information. In general, the same electricity distribution companies are found to be in the highest and lowest efficient groups, reflecting weak sensitivity to the prior information considered in the estimation procedure.

     

Efficiency analysis of German electricity distribution utilities – non-parametric and parametric tests

This study applies non-parametric and parametric tests to assess the efficiency of electricity distribution companies in Germany. Traditional issues in electricity sector benchmarking are addressed, such as the role of scale effects and optimal utility size, as well as new evidence specific to the situation in Germany. Labour, capital, and peak load capacity are used as inputs, and units sold and the number of customers as output. The data cover 307 (out of 553) German electricity distribution utilities. A data envelopment analysis (DEA) is applied with constant returns to scale (CRS) as the main productivity analysis technique, whereas stochastic frontier analysis (SFA) with distance function is the verification method. The results suggest that returns to scale play but a minor role; only very small utilities have a significant cost advantage. Low customer density is found to affect the efficiency score significantly, in particular in the lower third of all observations. Surprisingly, East German utilities feature a higher average efficiency than their West German counterparts. The correlation tests imply a high coherence of the results.     

证券分析师关注与上市公司成本黏性*

本文以2002-2014年沪、深A股上市公司为样本,研究了证券分析师关注对成本黏性的影响。研究发现,越多分析师关注的公司,其成本黏性显著越低,并且这种关系受公司内部股权结构和外部市场化水平的影响;在国有企业、第一大股东持股比例较低及市场化水平较低的上市公司中,分析师关注对成本黏性的影响更显著。进一步的研究发现,明星分析师及团队分析师的关注能更好地抑制成本黏性。本文不仅有助于全面认识分析师发挥监督作用的机制和情境,而且有助于深化成本黏性影响因素的研究,对于降低企业的成本黏性以提高资源配置效率具有启示意义。     

Benchmarking and firm heterogeneity: a latent class analysis for German electricity distribution companies

In January 2009, the German Federal Network Agency introduced incentive regulation for the electricity distribution sector based on results obtained from econometric and nonparametric benchmarking analysis. One main problem for the regulator in assigning the relative efficiency scores is unobserved firm-specific factors such as network and technological differences. Comparing the efficiency of different firms usually assumes that they operate under the same production technology, thus unobserved factors might be inappropriately understood as inefficiency. To avoid this type of misspecification in regulatory practice, estimation is carried out in two stages: in the first stage observations are classified into two categories according to the size of the network operators. Then separate analyses are conducted for each subgroup. This article shows how to disentangle the heterogeneity from inefficiency in one step, using a latent class model for stochastic frontiers. As the classification is not based on a priori sample separation criteria it delivers more robust, statistically significant, and testable results. Against this background, we analyze the level of technical efficiency of different subgroups from a sample of 200 regional and local German electricity distribution companies for a balanced panel data set (2001–2005). Testing the hypothesis if larger distributors operate under a different technology than smaller ones, we assess if a single step latent class model provides new insights to the use of benchmarking approaches within the incentive regulation schemes.     

Optimal privatization of vertical public utilities

Abstract We examine restructuring, divestiture, and deregulation of a vertically integrated public utility, (e.g., electricity), from a public finance perspective. How an optimal restructuring plan for the utility depends on the cost of public funds and on the X‐efficiency gains from privatization, how the optimal degree of competition in the upstream and downstream segments are connected, and implications of privatization for consumer prices are examined. The higher the cost of public funds, the more likely the post‐privatization price will exceed the regulated public utility price. The greater the X‐efficiency gains from privatization, the more likely the post‐privatization price will fall.     

Substitution between energy,capital and labour within industrial companies: A micro panel data analysis

Based on micro panel data for industrial companies, we estimate factor demand models with electricity, other energy, labour and machine capital as flexible inputs using both the translog and the linear logit specification. As opposed to the few previous micro (cross-section) data studies we find that both electricity and other energy are complements with capital. Substitution between electricity and other energy is limited. The own-price elasticity for electricity is −0.21 in the translog model and −0.19 in the linear logit model. The corresponding own-price elasticities are −0.45 and −0.23 for other energy, −0.08 and −0.05 for labour and −0.45 and −0.34 for capital.     

Price effects of independent transmission system operators in the United States electricity market

In 1996, the Federal Energy Regulatory Commission (FERC) sought to “remove impediments to competition in the wholesale bulk power marketplace and to bring more efficient, lower cost power to the Nation’s electricity consumers” through a series of market rules. A product of these rules was the establishment of regional transmission organizations (RTOs) and independent system operators (ISOs) charged with facilitating equal access to the transmission grid for electricity suppliers. Whether these changes in market structure have succeeded in achieving FERC’s goal to provide “lower cost power to the Nation’s electricity consumers” remains an open question. This paper utilizes a panel data set of the 48 contiguous United States and a treatment effects model in first differences to determine whether there have been changes in delivered electric prices as a result of the establishment of ISOs and RTOs. To avoid the confounding effects of electric restructuring, the model is estimated with the full panel data set, and then again without the states that have restructured their electric markets. This estimation shows that electricity prices fall approximately 4.8 % in the first 2 years of an ISO’s operation and that this result is statistically significant. However, this result is dependent on the presence of states that restructured their electricity markets. When these restructured states are removed from the data set the price effects of RTOs become indistinguishable from zero. The paper concludes that rate agreements are the principal source of the observed decrease in prices and that RTOs have not had the desired effect on electricity prices.     

交易成本是影响纵向整合选择的重要因素吗?——来自中国煤电上市公司的实证检验

笔者以中国52个煤电上市公司的纵向整合状况为例,运用面板数据模型分析了煤电企业选择纵向整合方式时考虑的因素。研究结果表明:交易成本对煤电企业采用纵向整合的影响较大,生产成本和策略效应的影响较小,这证实了交易成本和组织成本影响到了纵向整合的选择。纵向整合是中国煤电协调的有效但非唯一选择。     

Economies of scope and scale in the Norwegian electricity industry

An important issue for multi-product firms to consider is economies of scope, i.e., whether there is any benefit from producing two or more products, or whether specializing in producing only one product would be less costly. We examined the economies of scope for Norwegian electricity companies because policy makers have decided to force companies that both generates and distributes electricity to split their operations into two companies, one engaged in generation only and the other in distribution only. We set out to test the validity of the policy makers decision on unbundling generation and distribution. Using data from Norwegian electricity companies for the period 2004–2014, we found evidence of economies of scope, meaning that policy makers’ insistence on separating generation and distribution companies will have increased costs. We also found evidence of economies of scale, meaning that there are cost savings in expanding outputs. Our findings provide important information to consider in future policy decisions in the Norwegian electricity industry, probably with implications for other countries.     

Entry decision of a vertically integrated foreign firm with downstream subsidization and upstream privatization

This study considers a vertical structure model in which an upstream state-owned enterprise (SOE) and a downstream domestic firm compete with a vertically integrated foreign firm (VIFF). We consider the cost-inefficiency of the SOE and examine the entry decisions of a VIFF under downstream subsidization. We find that without upstream privatization, the VIFF's entry decision might not be socially desirable unless it enters both markets and the cost inefficiency is intermediate. Additionally, a policy to reduce the cost inefficiency might cause a drastic welfare increase or loss when the VIFF changes its entry decision. We then examine upstream privatization and show that a substantial improvement in cost efficiency can increase welfare with privatization. When the SOE maximizes welfare, however, lesser (greater) cost efficiency improvement is necessary to increase welfare with privatization if the ex-ante cost inefficiency is high (low).     

Efficiency and regulation in the case of the Swiss Private Railways

This paper discusses the efficiency of the Swiss Private Railways in an economic and regulatory context. For this purpose, scale efficiency and overall cost efficiency for 48 Swiss private railway companies are investigated. A translog cost function for a four-year panel is estimated and measures of economies of scale and density are derived. A compound indicator for network size and structure is introduced. The estimation results allow for a discussion of efficiency in terms of optimal scale and density. Overall cost efficiency is estimated by means of a frontier cost function. The findings on efficiency are discussed in the Swiss political and regulatory context. More specifically, a regression on the influence of ownership and subsidy structure on the efficiency is performed. The findings are that most of the Swiss private railway companies operate at an inappropriately low scale and density. While the companies are rather homogenous in terms of overall cost efficiency, evidence is found for a significant influence of regulation in terms of the subsidy structure.     

Regulatory design and technical efficiency: public transport in France

The provision of local public transport in France involves private and public firms and the use of incentive contracts to regulate them. We study the effect of these institutional features on the sector’s efficiency using a long panel data of firms, with a two-stage estimation procedure. First, we use nonparametric data envelopment analysis techniques to estimate input usage efficiency, following a conditional approach that controls for differences in the environments in which the firms operate. Second, we estimate semiparametric censored regressions, using fixed effects to control for unobserved sources of heterogeneity. Our results point to a differential effect of private and mixed public-private companies. In particular, having the performance of public operators as the benchmark, efficiency is relatively higher for private firms, but lower when the service is delegated to a mixed public-private firm. In the latter case, the effects diverge by contract type: when the contract is of the cost reimbursement type, performance is lower than the public firm benchmark, while for other contract types, there are no statistically significant differences.     

APPLICATION OF PANEL DATA MODELS IN BENCHMARKING ANALYSIS OF THE ELECTRICITY DISTRIBUTION SECTOR*

ABSTRACT ** : This paper explores the application of several panel data models in measuring productive efficiency of the electricity distribution sector. Stochastic Frontier Analysis has been used to estimate the cost‐efficiency of 59 distribution utilities operating over a nine‐year period in Switzerland. The estimated coefficients and inefficiency scores are compared across three different panel data models. The results indicate that individual efficiency estimates are sensitive to the econometric specification of unobserved firm‐specific heterogeneity. This paper shows that alternative panel models such as the ‘true’ random effects model proposed by Greene (2005) could be used to explore the possible impacts of unobserved firm‐specific factors on efficiency estimates. When these factors are specified as a separate stochastic term, the efficiency estimates are substantially higher suggesting that conventional models could confound efficiency differences with other unobserved variations among companies. On the other hand, refined specification of unobserved heterogeneity might lead to an underestimation of inefficiencies by mistaking potential persistent inefficiencies as external factors. Given that specification of inefficiency and heterogeneity relies on non‐testable assumptions, there is no conclusive evidence in favour of one or the other specification. However, this paper argues that alternative panel data models along with conventional estimators can be used to obtain approximate lower and upper bounds for companies' efficiency scores.     

Privatization and Performance in Eastern Europe: Alternative Scenarios

The paper focuses on the possible outcomes of privatization and considers how different scenarios of privatization lead to varied macroeconomic performance. Alternative scenarios involve changes in efficiency, taxation, wages, income distribution and interactions with the world economy. The consequences of pursuing different scenarios of privatization are simulated using a Computable General Equilibrium (CGE) model. Illustrative simulations with the model are carried out for a representative economy, intended to depict a country at the outset of transition. The simulation results suggest that privatization can exert a favourable or adverse impact on the whole economy, depending on the way in which the performance of the newly privatized sector changes. The simulation analysis for Poland shows that some developments accompanying privatization processes might have contributed to recession and budget deficit.     

THE EFFECTS OF FIRM BOUNDARY AND FINANCING CONSTRAINTS ON UTILITY COSTS: THE CASE OF MUNICIPALLY OWNED ELECTRICITY DISTRIBUTION UTILITIES

ABSTRACT: A number of studies have examined costs and potential for scale and scope economies in electricity distribution; however, few if any, have examined this area in terms of the unique constraints associated with municipal ownership or historical and regulatory constraints associated with former municipal ownership. This paper focuses on 19 distribution‐only municipally owned utilities for a ten‐year period (1988–97). Distortions from variable outputs but largely fixed inputs are minimized. The data used were collected specifically to assess productivity, cost, and efficiency performance and include value‐based capital inputs and service prices. Outputs include energy conveyed and number of connections; inputs include capital, system losses, labour, and materials. We examine the effect of using third‐party financing (e.g., connection charges), with its inherent principal‐agent problems, on utility costs, as well as the effect of shared services and multi‐utility output (e.g., electricity and water). A translog total cost function is estimated. Our findings suggest significant returns to scope but also significant increases in costs associated with the use of third‐party financing. The results also suggest scale diseconomies. Shared outputs, which have been greatly restricted or eliminated under restructuring, may have provided larger, and now lost, economies than the scale returns blindly pursued by some through restructuring or incented/forced mergers or divestitures. Finally, it is clear that third‐party financing can raise costs; such financing is widely used among utilities providing electricity, gas, water, and telecommunications, and should be closely scrutinized.     

Privatization, Ownership and Technical Efficiency a Study of the Turkish Cement Industry

This paper presents an empirical study of the effects of ownership and privatization on technical efficiency in the Turkish cement industry. We first summarize the characteristics of the Turkish cement industry and changes in industrial structure in the post-privatization period. The effects of ownership and privatization on technical efficiency are estimated using the stochastic production frontier approach. The empirical tests presented, which use data on all cement plants in Turkey, suggest that neither ownership nor privatization had a significant impact on technical efficiency.     

POLITICAL SELECTION OF FIRMS INTO PRIVATIZATION PROGRAMS. EVIDENCE FROM ROMANIAN COMPREHENSIVE DATA

Exploiting a unique institutional feature of early Romanian privatization, when a group of firms was explicitly barred from privatization and another was partially privatized by management–employee buyouts, we test how politicians select firms into privatization programs. Using comprehensive firm data, we estimate the relation between preprivatization firm characteristics – the information known to politicians at the time of decision‐making – and the effect of privatization on employment, efficiency, and wages. With the estimated coefficients we simulate the effect of privatization on non‐privatizable and privatizable firms. We find that politicians expected privatization to increase employment in the privatizable group by 7%–10%, while to decrease it in the non‐privatizable group by 10%–30%, depending on the first‐stage estimation method, ordinary least squares with or without matching. We do not find such discrepancies in the expected change in firm efficiency; the simulated efficiency effect of privatization is large and positive for both groups of firms, and it is 52%–65% for non‐privatizable and 41%–43% for privatizable firms. The analysis does not support the hypothesis that wages played an important role in privatization decisions. Our study suggests that employment concerns played the key role in selecting firms for privatization, even if efficiency gains had to be sacrificed.     

Privatization's impact on private productivity: The case of Brazilian iron ore

A major motivation for the recent wave of privatizations of state-owned enterprises (SOEs) was a belief that privatization would increase SOE productivity. There are now many studies showing most privatizations achieved this goal. Our theme is that the productivity gains from privatization are much more general and widespread than has typically been recognized in this literature. In assessing the productivity gains from privatization, the literature has only examined the productivity gains accruing at the privatized SOEs. But privatization may have significant impact on the private producers that often exist side-by-side SOEs. In this paper we show that this was indeed the case when Brazil privatized its SOEs in the iron ore industry. That is, after their privatization, the iron ore SOEs dramatically increased their labor productivity, but so did the private iron ore companies in the industry.     

Improving the econometric precision of regulatory models

Regulatory regimes often attempt to introduce quasi-competitive pressures by undertaking comparative efficiency assessments between the regulated companies and setting company-specific cost reduction targets based on those comparisons. The UK water industry is one example of such a regime—indeed, it has emphasized the importance of maintaining the number of independent companies in order to preserve the robustness of the modeling. For example, in 2007, the Competition Commission considered whether the merger between Mid Kent Water and South East Water might prejudice the ability of the regulator (Ofwat) to make comparisons across water companies for the purposes of assessing performance and setting price controls. In this paper, we examine this issue and provide specific recommendations to regulators. Our cross-sectional results show that the impact of this merger is not significant. We demonstrate that joint estimation of all the sub-models using the ‘seemingly unrelated regression’ (SUR) procedure in a cross-section and/or panel data framework can dramatically improve the accuracy of the modeling. Moreover, the merger does not affect the confidence intervals significantly under such approaches, which still remain far superior to those under Ofwat’s cross-sectional approach. Based on these results, we recommend that Ofwat and other regulators adopt SUR and/or panel data analysis and thereby reduce their reliance on having sufficient numbers of independent companies.     

Economies of scale in Norwegian electricity distribution: a quantile regression approach

In this article, we investigate scale economies in Norwegian electricity distribution companies using a quantile regression approach. To the best of our knowledge, this is the first attempt to apply this estimation technique when analysing scale economies. We estimate the cost elasticities of the two output components: network length and number of customers, to calculate returns to scale. Our results show large potential of scale economies, particularly for the smallest companies. We also find that returns to scale is increasing over time. These findings have important implications for policymakers when they are deciding the structure of the industry in the future.