Discussion Papers, Department of Business and Management Science, Norwegian School of Economics (NHH)
Finding the Right Yardstick: Regulation under Heterogeneous Environments
(), Mette Bjørndal
(), Astrid Cullmann
() and Maria Nieswand
Abstract: Revenue cap regulation is often combined with systematic
benchmarking to reveal the managerial inefficiencies when regulating
natural monopolies. One example is the European energy sector, where
benchmarking methods are based on actual cost data, which are influenced by
managerial inefficiency as well as operational heterogeneity. This paper
demonstrates how a conditional nonparametric method, which allows the
comparison of firms operating under heterogeneous technologies, can be used
to estimate managerial inefficiency. A dataset of 123 distribution firms in
Norway is used to show aggregate and firm-specific effects of conditioning.
By comparing the unconditional model to our proposed conditional model and
the model presently used by the Norwegian regulator, we see that the use of
conditional benchmarking methods in revenue cap regulation may effectively
distinguish between managerial inefficiency and operational heterogeneity.
This distinction leads first to a decrease in aggregate efficient costs and
second to a reallocation effect that affects the relative profitability of
firms and relative customer prices, thus providing a fairer basis for
setting revenue caps.
Keywords: Data Envelopment Analysis; Yardstick Regulation; Electricity Distribution; (follow links to similar papers)
JEL-Codes: C44; L51; L94; (follow links to similar papers)
37 pages, February 25, 2016
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