Regulating Heterogeneous Utilities: A New Latent Class Approach with Application to the Norwegian Electricity Distribution Networks

Orea, L.; Jamasb, T.

doi:10.5547/01956574.38.4.lore

Regulating Heterogeneous Utilities: A New Latent Class Approach with Application to the Norwegian Electricity Distribution Networks

Orea, L.; Jamasb, T.

Authors

L. Orea

T. Jamasb

Abstract

Since the 1990s, electricity distribution networks in many countries have been subject to incentive regulation. The sector regulators aim to identify the best performing utilities as frontier firms to determine the relative efficiency of firms. This paper develops a nested latent class (NLC) model approach where unobserved differences in firm performance are modelled using two 'zero inefficiency stochastic frontier' (ZISF) models nested in a 'latent class stochastic frontier' (LCSF) model. This captures the unobserved differences due to technology or environmental conditions. A Monte Carlo simulation suggests that the proposed model does not suffer from identification problems. We illustrate the proposed model with an application to Norwegian distribution network utilities for the period 2004-2011. We find that the efficiency scores in both LCSF and ZISF models are biased, and some firms in the ZISF model are wrongly labelled as inefficient. Conversely, inefficient firms may be wrongly labelled as being fully efficient by the ZISF model.

Citation

Orea, L., & Jamasb, T. (2017). Regulating Heterogeneous Utilities: A New Latent Class Approach with Application to the Norwegian Electricity Distribution Networks. The Energy Journal, 38(4), 101-127. https://doi.org/10.5547/01956574.38.4.lore

Journal Article Type	Article
Acceptance Date	Mar 14, 2016
Online Publication Date	Oct 1, 2017
Publication Date	Oct 1, 2017
Deposit Date	Mar 22, 2016
Publicly Available Date	Oct 1, 2020
Journal	Energy Journal
Print ISSN	0195-6574
Electronic ISSN	1944-9089
Publisher	International Association for Energy Economics
Peer Reviewed	Peer Reviewed
Volume	38
Issue	4
Pages	101-127
DOI	https://doi.org/10.5547/01956574.38.4.lore
Public URL	https://durham-repository.worktribe.com/output/1408712