Comparing Welfare Effects of Different Regulation Schemes: An Application to the Electricity Distribution Industry

23 Pages Posted: 11 Nov 2009

See all articles by Maria Kopsakangas-Savolainen

Maria Kopsakangas-Savolainen

Finnish Environment Institute; University of Oulu - Department of Economics, Accounting and Finance

Rauli Svento

University of Oulu - Department of Economics, Accounting and Finance

Date Written: October 2, 2009

Abstract

We compare the welfare effects of different regulation schemes of electricity distribution utilities. The compared regulation schemes are fixed price regulation, cost of service regulation, menu of cost-contingent contracts and simple menus of contracts. In our calculations we utilize the information of firm specific potential to improve cost efficiency. The firm specific cost information of Finnish electricity distribution utilities is obtained by using various Stochastic Frontier models. Our basic result is that welfare can be improved by changing the cost of service regulation scheme to the menu of contracts regulation. Welfare also increases in the case of fixed price regulation and simple menus of contract regulation. There is however, a significant difference among regulation regimes on how this improved welfare is distributed to consumers and producers.

Keywords: welfare, regulation, benchmarking, stochastic frontier analysis, cost efficiency, heterogeneity, electricity distribution

JEL Classification: C13, C23, D6, D24, L51, L94

Suggested Citation

Kopsakangas-Savolainen, Maria and Svento, Rauli, Comparing Welfare Effects of Different Regulation Schemes: An Application to the Electricity Distribution Industry (October 2, 2009). Available at SSRN: https://ssrn.com/abstract=1502668 or http://dx.doi.org/10.2139/ssrn.1502668

Maria Kopsakangas-Savolainen (Contact Author)

Finnish Environment Institute ( email )

PO Box 413
Oulu, 90014
Finland

University of Oulu - Department of Economics, Accounting and Finance ( email )

PO Box 4600
FIN-90014 University of Oulu
Finland

Rauli Svento

University of Oulu - Department of Economics, Accounting and Finance ( email )

PO Box 4600
FIN-90014 University of Oulu
Finland

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