Stochastic Semi-Nonparametric Efficiency Analysis of Electricity Distribution Networks: Application of the StoNED Method in the Finnish Regulatory Model

31 Pages Posted: 12 Apr 2011

Date Written: April 11, 2011

Abstract

Electricity distribution network is a prime example of a natural local monopoly. In many countries, electricity distribution is regulated by the government. In Finland, the regulator estimates the efficient cost frontier using the data envelopment analysis (DEA) and stochastic frontier analysis (SFA) methods. This paper reports the main results of the research project commissioned by the Finnish regulator for further development of the efficiency estimation in their regulatory model. The key objectives of the project were to integrate a stochastic SFA-style noise term to the nonparametric, axiomatic DEA-style cost frontier, and take into account the heterogeneity of firms and their operating environments. To estimate the resulting stochastic semi-parametric cost frontier model, a new method called stochastic nonparametric envelopment of data (StoNED) is proposed. Based on the insights obtained in the empirical analysis using real data of the regulated networks, the Finnish regulator is replacing the currently used DEA and SFA methods by the StoNED method.

Keywords: Energy markets, heterogeneity, nonparametric production analysis, productive efficiency

JEL Classification: C14, D24, L43, L94

Suggested Citation

Kuosmanen, Timo, Stochastic Semi-Nonparametric Efficiency Analysis of Electricity Distribution Networks: Application of the StoNED Method in the Finnish Regulatory Model (April 11, 2011). Available at SSRN: https://ssrn.com/abstract=1806867 or http://dx.doi.org/10.2139/ssrn.1806867

Timo Kuosmanen (Contact Author)

Turku School of Economics ( email )

FIN-20500 Turku
Finland

HOME PAGE: http://https://www.utu.fi/en/people/timo-kuosmanen

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