Optimal Scale in Different Environments – The Case of Norwegian Electricity Distribution Companies

23 Pages Posted: 19 Sep 2015

See all articles by Xiaomei Cheng

Xiaomei Cheng

Independent; Norwegian School of Economics

Endre Bjorndal

Norwegian School of Economics (NHH) - Department of Business and Management Science

Mette Helene Bjorndal

Norwegian School of Economics (NHH) - Department of Business and Management Science

Date Written: September 17, 2015

Abstract

We study returns to scale in Norwegian electricity distribution companies. The scale issue of this sector has become an important political question, and it was for instance discussed by the Reiten commission (OED, 2014) in a study about the future structure and organization of the Norwegian electricity network industry. We use panel data from the Norwegian Water Resources and Energy Directorate (NVE) for the period from 2004 to 2010. The Data Envelopment Analysis (DEA) method and the Stochastic Nonparametric Envelopment of Data (StoNED) approach are applied to examine the scale issue. We show that a majority of the companies are smaller than the optimal size, in line with Kumbhakar et al. (2014). The performance of Norwegian distribution companies are influenced by a number of environmental factors, and some of these factors are negatively correlated with company size. However, our results show that controlling for environmental factors when estimating returns to scale does not have a big effect on the estimated optimal sizes.

Keywords: Returns to scale, electricity distribution companies, Data Envelopment Analysis, Stochastic Nonparametric Envelopment of Data

JEL Classification: Q00

Suggested Citation

Cheng, Xiaomei and Cheng, Xiaomei and Bjorndal, Endre and Bjorndal, Mette Helene, Optimal Scale in Different Environments – The Case of Norwegian Electricity Distribution Companies (September 17, 2015). NHH Dept. of Business and Management Science Discussion Paper No. 2015/22, Available at SSRN: https://ssrn.com/abstract=2662373 or http://dx.doi.org/10.2139/ssrn.2662373

Norwegian School of Economics ( email )

Helleveien 30
Bergen, NO-5045
Norway

Endre Bjorndal

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Mette Helene Bjorndal

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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