Comparing welfare effects of different regulation schemes: an application to the electricity distribution industry

Transcription

1 Comarng welfare effects of dfferent regulaton schemes: an alcaton to the electrc dstrbuton ndustr Mara Kosakangas-Savolanen and Raul Svento Unvers of Oulu, Deartment of Economcs and Martt Ahtsaar Instute of Global Busness and Economcs 1

2 Outlne Motvaton Dfferent regulaton schemes Stochastc Fronter Analss Welfare effects 2

3 Motvaton Most regulaton schemes need some nformaton of the un secfc effcenc SFA and DEA are examles of the methods used n measurng cost effcenc Ths aer gves an examle how to utlse ths frm secfc cost nformaton (obtaned b SFA) n order to evaluate the effects of dfferent regulaton schemes for the consumer and roducer surlus. 3

4 Wh regulaton? Problem 1: A Utl uses market ower excessve rcng allocatve neffcenc and redstrbuton of ncome Problem 2: If the utl s vertcall ntegrated wh one art oeratng n cometve market and the other s monool owns an ncentve to cross-subsdse ncreased roducton and lower rces n cometve markets decreaced roducton and hgher rces n monool markets. 4

5 Prce regulaton Rate of Return regulaton Pure rce regulaton theor Pure rate of return regulaton rate of ncome nsurance 0 100% ractce 5

6 Regulaton schemes used n ths stud Prce Ca Regulaton Rate of return regulaton/ cost of servce Menu of Contracts Smle menus of contracts 6

7 7 Estmated SFA model secfcatons RE Model REH Model TRE Model TFE Model t K k L l LF u v T LF c = α ( ),,, ), (0, u v t K k L l LF N u N v u v T c δ δ µ σ µ σ α = = = = t K k L l LF u v T LF w c = α ) ( t K k L l LF u v T LF c = α

8 Table 3 Statstcs of neffcenc scores RE REH TRE TFE Mnmum Maxmum Mean Std.Dev. of E [ ε ] u σ(v) σ(u)

9 Fgure 1. Ineffcenc Ineffcenc dstrbutons dstrbuton Dens ,2 0,4 0,6 0,8 neffcenc RE REH1 TRE TFE 9

10 Welfare effects We combne the cost nformaton obtaned b our SFA estmatons to the four theoretcal regulaton models We calculate the changes (comared to the benchmark) n welfare measured as a sum of consumer and roducer surlus 10

11 The rce resultng from a range of regulator otons can be llustrated as follows. Consder a regulator rocess n whch the frm s allowed rce P s determned based on a comonent of effcent costs of the hghest te, C*, and on a comonent that s based on the frm s realzed costs C. Then the allowed rce s determned accordng to followng equaton: P *, t = act 1 ( 1 a) C, t 1 where a s the sharng arameter that defnes the resonsveness of the frm s allowed rce to the realzed costs, t refers to tme and to the frm n queston. 11

12 Welfare Results The change n consumer surlus can be wrten as the lne ntegral: C The corresondng change n roducer s surlus s: Therefore, the change of total surlus s 76 PN CS = D 1 ( Q ) P PS = dq 76 N 1 ( CS PS ) = D ( Q ) dq [( P Q C( Q )) ( P Q C( Q ))] = 1 = 1 N N N C C C PC ( P Q C Q )) ( P Q C( Q )), N N ( N C C C P 12

13 Change n welfare (PS CS), Cost of servce regulaton as benchmark, mllon SFA Model Prce ca ΔTS ΔPS ΔCS Menu of Contracts ΔTS ΔPS ΔCS Smle menu of Contracts ΔTS ΔPS ΔCS RE 177,8 (33,1%) 240,9-63,1 194,4 (36,2%) 150,0 44,4 144,43 (26,9%) 70,6 73,9 REH 49,6 (9,2%) 234,2-184,5 61,5 (11,5%) 184,1-122,6 25,9 (4,8%) 10,4 15,6 TRE 5,6 ( 1,1%) 239,7-234,1 25,8 (4,8%) 163,6-137,8 6,4 (1,2%) 4,5 1,9 TFE 8,3 (1,5%) 235,5-227,2 14,7 (2,7%) 207,4-192,7 3,6 (0,7%) 1,4 2,2 13

14 Conclusons Changng the regulaton scheme from cost of servce to whatever other regulaton regme resented above results welfare mrovement. However, there s clear dfference how dfferent regulaton schemes dvde welfare to roducers and consumers. The onl regulaton scheme whch mroves both roducer and consumer welfare regardless of the model used n effcenc estmatons s the smle menu of contracts. However, the overall welfare mrovement s smaller than resultng from the rce ca regulaton or menu of contracts regulaton The underlng benchmarkng results (whch method/model secfcaton to use) have an mortant role. 14