International Handbook on the Economics of Energy
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International Handbook on the Economics of Energy

Edited by Joanne Evans and Lester C. Hunt

As an essential component for economic growth, energy has a significant impact on the global economy. The need to meet growing energy demand has prompted cutting-edge innovation in clean technology in an attempt to realise environmental and cost objectives, whilst ensuring the security of energy supply. This Handbook offers a comprehensive review of the economics of energy, including contributions from a distinguished array of international specialists. It provides a thorough discussion of the major research issues in this topical field of economics.
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Chapter 25: Efficiency Measurement in the Electricity and Gas Distribution Sectors

Mehdi Farsi and Massimo Filippini


In the last two decades the electricity and gas distribution sectors have witnessed a wave of regulatory reforms aimed at improving the economic efficiency. In the design of these reforms the information on several efficiency concepts, including scale efficiency, scope efficiency, and cost efficiency has become very important. The first two concepts are directly related to the economies of scale and scope, which are characteristics of the production technology, whereas the concept of cost efficiency is mainly a firm’s characteristic related to its economic performance facing market and technological conditions. Scale efficiency addresses the question of whether, for instance, an electricity distribution company is operating at the minimum of its long-run average cost curve. Any deviation from this level of production could result in inefficiency in terms of scale of operation. Thus, scale efficiency arises when the company cannot lower average costs by changing its output levels. For multiproduct energy companies, that is, a company distributing electricity and gas, scope efficiency focuses on the relative cost of joint production to the cost of producing the same total output in multiple companies. Scope inefficiency exists if the costs can be lowered by changing the output mixes across companies. The concepts of scale and scope efficiency rely on the assumption that the market structure, particularly outputs, can be adjusted to provide the companies with the greatest possibility of exploiting synergies. Cost efficiency measures the ability...

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