Essays in Honour of Colin Robinson
Edited by Lester C. Hunt
Chapter 3: Yardstick competition and efficiency benchmarking in electricity distribution
3. Yardstick competition and eﬃciency benchmarking in electricity distribution Thomas Weyman-Jones INTRODUCTION The last decade has seen signiﬁcant developments in the privatization, liberalization and deregulation of the electricity industry in many countries. One characteristic has been vertical deintegration and the separate regulation of distribution natural monopolies by some form of price capping combined with productivity benchmarking and yardstick competition. This chapter surveys some of the developments in this area. It focuses in particular on the theory of yardstick competition and the implementation of benchmarking using data envelopment analysis (DEA). Three ideas are examined in detail: the extent to which DEA-based yardstick competition has attractive incentive properties, the issue of scale economies and convexity assumptions in DEA, and the arguments for and against benchmarking and yardstick competition in general. Colin Robinson (1999) has emphasized that increased competition should be a major instrument of energy policy, and nowhere has this been more successfully implemented than in the electricity industry, ﬁrst in the UK and subsequently in the rest of Europe. Privatization, market liberalization and deregulation have characterized the last decade of the industry’s development in the European Union with its many diﬀerent versions of the UK model of competitive generation and supply together with incentive-based regulation of transmission and distribution. The distinction between these reforms is well known. Privatization means sale to the general public of at least 50 per cent of the shares in a state-owned industry. The industry may, however, remain a monopoly subject to more or...
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