2821. Incentive Regulation of Power Distribution and Nonconvexities:Why Economists are Wrong, and Engineers are Only Half Right
Invited abstract in session WD-60: DEA applications in Economic Modeling, stream Data Envelopment Analysis and its applications.
Wednesday, 14:30-16:00Room: Western LT
Authors (first author is the speaker)
| 1. | Kristiaan Kerstens
|
| IESEG School of Management, CNRS-LEM (UMR 9221) | |
| 2. | Stefano Nasini
|
| IESEG School of Management | |
| 3. | Miguel Pereira
|
| Instituto Superior Técnico (Universidade de Lisboa) |
Abstract
Incentive regulation in many countries makes use of frontier benchmarking to determine the RPI-X type of formula to be applied to electricity distributors. Convexity is almost universally imposed on technologies and cost functions modelling electricity distribution by both economists and engineers. However, in the engineering literature, it is well known that the physical laws involving the power flow going through the electricity grid entail the nonconvexity of the electricity distribution problem. This contribution is the fi rst to investigate to which extent convex and nonconvex cost functions, as specified in the economic literature at the firm level, yield the same cost estimates. We explore the economics and engineering perspectives of the electricity distribution problem. Using secondary data from Finland and Iran, we show that the convexity hypothesis can be most often rejected. We also spell out the different implications of convex and nonconvex cost estimates for RPI-X cost norms. We hope our contribution makes regulators think twice about the use of the traditional convex cost models to regulate an industry that is intrinsically nonconvex and where the convex models provide a poor approximation of the nonconvex reality.
Keywords
- Data Envelopment Analysis
- Efficiency Analysis
Status: accepted
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