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COST FUNCTIONS AND COST EFFICIENCY IN ELECTRICITY DISTRIBUTION: A STOCHASTIC FRONTIER APPROACH *
Author(s) -
Burns Philip,
WeymanJones Thomas G.
Publication year - 1996
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/j.1467-8586.1996.tb00623.x
Subject(s) - panel data , econometrics , electricity , economics , estimation , sample (material) , distribution (mathematics) , stochastic frontier analysis , frontier , cost efficiency , electric power distribution , economies of scale , microeconomics , power (physics) , computer science , mathematics , production (economics) , engineering , mathematical analysis , chemistry , physics , management , archaeology , chromatography , quantum mechanics , electrical engineering , history , operating system
The paper develops a cost frontier model of electricity distribution and estimates it on data for the 12 regional electricity companies of England and Wales. It is found that some significant cost drivers in cross‐section estimation are insignificant when the model is estimated on panel data, highlighting the well‐known drawbacks of cross‐section estimation. Panel data estimation suggests that the main determinants of distribution operating costs are the number of customers in the area and simultaneous maximum demand. These results and the efficiency rankings of the companies are not sensitive to changes in error distribution assumptions and sample size. There is also significant evidence of economies of scale. There is a small but significant effect on cost efficiency from privatization, but this is as likely to be due to the changes in accounting policies at the time of privatization as any real effect.