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This paper examines the relative performance of electricity distribution systems in the UK and Japan between 1985 and 1998 using cost-based benchmarking with data envelopment analysis (DEA) and stochastic frontier analysis (SFA) methods. The results suggest that the productivity gain in the UK electricity distribution has been larger than in the Japanese sector. In particular, productivity growth accelerated during the last years when the UK utilities were operating under tightened revenue caps. It also suggests that efficiency scores are higher for UK utilities. The findings also highlight the advantages of using multiple techniques in comparative analysis and in incentive regulation.
I. INTRODUCTION
Electricity sector reforms are transforming the structure and operating environment of the industry across many different countries throughout the world. Although the main purpose of the reforms is to introduce competition and market mechanisms into electricity generation and supply, there is a growing interest in regulatory reforms to improve the efficiency of the natural monopoly activities of distribution and transmission networks. In moving away from traditional rate-of-return utility regulation, a number of electricity regulators in, for example the UK, Netherlands, Norway and Australia, have adopted price or revenue cap regulation based on the RPI-X formula, thereby promoting cost savings and lower prices for the end-users.1
UK has a rich experience of adopting the RPI-X type incentive-based regulation for an electricity network: both the charges for transportation of electricity over the national high voltage transmission network and over the lower voltage regional distribution networks have been regulated by this method for over a decade. The initial distribution price controls on the regional electricity distribution companies (RECs) were put in place by the government at the time of restructuring in 1990, and permitted price increases of up to 2.5% above the inflation rate (OFFER, 1994). These initial price caps were seen by many as generous to the companies.2 In August 1994 OFFER announced reductions averaging 14% in final electricity prices to take effect in April 1995, requiring cuts in real terms of 11 to 17% in distribution charges in 1995/96, and further reductions in real terms of between 10 and 13% in 1996/97. Distribution charges were, thereafter, required to fall by 3% per year in real terms for the duration of the price control...