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Since the 1990s, electricity distribution networks in many countries have been subject to incentive regulation. The sector regulators aim to identify the best performing utilities as frontier firms to determine the relative efficiency of firms. This paper develops a nested latent class (NLC) model approach where unobserved differences in firm performance are modelled using two `zero inefficiency stochastic frontier' (ZISF) models nested in a `latent class stochastic frontier' (LCSF) model. This captures the unobserved differences due to technology or environmental conditions. A Monte Carlo simulation suggests that the proposed model does not suffer from identification problems. We illustrate the proposed model with an application to Norwegian distribution network utilities for the period 2004-2011. We find that the efficiency scores in both LCSF and ZISF models are biased, and some firms in the ZISF model are wrongly labelled as inefficient. Conversely, inefficient firms may be wrongly labelled as being fully efficient by the ZISF model.

Publikationsoplysninger

OriginalsprogEngelsk
TidsskriftEnergy Journal
Vol/bind38
Udgave nummer4
Sider (fra-til)101-127
Antal sider27
ISSN0195-6574
DOI
StatusUdgivet - 2017
Eksternt udgivetJa

    Forskningsområder

  • Latent class models, Environmental conditions, Electricity distribution, Reference networks

ID: 59001254