Christian Growitsch

Quality of Service, Efficiency and Scale in Network Industries: An analysis of European electricity distribution

Quality of service (QoS) is of major economic significance in natural monopoly infrastructure industries. In this article, we present an efficiency analysis of electricity distribution networks from seven European countries. We apply the stochastic frontier analysis method to multi-output translog input distance function models to estimate cost efficiency and scale economies. We show that introducing the quality dimension into the analysis affects estimated efficiency significantly, especially that smaller utilities’ efficiency seems to decrease. Our results emphasize that QoS should be an integrated part of efficiency and economic analysis of regulated natural monopolies.

Price Convergence and Information Efficiency in German Natural Gas Markets

Abstract In 2007, Germany changed network access regulation in the natural gas sector and introduced a so-called entry-exit system. The spot market effects of the reregulation remain to be examined. We use cointegration analysis and a state space model with time-varying coefficients to study the development of natural gas spot prices in the two major trading hubs in Germany and the interlinked spot market in the Netherlands. To analyse information efficiency in more detail, the state space model is extended to an error correction model. Overall, our results suggest a reasonable degree of price convergence between the corresponding hubs. Market efficiency in terms of information processing has increased considerably among Germany and the Netherlands.

Broadband Investment and the Threat of Regulation: Preventing Monopoly Exploitation or Infrastructure Construction?

Recently, investments in new generation networks in Germany have been curtailed, since potential investors required this new network be unregulated. To develop a regulators strategy that allows investments to occur but prevents monopolistic prices, we model an investors decision problem under a threat of regulation. We show that the mere threat of a regulators intervention may prevent supernormal profits without actual price regulation. The regulator, on the other hand, can influence both the investment decision and the investors price via her signals on regulation probability and price.

Supply Disruptions and Regional Price Effects in a Spatial Oligopoly—An Application to the Global Gas Market

Supply shocks in the global gas market may affect countries differently, as the market is regionally interlinked but not perfectly integrated. Additionally, high supply-side concentration may expose countries to market power in different ways. To evaluate the strategic position of importing countries with regard to gas supplies, we disentangle the import price into different components and characterize each component as price increasing or price decreasing. Because of the complexity of the interrelations in the global gas market, we use an equilibrium model programmed as a mixed complementarity problem (MCP) and simulate the blockage of liquefied natural gas (LNG) flows through the Strait of Hormuz. This enables us to account for the oligopolistic nature and the asymmetry of the gas supply. We find that Japan faces the most severe price increases, as the Japanese gas demand completely relies on LNG supply. In contrast, European countries such as the UK benefit from good interconnection to the continental pipeline system and domestic price taking production, both of which help to mitigate an increase in physical costs of supply as well as in the exercise of market power.

Comparing Single- and Multichannel Distribution Strategies in the German Life Insurance Market: An Analysis of Cost and Profit Efficiency

To explain the success of different distribution strategies in the life insurance industry, we analyze the performance of single- and multichannel distribution firms in the german life insurance industry. We estimate cost and profit efficiency for three groups of life insurers: multichannel insurers, direct insurers, and independent agent insurers. We use nonparametric data envelopment analysis to calculate efficiencies for german life insurers for the years 1997–2005. We identify the absence of performance advantages of specialized insurers as the most important reason for the coexistence of different distribution systems.

The Costs of Power Interruptions in Germany: A Regional and Sectoral Analysis

Abstract A high standard of security of electricity supply comes at serious electricity system costs. However, these system costs have to be balanced with the economic costs induced by an insecure supply of electricity. Following a macroeconomic approach, we analyze the economic costs imposed by potential power interruptions in Germany. Using an extensive dataset on industries and households, we estimate both Values of Lost Load and the associated hourly costs of power interruptions for different German regions and sectors. We find that interruption costs vary significantly over time, between sectors and regions. Peaking at midday on a Monday in December at 750 Mio € per hour, the average total national outage costs amount to approximately 430 Mio € per hour. A missing gigawatt hour creates average outage costs of about 7.6 Mio €.

Efficiency Effects of Quality of Service and Environmental Factors: Experience from Norwegian Electricity Distribution

Since the 1990s, efficiency and benchmarking analysis has increasingly been used in network utilities research and regulation. A recurrent concern is the effect of environmental factors that are beyond the influence of firms (observable heterogeneity) and factors that are not identifiable (unobserved heterogeneity) on measured cost and quality performance of firms. This paper analyses the effect of geographic and weather factors and unobserved heterogeneity on a set of 128 Norwegian electricity distribution utilities for the 2001-2004 period. We utilize data on almost 100 geographic and weather variables to identify real economic inefficiency while controlling for observable and unobserved heterogeneity. We use the factor analysis technique to reduce the number of environmental factors into few composite variables and to avoid the problem of multi-collinearity. We then estimate the established stochastic frontier models of Battese and Coelli (1992; 1995) and the recent true fixed effects models of Greene (2004; 2005) without and with environmental variables. In the former models some composite environmental variables have a significant effect on the performance of utilities. These effects vanish in the true fixed effects models. However, the latter models capture the entire unobserved heterogeneity and therefore show significantly higher average efficiency scores.

Quality of Supply in Energy Regulation Measurement,Assessment and Experience from Norway

In order to overcome the incentive of excessive maintenance reductions and insufficient network investments in incentive regulation of electricity distribution companies, regulators throughout Europe have started regulating quality of service in the energy sector. In this paper, we discuss the issue of assessing and implementing quality-related incentives based on customers’ WTP for network reliability and analyse the impact of such regulatory measures by means of a concrete casestudy. Surveying the most prominent methodological approaches to quantify customers’ WTP for quality we find that survey techniques such as contingent valuation and conjoint analysis cover regulatory purposes well. As Norway has put the measurement and assessment of quality of supply into practice, we empirically examine how network operators have adapted to quality-incorporated regulation. We find that the external cost for quality has not played a major role in Norwegian electricity distribution.

Redesigning the balancing power market in Germany — a critical assessment

Since electrical energy cannot be stored the maintenance of balance between supply and demand in the grid is one major task of the system operator. His duty is to estimate beforehand how much energy will be injected in or withdrawn from the network. Therefore, an efficient and appropriate designed market is a necessary component in order to assist the balancing management. In awareness of this, the following study examines the effects of the auction redesign on observable demand charges. We analyze the consequences caused by the launch of the common IT platform on power balance charges, particularly with regard to expected values and volatility. This allows further conclusions about possible difficulties resulting from the new market design and which may contradict the assistance for managing the grid balance. Furthermore, we compare the efficiency of the German power reserve market before and after the change of the market design by using a number of econometric approaches for analyzing structural changes. With the view to assist the establishment of a secure German energy network, we finally draw economic conclusions.

Die deutsche Energiepolitik aus ökonomischer Perspektive

Die Energiewende und der damit verbundene Systemwandel haben eine grose Unsicherheit bezuglich der zukunftigen Entwicklung des Marktumfelds sowie der gegebenen Rahmenbedingungen bei den Marktteilnehmern induziert. Gleichzeitig offenbart sich, dass es bei der Auswahl und der Wirkrichtung der politischen Instrumente der Energiewende zu Fehlsteuerungen gekommen ist, die politischer Anpassung bedurfen.