An Exploration of Factors Influencing Cost Inefficiency in Swedish Electricity Distribution using Stochastic Frontier Analysis

Benchmarks based on cost frontiers have become increasingly popular as a way to regulate electricity distribution utilities. There has been an extensive research focus on how to estimate the level of inefficiency, but only limited investigation of which factors influence inefficiency. If the sources of inefficiency were known, then the reliability of benchmarks would increase and regulators would be able to act as active catalysts for welfare improvements. This paper uses stochastic frontier models and a 2000-2005 panel data set from the Swedish electricity distribution sector and finds that inefficiency is sensitive to outages, transformer capacity and share of overhead lines whereas utility ownership does not affect inefficiency