Integrated cost and quality benchmarking for electricity distribution using DEA

Abstract

PurposeEnergy regulators applying price‐cap systems typically do not incorporate quality into the benchmarking process. The paper aims to develop a methodology for integrated cost‐quality benchmarking for electricity distribution networks.Design/methodology/approachTwo basic models are developed namely a technical model which specifies quality as a minimising input factor, and a social cost model which measures the extent to which the provided quality level is optimal. The two models are applied to a sample of Dutch and UK firms.FindingsThe results suggest that integrated price‐quality benchmarking is an important regulatory asset but at the same time, its limitations should also be recognised.Originality/valueTraditionally, benchmarking under price‐caps has been mostly restricted to the analysis in the area of costs. A truly integrated price‐quality benchmarking approach for electricity distribution networks is, however, lacking. This paper aims to fill this gap.