Yardstick and Ex-post Regulation by Norm Model: Empirical Equivalence, Pricing Effect, and Performance in Sweeden

Following the liberalisation of network industries there has been a number of innovations in incentive regulation. This paper examines the effects of the application of norm models within an ex-post incentive regulation of electricity distribution networks in Sweden. We first examine the empirical equivalence of norm models to real utilities. Next, we estimate the effect of regulation on pricing behaviour and performance of utilities in average costs, quality of service, and network energy losses. The norm models seem to reflect the main network features, demand characteristics, and capital stocks of real utilities. However, the price of labour affects relative performance. Also, quality of service has not affected the relative performance of utilities, indicating that incentives may be weak. Moreover, on the whole, utilities respond to norm models and incentives and reduce their average prices. However, investor-owned utilities that perform better than their norm models behave strategically and increase their prices. We also find that investor-owned utilities reduce (inflate) their average cost if they perform worse (better) than the benchmark. Public utilities have not adjusted their costs significantly in response to the incentives. Furthermore, we do not find evidence of improvement in quality of service and reduction in network energy losses although less efficient investor-owned networks seem to have improved on both fronts. Finally, efficient investor-owned utilities seem to have reduced their quality of service in terms of outage length.