Comparison of cost efficiency among electricity distribution companies in Northern Europe: A panel data stochastic frontier approach

Abstract

Electricity distribution system operators (DSOs) in Denmark, Norway, Sweden, Finland, and Iceland, along with numerous other nations, operate as local natural monopolies. Regulatory bodies in each of these five countries are responsible for overseeing and regulating the local markets to offset this inherent market failure. Despite the many similarities in regulation between countries, cross-country studies on DSO performance are a rarity in the literature. This study addresses this gap by employing a panel data stochastic frontier analysis (SFA) to examine differences in cost efficiency levels between the aforementioned five countries. This includes the short-term adjustable time-varying efficiency, often called the managerial efficiency, endogenous to each DSO and the short-term unadjustable time-invariant efficiency, often called the organizational efficiency, exogenous to each DSO. The results of the analysis indicate vast differences in operational environments both within and between countries. When controlled for, efficiency distributions across countries mostly appear to be similar, indicating no significant difference in performance capabilities between DSOs across the countries examined.