Catch-up speed in network regulation: a decomposition of cost efficiency

Practitioners of network regulation are extensively using benchmarking measures in defining their incentive regulatory schemes and, more specifically, the speed at which those schemes require inefficient network utilities to catch-up to efficiency through cost minimisation. This catch-up speed is usually set based on the incumbent inefficiency of operators and the period of time they are granted to remove it. However, its computation lacks research and foundation as the allowed period to reach target performance is not firm-specific and often set based on negotiated speculations on potential productivity improvement. We propose an approach to set a firm-specific catch-up period based on historical cost efficiency change rates and the decomposition of an operator's cost efficiency into technical and allocative efficiency. We demonstrate that this decomposition can be used to assess the source of a firm's excess costs and thus the strategies that need to be implemented to eliminate those costs. An econometric analysis is used on a panel of 143 Swedish electricity distributors to validate the decomposition of cost efficiency and a model is proposed to compute the catch-up period according to this decomposition.Master [120] en Ingénieur de gestion, Université catholique de Louvain, 201