Utility benchmarking - how to ask the right question?
Utility benchmarking as part of the tariff setting process is receiving increasing attention throughout Europe. Critics of utility benchmarking point to different regulators using different benchmarking techniques and different model specifications that consequently produce differing results. Critics argue that this is an indication of benchmarking being unreliable.
In a new publication in the German Energy Economics Journal (ZfE), Dr Christoph Riechmann, Director in the Frontier Energy Practice in Cologne and London and Dr Aria Rodgarkia-Dara from the Austrian energy regulator, E-Control,�show that different models have evolved, because different regulators are under legal obligations to explore different regulatory questions. Each�question requires a specific benchmarking approach.� In order to identify which model is most appropriate it first needs to be established, e.g. whether:
� ~ companies should be made responsible for all cost including those that result from historic investment (or only for ongoing operating expenditure);
� ~ companies should be made responsible for the scale of operation (or whether smaller firms should be allowed higher average costs);
� ~ the regulator is under an obligation to show that nominally efficient firms are truly efficient or whether they only lack an approrpiate comparator;
� ~ the regulator will use the benchmarking results in a formal way to set or cap tariffs.
The authors show how to adapt the specification of the benchmarking model to explore the relevant question. They also show empirically in which way changing the benchmarking question changes the efficiency assessment for different companies. This quantitative assessment is based on a sample of some 50 Austrian electricity distributors.
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