The role of efficiency analysis in price reviews

Experts from the UK electricity, water, railways and air transport sectors discussed the role of efficiency analysis in price reviews at a conference hosted by The London Business School Regulation Initiative. The main topic that arose was the need for consistent and reliable datasets to be in place to ensure that the efficiency analysis is robust. The advantages and disadvantages of different benchmarking methodologies were also discussed. In addition, several speakers emphasised that the interaction between benchmarking analysis and other incentive mechanisms needed to be examined in more detail.Christoph Riechmann, a Director of Frontier Economics (London and Cologne), working in the European Energy and Regulation practices, noted that the objectives of regulation needed to be understood when considering the role of efficiency analysis. He noted that different methodologies might be appropriate depending on whether the analysis is used to set X-factors directly or whether it is simply used as the basis for discussions about cost levels. Similarly, other elements of the regulatory regime, such as the cost of capital, need to be considered alongside the benchmarking analysis to ensure they are set on a consistent basis. Christoph also emphasised that the quality of the data determined the quality of the efficiency analysis, both with respect to cost variables and cost drivers. He stressed, however, that obtaining a reasonably consistent and comparable dataset was not an impossible task, as demonstrated by the work of regulators in the UK and across Europe. He encouraged participants to persevere in this area and emphasised that as better data becomes available, regulators can use a broader range of benchmarking methodologies and can consider using them more robustly in the regulatory regime.