Firms that operate combined heat and power (CHP) plants in Sweden face strong incentives to let their district heating (DH) customers subsidize the sales of electricity. This study investigates ...whether firms exploit the variation in competitive intensity across the two markets and 1) shift costs from electricity to DH, and 2) pass on any cost increase to consumers. A major empirical challenge is that firms endogenously decide whether to operate a CHP plant or not. Two different matching procedures are used to circumvent this problem. The results show that 1) compared with a similar non-CHP firm, the average CHP firm reports a DH cost that is 20–25% higher, 2) the extra cost that CHP firms report is fully passed on to consumers and 3) with reported costs, the price-cost margin is 8% for both groups and with imputed costs the margin increases to 30–35% for the CHP firms. The results are consistent with the presence of strategic cost shifting, which can be tackled through either stricter accounting rules or DH price regulation.
The amount of electricity end-users demand from the distribution grid is going to be more uncertain in the future. In this paper, we empirically investigate how variation in demand (which we refer to ...as demand uncertainty) influence the pricing behavior of distribution system operators (DSOs) that are subject to an ex-ante revenue cap and a penalty scheme that is activated when the cap is violated. Using data from 162 Swedish electricity DSOs observed over 13 years, our econometric investigations shows that demand uncertainty leads to lower electricity distribution prices under the current ex-ante revenue cap regime, but not under the previous ex-post rate-of-return regime. We also find that DSOs react more strongly to uncertainty when they have a relatively higher debt ratio. While lower network prices may sound like a good outcome for customers, it also leads to reduced revenue and a slowdown in investments. Thus, when society benefits from distribution network expansions and the DSOs are regulated by ex-ante revenue caps, the regulator should consider regulating the debt ratio.
•We estimate the effect of demand uncertainty on price.•We use 2SLS estimators.•Price responds to uncertainty when regulation is ex post.•The link between demand uncertainty and price depend on debt ratio.
Academics and policymakers generally agree that energy infrastructure should be subject to price regulation. More and more critics of modern regulatory approaches, however, point to the apparent ...failures of these mechanisms to achieve competitive pricing in practice. Some have suggested that customers ought to be involved in the regulatory process, but it is uncertain how customers' perspectives can best be incorporated. In this study, we evaluate how electoral competition influences monopoly pricing by extending well-known regulatory laboratory experiments. We show that electoral competition has a significant and negative impact on prices. This effect disappears when electoral competition is implemented jointly with incentive regulation, implying substitutability rather than complementarity of regulation and electoral competition.
•There is a trend to include customers when energy networks are regulated.•We explore one form of customer involvement in the lab: electoral competition (EC).•All else equal, EC lowers monopoly prices.•When combined with incentive regulation, the effect of EC vanishes.
It is known that regulators and customers value stable prices in monopolised energy markets. The purpose of this paper is to investigate what factors influence local energy distributors to care ...about, and seek to implement, stable prices. Because the literature has suggested that ownership and political ideology affect monopoly pricing behaviour, we pay particular attention to ideological and ownership heterogeneity across a large number of local jurisdictions in Sweden. Specifically, this paper investigates two different pricing aspects; first, actual pricing behaviour in the unregulated Swedish district heating market and, second, survey data where the district heating firms report how important they think price stability is for their level of competitiveness. The results show that district heating firms that operate in municipalities with a left-wing government (i) implement actual prices that follow the long-term price path to a larger extent and (ii) state that smoothed prices are more important for their level of competitiveness. Results are both statistically and economically significant at conventional levels.
•Purpose is to learn what factors influence monopoly firms' preference for price smoothing.•No previous study focuses on the role of ideology/ownership on price stability.•Data sets represent actual and stated price preferences of Swedish district heating firms.•Results show that firms in left-wing municipalities smooth their prices more.
Policy-makers in Denmark have expressed a willingness to use benchmarks as a means to determine how much each district heating firm should reduce its cost. A reliable cost model should be based on a ...theoretically consistent specification, but no such model exists for vertically integrated district heating (DH) utilities. The first purpose of this paper is to address that gap, focusing on heat-only utilities. The second purpose is to use this specification to estimate its parameters using data from Denmark. The estimated parameters reveal that the Danish district heating utilities are subject to substantial economies of density, i.e. costs go down as the ‘network length’-to-‘heat production’ ratio decreases. We calculate two different inefficiency values for each utility: one conservative, where the utility-specific effects are treated as natural cost variation, and one liberal, where the same effects are treated as inefficiency. Those values can be interpreted as upper and lower bounds of the true inefficiency. Of the 634 observations included in the estimation, 10 have inefficiency values below 0.9 under both the conservative and the liberal assumptions.
•We develop the first theoretically consistent district heating cost model.•Unique, network-specific data from Denmark is used in the empirical part.•Results reveal that the utilities are subject to substantial economics of density.•It is shown how the model can be used to determine cost reducing requirements.
This paper evaluates the behavioral spillover effect of organic waste sorting on households’ waste reduction. We use an administrative household-level dataset on residential waste from a Swedish ...municipality. To identify the spillover effects, we utilize a natural experiment triggered by the staggered implementation of a policy that introduced home-based organic waste sorting bins. We find a substantial positive spillover effect of waste sorting on waste reduction. The effect, however, disappears over time.
We estimate cost, quality and price models for electricity distribution businesses (EDBs) in New Zealand, treating ownership as endogenous. We also account for simultaneity issues between costs and ...quality. We find that customer ownership is associated with lower prices and costs, and also with higher quality. We calculate welfare (total surplus) for both customer - and investor-owned EDBs, allowing for the possibility that investor-owned EDBs might produce higher welfare than customer-owned firms (e.g. due to having more valuable customers). However, we find that welfare is higher for customer-owned EDBs. Ownership is treated as endogenous in all models and we instrument it with the presence of regional air quality regulation.
•We estimate cost, quality and price models for electricity distribution businesses in New Zealand.•We find that customer ownership is associated with lower prices and costs, and also with higher quality.•Ownership is treated as endogenous and instrumented with the presence of regional air quality regulation.
This paper empirically investigates how economic development (GDP) affects energy use. It deviates from previous studies in two important ways: (i) it explicitly allows the effect to be heterogeneous ...across regions, and (ii) it acknowledges that changes in GDP, i.e. GDP growth, can be endogenous and controls for this by exploiting deaths from natural disasters in 2002 and 2003. This instrument incorporates a natural experiment caused by the unusually severe heat wave that swept past several European countries in the summer of 2003. Based on data from 120 countries, results indicate that the marginal effect of the GDP rate is 66% higher when using 2SLS compared to OLS and that there is substantial heterogeneity across countries. Energy use is negatively correlated with the GDP level suggesting that there may be an Energy Kuznets Curve, but unexplained heterogeneity at high income levels suggests that there is still more to learn about the GDP-Energy relationship.
HIGHLIGHTS
Investigates empirically how GDP growth affects energy use.
Utilises the 2003 European heat wave as an instrument for GDP.
Results show the relationship is heterogeneous and OLS is downward biased.
Indication of Kuznets effect, i.e. a stronger relationship for less developed countries.
This article examines a novel regulatory mechanism in a setting with multiple local monopolists. The mechanism rests upon the behavioral assumption that cus- tomers form opinions about prices by ...comparing them with prices set by nearby mo- nopolies and that this comparison influences their behavior. In this way, an “implicit yardstick competition” emerges among monopolists although they do not operate in the same markets. We test this mechanism using a unique dataset of unregulated district heating monopolists in Sweden. We find a large effect of neighbors’ prices, which indicates that the implicit yardstick competition has a considerable disciplin- ing effect on monopolies’ pricing behavior.
•Customers compare their prices with those in neighbouring jurisdictions.•An Implicit Yardstick Competition between the monopolies emerges.•We test this model using a novel dataset on Swedish district heating monopolists.•The results confirm the hypothesis.
We theoretically and empirically study the effect of variation in regulatory review time on firms’ choices between radical and incremental innovations. We differentiate between entry into new ...segments (the extensive margin) and increasing the number of innovations in a given sector (the intensive margin). Our theoretical investigation indicates additional entry into medical device segments as a result of shorter application review times. It also predicts firm-level substitution effect, suggesting firms shift their R&D to innovation applications with relatively shorter review times. To test the theoretical predictions, we utilize a unique data set from the U.S. Food and Drug Administration that contains all product market approvals in the high-risk medical device market for the 1978–2007 period. The empirical results generally support our theoretical predictions. However, the results also show that firms are more responsive to changes in the review time for incremental applications compared to radical ones.
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