Optimal Scale in Different Environments – The Case of Norwegian Electricity Distribution Companies

Abstract

We study returns to scale in Norwegian electricity distribution companies. The scale issue of this sector has become an important political question, and it was for instance discussed by the Reiten commission (OED, 2014) in a study about the future structure and organization of the Norwegian electricity network industry. We use panel data from the Norwegian Water Resources and Energy Directorate (NVE) for the period from 2004 to 2010. The Data Envelopment Analysis (DEA) method and the Stochastic Nonparametric Envelopment of Data (StoNED) approach are applied to examine the scale issue. We show that a majority of the companies are smaller than the optimal size, in line with Kumbhakar et al. (2014). The performance of Norwegian distribution companies are influenced by a number of environmental factors, and some of these factors are negatively correlated with company size. However, our results show that controlling for environmental factors when estimating returns to scale does not have a big effect on the estimated optimal sizes.