Quality of Service, Efficiency, and Scale in Network Industries: An Analysis of European Electricity Distribution

Quality of service is of major economic significance in natural monopoly infrastructure industries. In this paper we present an efficiency analysis of electricity distribution networks from seven European countries. We apply the stochastic frontier analysis (SFA) method on multi-output translog input distance function models to estimate cost efficiency and scale economies. We show that introducing the quality dimension into the analysis affects estimated efficiency significantly, especially that smaller utilities’ efficiency seems to decrease. Our results emphasise that quality of service should be an integrated part of efficiency analysis and in the economic review in regulated natural monopolies.