The impact of ownership unbundling on cost efficiency: Empirical evidence from the New Zealand electricity distribution sector

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Several countries around the world have introduced reforms to the electric power sector. One important element of these reforms is the introduction of an unbundling process, i.e., the separation of the competitive activities of supply and production from the monopole activity of transmission and distribution of electricity. There are several forms of unbundling: functional, legal and ownership. New Zealand, for instance, adopted an ownership unbundling in 1998. As discussed in the literature, ownership unbundling produces benefits and costs. One of the benefits may be an improvement in the level of the productive efficiency of the companies due to the use of the inputs in just one activity and a greater level of transparency for the regulator. This paper analyzes the cost efficiency of 28 electricity distribution companies in New Zealand for the period between 1996 and 2011. Using a stochastic frontier panel data model, a total cost function and a variable cost function are estimated in order to evaluate the impact of ownership unbundling on the level of cost efficiency. The results indicate that ownership separation of electricity generation and retail operations from the distribution network has a positive effect on the cost efficiency of distribution companies in New Zealand. The estimated effect of ownership separation suggests a positive average one-off shift in the level of cost efficiency by 0.242 in the short-run and 0.144 in the long-run.