Total Factor Productivity Benchmarking in Incentive Regulation: Evidence from Czech Gas Utilities and Implications for Post-Communist Countries

Abstract

Incentive regulation and regulatory benchmarking are becoming frequently used tools in tariff regulation of public utilities, including natural gas distribution companies. Firstly, we dealt with the principles of incentive regulation and total factor productivity measurement. Then, we discussed the international experience with TFP benchmarking and possible weaknesses of the TFP approach and sources of errors and misinterpretation of results. Further, we determined the productivity development of the Czech regional gas distribution companies in the period 2001-2011 using Fisher index and partial factor productivity analysis. Finally, we summarise the assumptions and measures which should be taken in order to apply TFP benchmarking in practice. We do not recommend using TFP-based tariff setting in the Czech Republic, nor in other post-communist countries. In particular, we argue that the events which took place in the period under consideration resulted in a distortion of available data which disallow their efficient use in tariff regulation at the present time and in the near future. We suggest using the TFP approach rather as an underlying method for further analysis and tariff setting.