On network efficiency comparisons: Electricity distribution

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1 On network effcency comparsons: Abstract Electrcty dstrbuton Ralph Turvey Short-run effcency comparsons for electrcty dstrbuton networks, a matter of ther operatng costs, reure a clear concept of the scale of what they do. A measure s proposed. ong-run comparsons reure an estmate of the nput of captal servces whch avods the crcularty of concepts whch depend upon the productvty that s to be compared. The extremely strngent condtons for usng a perpetual nventory approach are set out. A measure of capacty s also proposed, not energy whch s a throughput, not an output. Keywords: Electrcty dstrbuton, Effcency, Operatng cost, Captal measurement The effcency of an enterprse s a matter of whether t does what t does as well as t should do t, judged ether by comparson wth acknowledged best practce or by comparsons wth other enterprses. The concept can be extended to cover n addton whether what an enterprse does s what t ought to do, but ths paper takes the narrower approach. A prme use made of effcency comparsons s the determnaton by regulators of the revenues or prce levels whch they wll allow. Settng these ndependently of an enterprse s actual costs (apart from those whch are completely outsde ther control where pass-through can be allowed) provdes the strongest possble ncentves to effcency. For such a system to work, the targeted cost savngs must reflect realstc estmates of what effcency gans are feasble for the enterprse. Hence the judgments of comparatve effcency that these estmates rest upon need to be well founded.

2 Judgments of comparatve effcency can be made by experts who possess a deep and practcal understandng of the functonng of the organsaton, and of the technology nvolved. Utlty regulators are generally not suffcently expert to make such judgments. They can hre engneerng consultants to do ths for them, but happly for them economsts clam that they have a conceptual short cut whch allows objectve effcency comparsons to be made more readly and less expensvely. Comparng dfferent enterprses at the same tme, or the same enterprse at dfferent tmes, the economsts defne effcency as hgher where the value of outputs at constant prces s greater relatve to the value of nputs at constant prces. Ths paper s about some problems of makng statstcal cost comparsons that apply ths economc nsght, wth specal reference made to the case of electrcty dstrbuton networks. The regulatory context n whch utlty regulators use such effcency comparsons vares between countres. In some cases, a loosely specfed approach may be regarded smply as a useful way of challengng companes, whle n others a common X-factor s appled to all companes, usng the analyss subject to check that cost level dfferences are justfable. But the problems of makng statstcal effcency comparsons are much the same n all cases. As s standard n economcs, short-run and long-run analyses need to be dstngushed. An explct example s provded by a recent Swedsh study (Energmyndgheten, 004).Short run analyses take as gven the fxed assets of the enterprses, lookng only at those of the network operators costs whch are avodable n the short-run and regardng the Much of what s sad also apples to effcency comparsons that apply data envelopment analyss. A recent German study estmated dfferent models takng labour, a weghted sum of lne and cable lengths, and peak load (to approxmate transformer capacty) as the nputs, and MWh sold and the number of customers as the output. In addton, an nverse densty ndex was used as a structural varable. (German Insttute for Economc Research, 004)

3 results of those actvtes wth whch avodable costs vary as the relevant outputs. Comparsons between enterprses (or, for a sngle enterprse, over tme) between avodable costs at constant prces, as approxmated by operatng expendtures, and approprately measured scales of those actvtes whch determne ther short-run avodable costs would yeld useful nformaton about effcency dfferences between enterprses (or the development of effcency wthn a partcular enterprse ). ong run analyses treat all nputs as varable, so that captal costs have to be ntroduced. In contrast wth the short-run, where effcency s a matter of the operaton and mantenance of exstng capacty, outputs are treated as unconstraned by the exstng asset stock. Thus the provson of addtonal capacty and retrements of exstng capacty are taken nto account. Effcency comparsons relate to total factor productvty. Cost comparsons between enterprses can only llumnate dfferences n ther effcency n dong what they do f the magntudes of ther tasks can be compared. Ths s a plattude, yet falure to artculate t has led some authors to scrabble around among avalable data to select a set of explanatory varables wthout dsplayng any understandng of what the enterprses actually do and how they do t. Applyng dfferent econometrc methods to fnd whch method and whch of such varables gve the best results s very dfferent from understandng the ndustry suffcently well to dentfy and descrbe the determnants of short-run or long-run costs. Unfortunately, data concernng these true determnants are usually lackng, resort beng had by econometrsts to usng whchever of the lmted avalable data that they consder most relevant. In specfyng ts step-by-step approach used to derve ts statstcal models for assessng water and sewerage operatng and captal mantenance expendtures, OFWAT ute rghtly lsted Step as "Expert revew of potental cost drvers (OFWAT, 00, p. 43) 3

4 Short run effcency comparsons By short-run costs s meant those costs that are controllable (avodable) by the enterprse gven the nature and makeup of ts stock of fxed assets. Captal costs are thus excluded. The outputs of the enterprse are the results of ncurrng those costs usng the exstng stock of assets. In the partcular case of a ppes or wres network these results are the operaton and mantenance of that network, not the producton of a stream of physcal output. The output of an electrcty dstrbuton network s not the number of MWh passng through t, for n the short run, a change n that number would not alter avodable costs. The avodable costs are ncurred n operatng and mantanng the network s fxed assets. They arse from work done, by contractors and by the network s own employees, usng offces and offce eupment, depots, vehcles, tools and plant, materals and spares. A part of operatons and mantenance costs of electrcty dstrbuton networks conssts of the 4 hour a day operatons control exercsed from one or more control centres. The rest, the great bulk of these costs, conssts of the costs, ncludng central engneerng costs and organsatonal overheads, of lookng after substatons (swtchgear, transformers and protecton), communcaton systems, servce connectons, and cables and overhead lnes and ther poles and towers, ncludng wayleave payments. Routne mantenance and fault repars have to be undertaken on all these parts of the system. The aggregate magntude of all these tasks depends upon the sze, composton and characterstcs of the dstrbuton network. Total MWh dstrbuted provde an extremely poor ndex of the sze of these tasks. A 4

5 good ndex would be a weghted sum of the uanttes of the dfferent network components 3. Quanttes mean, for example, the length n klometers of overhead three-phase V lne, the number of substatons classfed by the type of plant n them and the number of servce connectons 4 by type. The weghts would eual the operaton and mantenance costs ncurred per unt to look after each of those dfferent network components. An addton must be made for those operatng expendtures, manly for some head offce functons, whch bear lttle relatonshp to these uanttes. It turns out that ths conceptually clear and relevant approach has been adopted by the dstngushed members of Eurelectrc s Workng Group on Dstrbuton Benchmarkng, usng the Grd Volume Model developed by PA Consultng Group (Eurelectrc, 00). The cost drvers lsted n page of ther report and ther followng dscusson of external factors reflect the avalablty, or lack of t, of comparable cross-country data, but serve to llustrate the nature of ths approach. 5 A smlar method, whch, however, really relates to long-run comparsons as t ncludes deprecaton as well as operatons and mantenance expendture, has been appled domestcally n Denmark, wth a correcton for dfferences n consumer densty. (Energtlsynet, 00) 3 Note that some of these costs are more a functon of numbers than of capactes, for example the costs of nspecton and mantenance actvtes ncludng pantng 4 Ths can dffer from the number of consumers, for nstance where there s one connecton for several flats. 5 On the contnent, but not n GB, the man sgnfcance of the number of customers other than as an ndcator of the number of connectons s as a measure of supply actvtes. 5

6 Such cost estmates could relate to ether of two thngs: Best practce operatons and mantenance costs per unt, The average of operatons and mantenance costs per unt over a number of dstrbuton networks In the frst case, comparson wth actual operatng and mantenance costs would provde an estmate of effcency judged n relaton to best practce. In the second case, the comparsons would show the effcency of each network relatve to the average level for all of them. Such comparsons could obvously be made wth varous levels of detal, dependng upon the avalablty of data. 6

7 Recourse to usng a weghted sum of aggregate network length, customer numbers and total MWh dstrbuted 6 as a measure of scale s obvously smpler and may happen to yeld reasonable results. (OFGEM, 004) But correlaton s not causalty; expermentng to fnd best fts s no substtute for understandng what determnes the magntude of the work that a network owner has to do or contract for n order to look after ts system. The frst two of OFGEM s varables are excessvely aggregatve, not dstngushng voltage levels and locatons, whle energy dstrbuted, whether a smple or a weghted sum, s not a network output, but a network throughput. A dstrbuton network acts passvely n dstrbutng energy along ts lnes and cables and through ts swtchgear and transformers; the amount dstrbuted s not decded by the dstrbuton network operator. In the short-run a load alteraton wll not affect the sze of the network and wll have only trvally mnmal effects upon operaton and mantenance costs. Even f the data reured for the conceptually clear and relevant form of operatons and mantenance effcency comparsons set out above are plentful and unformly defned 7, there are four sets of dffcultes attachng to the comparsons, the frst three of whch OFGEM has recognsed.. The frst s that labour costs can dffer regonally. Note that allowng for dfferences n enterprses own unt labour costs would provde no ncentve to economy. Correctons should relate to dfferences between regonal labour markets as a whole. 6 The weghts are 0.5, 0.5 and 0.5 respectvely. It s dffcult to understand OFGEM's falure to use nstead the half-hourly data from the settlement system, ncludng the proflegenerated estmates for non-half-hourly metered consumers, whch would enable t to examne maxmum demands. 7 Ensurng that companes apply common classfcatons and defntons n complng ther cost data s a major task for a regulator. 7

8 . Secondly, some dfferences n a network s actual operaton and mantenance costs from ther best practce or average level wll not reflect relatve effcency but result from envronmental dfferences. The freuency and ntensty of storms, the salne content of the atmosphere, the proporton of overhead lnes that pass through wooded areas, the length of cablng n dense urban areas and the accessblty of lnes and substatons are all factors whch affect the reured mantenance effort. If account cannot be taken of them statstcally, some ualfcatons to the comparsons, expressed n prose not numbers, wll be necessary. 3. Thrdly, there s the ssue of ualty of supply, of relablty. Operatons and mantenance expendture can be hgh, for example, because a lot of effort s put nto tree prunng, so reducng the ncdence of one of the major causes of supply nterruptons, or because the network s n a poor shape and reures much effort to rectfy faults. 8 The best way for a regulator to deal wth ths ssue may be to accept that takng account of ualty of supply n the cost comparsons s dffcult, nstead accompanyng them wth relevant prose descrpton and nsttutng a separate ncentve for servce ualty as well as for losses, as s done by OFGEM. 4. Operatons and mantenance costs per transformer, per km of lne etc. depend upon the condton of these assets, largely dependent upon ther age. 8 Interestngly, the Eurelectrc report remarked, on page, that "there was no sgnfcant correlaton between operatng costs and relablty n the sample. It must be noted that the data ualty on relablty was poorer than fnancal and physcal data. It s lkely that relablty depends on captal spendng rather than operatons." OFGEM also found that, as regards operatng costs "alternatve regressons have not demonstrated a statstcally sgnfcant lnk to ualty" (OFGEM, 004) 8

9 ong run effcency comparsons The throughput of a network of ppes and wres, as already ponted out, s not determned by the enterprse and should not be regarded as ts output. From the pont of vew of a long-run analyss, then, what the enterprse provdes s not gas, electrcty, water or messages; t s the capacty to convey them. It follows that, to compare effcences, t s necessary to compare dfferences n capactes wth dfferences n costs. For ths, n addton to operatng and mantenance costs at comparable prces, estmates of the cost of captal servces yelded by the stocks of assets whch are comparable through tme and/or between enterprses are reured. Wth such volume ndexes of captal servces t becomes possble to compare the value of total nputs at constant prces wth the ndependently measured value of total outputs at constant prces. Changes or dfferences n ther ratos wll then measure movement or dfferences n total factor productvty, here treated as meanng effcency. Asset user costs Extendng nput coverage beyond operatng and mantenance expendture to nclude the cost of fxed assets would create no problems other than data avalablty f such fxed assets were rented or traded second-hand. For an enterprse whose use of captal conssted almost exclusvely of offce premses, IT hardware and motor vehcles (or arcraft) the cost of ts captal servces at constant prces could be estmated from observable data on rents or second-hand prces. Captal costs could then be dealt wth n the same way as wages, materals and energy etc. In the case of fxed assets of sorts for whch there s no rental or second-hand market, the only way to proceed s to mpute user costs summed over all asset ages for each of all types of asset. Economsts 9

10 may be tempted to descrbe ths as mputng the rentals that the assets would command f they were rented. But the temptaton should be frmly ressted for such assets: the absence of a rental or second-hand market sgnfes that there are no alternatve users and hence no value n an alternatve use! Bearng ths n mnd, consder agan the partcular case of electrcty dstrbuton networks. What s reured wll nclude, for example, the user costs of dstrbuton transformers of dfferent szes and of dfferent ages unless age makes no dfference, n whch case an average user cost of such transformers wll suffce. But there are two reasons why, for many assets, age wll n fact make a dfference. The frst s that the desgn of recent types may be superor to that of older types, that s to say there may be dfferences between the characterstcs of models of dfferent vntages. The second s that operatng and mantenance costs may rse wth age, outages and the need for repars becomng more freuent, effcency n the engneers sense declnng and so on. These dfferences and changes are reflected n asset values the present worths to the owner-user of the expected future tme streams of the uas-rents yelded by assets, wth allowances for any eventual scrap values. The user cost of an asset for any one year s the declne n ts value over that year plus nterest on ts value at the begnnng of that year. User costs and uas rents are dentcal ex ante. To show ths, denote the value of an asset as V 0 at the end of year 0, ts expected uas rent at constant prces n year t as t, the last year of the asset s servce lfe as, and the annual dscount rate (whch s n real terms.e. t s a nomnal rate of nterest mnus the rate of general nflaton) as. Then, gnorng any scrap value and, just to smplfy the algebra, magnng that the uas rents accrue at the end of each year rather than durng t: 0

11 ( ) ( ) ( ) V = Gven expectatons at the end of year, for example, year user cost wll be the fall n value from the end of year,.e. from the begnnng of year, to the end of year, plus nterest tmes end of year value: ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) = = = If, however, the orgnal expectatons were wrong so that expected uasrents change, the user cost for a year wll not eual ether ts prevously expected or the currently expected uas-rent. What are these uas rents whch determne the value of an asset? In the case of assets whch produce ther own ascertanable revenue stream there s no problem; the uas rents are the stream of antcpated operatng surpluses. Such assets are often marketable so that a market value can also be drectly attrbuted to them. A generatng staton n a compettve electrcty market provdes an example. Ther market values can be descrbed as deprval values, for they measure the present worth of the loss of future profts that would result f they were to dsappear n a puff of smoke wth a wave of a wzard s wand. But what about the many assets for whch there s no rental or second-hand market and yeld no operatng surpluses of ther own, so lackng any ascertanable rental or market value? Clapham Juncton ralway staton and ondon s water rng man are two examples. The

12 answer must be that, at least n prncple, all assets do have deprval values. A deprval value s the present worth of the losses of future profts that would result f an asset were to dsappear n a puff of smoke. Ths present worth reflects the best way of reactng to such a dsappearance. It mght be to replace the vanshed tem, though not necessarly replcatng t wth an dentcal component, and to accept the loss of total operatng surplus entaled by dong wthout t untl the replacement was commssoned. Or the least unproftable course of acton mght be to accept ts dsappearance permanently. Estmatng the deprval values of such assets s dffcult, even n prncple. The only way out s to bundle them together wth the whole of the system of whch they form a part whch, as a whole, has a revenue and produces operatng surpluses (or losses). A user cost can be mputed for such a system even though none can be mputed for ts separate parts. Such aggregaton appeals to the economst, beng nterested only n aggregates, but has a prce n that the servce lves of the component parts can vary greatly n length. The concluson s that where market values and/or rentals are observable, as for offces, vehcles and varous types of eupment, constant prce estmates of the volume of captal servces can be calculated. Otherwse, uas rents and hence captal values and hence user costs can be estmated only for those assets, or for aggregatons of heterogeneous assets, whch produce dstngushable operatng surpluses. Ths means that estmates of the cost at constant prces of ther captal servces rest upon estmates of such assets contrbutons to output at constant prces! In other words, ther costs depend upon ther productvty. So they cannot be used to compare effcency; there s a crcularty.

13 Avodng crcularty To avod crcularty, the measure of the volume of captal servces must be ndependent of the measure of what they actually produce. Ths can be acheved by measurng captal servces ex ante, from the tme of asset commssonng, whle measurng output ex post, at the tme of producton, both at constant prces Extremely bold smplfyng assumptons are necessary to allow such estmaton of the ex ante cost of captal servces at constant prces.e. to estmate volume ndexes of captal servces that are ndependent of ther ex post productvty. What follows reflect a mass of research done on volume ndexes of captal servces n the context of analysng the contrbuton of captal growth to economc growth. Charles Hulten surveyed the current state of the art n hs contrbuton to an NBER symposum on Ffty Years of Economc Measurement, (Hulten, 990); an OECD Manual (OECD, 00) has recently been publshed and, stll more recently, an excellent synthess of the theory and ts applcaton to UK data appeared n a Bank of England Workng paper (Oulton and Srnvasan, 003) The two man smplfyng assumptons are that:. All varables can be expressed n constant prces. Thus, for each category of captal nvestment, a prce ndex s needed whch wll allow computaton of deflated values of nvestment n dfferent years whch are fully comparable.. The ntal value, V 0, of a new captal good s eual to ts ntal cost, C 0, so that the antcpated nternal rate of return on the nvestment euals the dscount rate reflectng the cost of captal funds. (I leave asde the complcatons arsng from taxes on profts.) 3

14 The computaton relates to the expected annual uas rents yelded by an asset that were mplct n the decson to nvest n t when that decson was taken. In the convenently smple case where t can be supposed that they were expected to start at an annual rate of 0 when the asset was brand-new and then declne at a constant geometrc rate δ throughout ts servce lfe, so that t = (-δ) t, then, applyng a cost of captal of : C 0 = V 0 0 δ ) ( δ ) ( δ ) 3 ( ( δ ) 3 ( ) ( ) ( ) hence and 0 = C n = ( δ ) n = 0 n ( ) n t n δ = = n= n δ δ t ( δ ) C = ( δ ) C 0 0 The calculaton wll be more complcated and reure more nformaton f the declne of uas rents at constant prces does not have the geometrc property whose mathematcal tractablty makes t so appealng to economsts. Relevant emprcal data are lackng. Heroc assumptons thus allow estmaton of what were the future annual flows of uas rents at constant prces from new assets of a gven type that were expected when the decson to acure them were taken. These estmatons reure only four knds of data 9 :. The nomnal values of the nvestments n assets of each type commssoned n each of the last years; t 9 Theorsts wll note that, n prncple, 3, 4 and 5 are nterrelated, the optmal servce lfe of an asset exprng when scrappng and replacng wll lower the present worth of future costs. 4

15 . The functon descrbng the declne wth age of the uas rents at constant prces yelded by each type of asset and ts antcpated average servce lfe; 3. The reured real rate of return on the funds used for those nvestments; 4. Prce ndexes for deflatng these values;. Data of the frst knd are reured separately for all of the enterprses to be compared whle the other data tems can often be assumed to be the same for all of them. Past nvestment expendtures are readly avalable, though n the case of dstrbuton network operators the regulators have experenced some dffculty n ensurng consstent treatment of the dstncton between captal and operatng expendtures. These expendtures should be broken down by type of asset to the extent that the data permt so as to allow the applcaton of dfferent prce ndexes, servce lfe estmates and rates of declne n uas rents. Where records do not go back far enough, t may be necessary to start the data seres wth a benchmark estmate of the net captal stock at the date when these seres commence by takng ts deprecated value at that date accordng to the accounts and hopng that ths approxmates to what s wanted.. Knowledge about how the expected uas rents at constant prces declne wth age s reured. Estmaton s smple when δ=0, the antcpaton then beng that, as wth a lght bulb, the servce yelded by an asset wll not declne, but output and mantenance costs wll reman unchanged untl the end of the asset s servce lfe. Estmaton s more complex f, for a gven average value of δ, allowance s made for expected lves varyng around a mean of. It becomes even more complex, maybe mpossbly so, f, n addton, δ s not expected to be constant through tme as, for example, when output and mantenance reurements are as new for the frst few years of an asset type s servce lfe whch then deterorates at an ncreasng rate. Unfortunately, lttle s 5

16 known about the declne n the functonalty of lnes, cables, transformers and swtchgear as they age, a matter of ncreasng fault rates and/or ncreasng repar and mantenance costs, so guessng has to be resorted to. Dstrbuton network companes are begnnng to abandon mantenance programmes based on age of plant or elapsed tme snce the last mantenance, nstead takng account of the operatng duty and the nstallaton envronment as well as assets current condton and performance record. Thus tme-based mantenance s beng succeeded by condton-based mantenance and falure rates as a functon of age and envronmental condtons are now beng nvestgated. Servce lfe estmates reflectng past experence may be obtaned from records of replacements or from an asset regster. Assumptons about expected servce lves are normally made when nvestments are planned, though there s now a tendency to move from rules of thumb to condton montorng to determne when replacements are necessary. Declnes n asset lves may have to be assumed because, through tme, some of the dentfed asset groups may contan ncreasng shares of shorter-lved assets. Snce all assets of a gven type and vntage are not replaced smultaneously, some assumed mortalty functon may be used to estmate the percentage dscarded at dfferent ages. Clearly, the more aggregatve the data, the more arbtrary wll the calculatons be. 3. As for reured real rates of return, n the context of cost comparsons made by ther regulators between utlty companes, the approprate measures are the Weghted Average Costs of Captal as determned by those regulators. 4. In the dfferent context of aggregatve growth accountng t s unversally agreed that the prce ndexes used for revalung nvestment expendtures to express them n constant prce terms would deally allow 6

17 for ualty mprovements. Perfecton would be acheved f hedonc and other technues employed to make these ualty adjustments enabled the deflaton to take full account of dfferences n the present worths of uas rents obtanable from new assets of dfferent vntages. The seres of captal expendtures at constant ualty adjusted prces would then consttute a measure of nvestment expressed n terms of constant effcency unts. Techncal progress n the desgn of new assets would show up as greater effcency on the part of the asset supplers, not the asset users, consttutng what s known as emboded techncal progress. Such a result s exactly what s wanted n growth accountng. In the context of cost comparsons between enterprses such as electrcty dstrbuton networks, however, ths rases an nterestng ssue. Except for computers where much work has been done, t s lkely that any avalable plant and eupment prce ndexes wll have been computed wth lttle or no ualty adjustment. Such unadjusted ndexes wll leave all or part of asset ualty mprovements to show up as hgher productvty on the part of those user enterprses wth the most recently acured plant and eupment. Is ths what s wanted when the purpose of the exercse s to make cost comparsons between enterprses? I suggest that the answer s Yes. Imagne, to clarfy the ueston, that there are two almost dentcal enterprses A and B whch produce exactly the same outputs wth the same degree of relablty and whch have smlar capactes and confguratons of plant, the same cost of captal, the same antcpated pattern of declne of uas rents, and dentcal expected servce lves. Assume, however, that A acured all ts plant and eupment later than B. though at the same prce for each component, but that t was techncally superor because of product mprovements ntroduced by the plant and eupment manufacturers. In conseuence: 7

18 If a ualty adjusted ndex were used for prce-updatng, wth techncal mprovements lowerng the ndex (snce more bang for a buck sgnfes fewer bucks for a bang), the prceupdated costs of A s assets would appear hgher than B s although, by assumpton, ther orgnal money costs were dentcal. Ths would rase A s asset user costs relatve to B s, offsettng the lower operatng and mantenance costs reflected n the ualty adjustments, so A s total costs would be the same as B s, mplyng eual effcency. If prce-updatng gnores techncal mprovements, the prceupdated costs of A s assets wll be the same as B s, but A s operatng and mantenance costs wll be lower than B s, so ts total costs wll be lower, mplyng greater effcency. I suggest that the second of these alternatves s relevant for regulaton. Regulators wll presumably judge that one enterprse s more effcent than another, not only f t s cleverer but also f t has benefted from the cleverness of ts supplers. If ths argument s accepted, comparsons between enterprses can be made for each type of asset dstngushed n the data for past captal nvestment, usng ualty-unadjusted prce ndexes to make these captal expendtures comparable. Wth all of these problems surmounted, f only by gnorng them or wth the ad of guesses, the ex ante user costs expected when the captal nvestments were made can be computed. Subject to the avalablty of approprate output measures (examned n the followng secton of ths paper), cost comparsons revealng dfferences n effcency can then be made by aggregatng operaton and mantenance costs wth these estmates of asset user costs. However, these comparsons between 8

19 enterprses, or over tme for one enterprse, wll not just reveal how competent dfferent enterprses are n producng ther outputs or how one enterprse s competence has evolved. They wll also reveal how accurate were the forecasts used n makng ther past nvestment decsons. The nfluence of these two sets of factors wll be ndstngushable. An enterprse may have hgh costs because t s rather ncompetently run, but t could also have hgh costs despte competence now, because n the past t wrongly expected, and nvested to meet, a growth n demand n some partcular area whch faled to materalse. Thus a low effcency score may relate ether to the way the enterprse has been and s run or to partcularly mperfect foresght n the past, for example n falng to antcpate some ndustral declne. A hgh effcency score may result from luck. Regulators who wsh to use total cost comparsons to reward or penalse enterprses accordng to ther relatve effcency wll therefore have to accept that they are unavodably takng a long-term and partly retrospectve vew. Otherwse they can crcumvent the problems dscussed by adoptng the more arbtrary approach of addng conventonal accountng deprecaton to the weghted average cost of captal tmes deprecated hstorc captal cost or a deprecated replacement cost. Such a procedure s convenent but yelds meanngless answers unless the age structures of assets and deprecaton methods are farly smlar among the networks compared. Measurng capacty Capacty measurements can, of course, be ascertaned for ndvdual gas storage nstallatons, generatng plants or telecomms lnks. But no such measurement can be provded aggregatvely for a whole network wth many geographcally separated nput and wthdrawal 9

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