The Efficiency of the Regulation for Horizontal Mergers Among Electricity Distribution Operators in Norway

Merger analysis is usually drawing on concepts derived from competitive horizontal markets, such as market concentration, predatory foreclosure and economies of scale in marketing. In evaluating horizontal mergers among energy network operators, regulators must use different tools to evaluate the attractiveness of mergers. Norway is one country having implemented an ex ante regulation for mergers among electricity distribution operators (DSOs). We investigate whether the actual mergers of Norwegian DSOs in the period 1995-2004 can be rationalized as cost saving exercises or whether they should be interpreted in other ways. We use Data Envelopment Analysis (DEA) to estimate the potential cost savings from mergers ex ante, and we decompose the gains into gains from learning best practice and from improving economies of scale and scope. Moreover, we compare the sources of post merger performance to identify plausible pre-merger motivations. We also discuss the possibility to gain from strategic gaming in the regulation. We compare the regulated revenues and the regulated efficiency improvement requirements before and after the mergers. We find limited potential cost gains ex ante but some improvement in allocative efficiency ex post. Moreover, merged companies show more rapid technological progress and catch up. We also find that the new companies face somewhat more favourable regulatory conditions, i.e. higher allowed revenues and fewer required efficiency improvements. The latter is the consequence of a flawed specification of the regulatory cost function at the time.