Potential Mergers in the Norwegian Electricity Distribution Industry: A DEA – Approach to Measure Efficiency

Abstract

Electricity is a utility, by many seen as a given. A contributing party in making this achievable is the distribution system operators (DSOs) of the electric grid. Following statements regarding too many and too small Norwegian grid operators, this thesis will explore how size affects performance and how efficiencies could be influenced by mergers, through three research questions: Research Question 1: How are the firm sizes of the DSOs in the Norwegian electricity industry affecting their performances? Research Question 2: What are the potential efficiency gains from mergers in the Norwegian electricity industry? Research Question 3: What are the most promising potential combinations of mergers, and what do the results imply? Data Envelopment Analysis (DEA), is utilized as a benchmarking tool to make an optimal efficiency frontier for the electricity distributors in Norway. The study is of a quantitative nature, analyzing detailed data consisting of costs, assets, and descriptions of the operating environment. Continuing, to estimate the most promising potential merger combinations, the 99 DSOs were restricted to county borders, before being combined in pairs, making 431 potential mergers. Moving forward, these merger gains were then decomposed into learning, harmony, and size effects. The 25 most promising mergers were presented. The efficiency findings from the DEA showed there are dubious reasons to believe that the performance is dependent on firm size. However, there are also found firm-specific potential for economies of scale among the smaller companies. Overall efficiency experienced a slight decrease post-merger, but the median overall efficiency rose, indicating that smaller firms benefits the most from a merger. The two latter effects are spread, but on overall deemed too low to recommend industry consolidation. Learning effect is the strongest driver for the overall merger potential. These effects can however be obtained by applying best practice from the fully efficient firms from the DEA. Therefore, the most promising mergers are sorted by pure merger gains, i.e. harmony and size effect. Further, this study finds that there are more pure merger gains from merging small companies than large