The influence of institutional forces in the Swedish electricity distribution

industry

Authors Linnéa Guss

Linnéa Haglund

Mathilda Lindersson

Supervisor: Katarzyna Cieslak

Date of submission: 2012-08-15

II

III

ACKNOWLEDGEMENTS

We would like to start by thanking our supervisor Katarzyna Cieslak for guidance during the

working process. We would also like to thank our opponents for their helpful comments on

previous drafts of this thesis.

Finally we would like to express our particularly thanks to our respondents whose opinions

and experiences constitute the basis for the results.

Uppsala August 2012

Linnéa Guss Linnéa Haglund Mathilda Lindersson

IV

V

ABSTRACT

Title: The influence of institutional forces in the Swedish electricity distribution industry

Authors: Linnéa Guss, Linnéa Haglund and Mathilda Lindersson

Supervisor: Katarzyna Cieslak

Background: The European Union (EU) consists of several institutions with the common

goal to build a single Europe-wide market in which goods, services, people and capital move

freely among its member states (SOU 2007:99). An important part of this work is to introduce

common rules for the areas in which the EU operates. One of these areas is the electricity

market.

Aim: The aim of the thesis is to analyze how the Swedish electricity distribution companies

have adopted and reacted to the revenue framework developed by the Energy Market

Inspectorate as a result of the 2010:304 regulation.

Research question: How has the revenue framework affected the productivity and the

efficiency in the Swedish electricity distribution companies?

Method: A qualitative study

Conclusions: It appears that the revenue framework has not had a major impact on the

Swedish electricity distribution companies. The results show that the majority of the

companies in our study have not adopted the framework in the magnitude as expected by the

Energy Market Inspectorate. Our study also shows that most of the companies are dissatisfied

with the framework mainly because of the decrease of allowed revenues. As a consequence,

about half of the companies have appealed the decision and are awaiting a decision from

higher authority.

Keywords: Institutional theory, productivity, electricity distribution companies and the

Energy Market Inspectorate

VI

VII

TABLE OF CONTENT

1. INTRODUCTION ............................................................................................................. 1

1.1 Background ........................................................................................................................ 1

1.2 Problem statement ............................................................................................................. 1

1.3 Outline ............................................................................................................................... 3

2. THE SWEDISH ELECTRICITY MARKET .............................................................................. 4

2.1 The Energy Market Inspectorate ......................................................................................... 4

2.2 Electricity producers, traders and users ............................................................................... 4

2.3 Network owners ................................................................................................................. 5

2.4 A monopoly position ........................................................................................................... 6

3. RESEARCH DESIGN ........................................................................................................ 7

3.1 Data collection .................................................................................................................... 7

3.2 Sample ............................................................................................................................... 7

4. PREVIOUS RESEARCH .................................................................................................. 10

4.1 The institutional theory .................................................................................................... 10 4.1.1 The three pillars of institutions........................................................................................................... 10

4.2 Productivity and efficiency ................................................................................................ 11

4.3 The revenue framework .................................................................................................... 13 4.3.1 Capital costs ........................................................................................................................................ 14 4.3.2 Running costs ...................................................................................................................................... 14

5. EMPIRICAL STUDY ....................................................................................................... 16

5.1 The institutional theory .................................................................................................... 16 5.1.1 The Energy Market Inspectorate ........................................................................................................ 16 5.1.2 The electricity distribution companies ............................................................................................... 16

5.2 Productivity and efficiency ................................................................................................ 18 5.2.1The Energy Market Inspectorate ......................................................................................................... 18 5.2.2 The Electricity distribution companies ............................................................................................... 19

6. ANALYSIS AND DISCUSSION ......................................................................................... 22

6.1 Institutional theory ........................................................................................................... 22

6.2 Productivity and efficiency ................................................................................................ 23

7. CONCLUSIONS AND CONTRIBUTIONS........................................................................... 26

REFERENCES ................................................................................................................... 28

APPENDIX 1 .................................................................................................................... 31

APPENDIX 2 .................................................................................................................... 32

APPENDIX 1 Questions to the companies 2 Questions to the representative at the Energy Market Inspectorate

VIII

TABLE OF FIGURES Figure 1 This figure clarifies the role of the different actors on the electricity market (SVK,

2012) ........................................................................................................................................... 5

Figure 2: Schematic structure of the revenue framework (Werther, 2009).............................. 14

IX

1

1. INTRODUCTION

1.1 Background When it comes to change one should not undermine the power of institutions. Scott (2008)

describes institutions as durable, multifaceted social structures made up of social activities,

symbolic elements and material resources. Institutions are relatively resistant to change and

tend to be transmitted across generations. According to Scott (2008) rules, norms and cultural-

cognitive beliefs are fundamental ingredients of institutions. However, if rules and norms are

going to be effective they must be backed up with sanctioning power. On the contrary, those

who possess power in the form of excess recourses seek legitimation and authorization for its

use.

The European Union (EU) consists of several institutions with the common goal to build a

single Europe-wide market in which goods, services, people and capital move freely among

its member states (SOU 2007:99). An important part of this work is to introduce common

rules for the areas in which the EU operates. One of these areas is the electricity market. In

June 2003 the 2003/54/EG directive concerning common rules for the internal electricity

market was adopted. The new directive contains a comprehensive and detailed regulatory

framework which aims to create a functioning internal electricity market where competition

takes place on equal terms.

Since Sweden became a member of the EU in 1995 issues concerning the electricity market

has increasingly been affected by decisions taken at EU level (SOU 2007:99). Furthermore

companies operating at the Swedish electricity market are also required to conform to the

electricity law (1997:857). In 1996 the electricity market in Sweden was deregulated with the

aim to ‘increase consumer choice and provide conditions for an efficient utilization of the

generation resources’ (EI, 2011a, p. 10). Electricity trading and generation companies are

open to competition in comparison to electricity distribution companies which act in a

regulated geographical monopoly market. This may give the distribution companies

incentives not to maximize their productivity at the same time as they can increase their prices

in order to make a higher profit.

1.2 Problem statement The Swedish electricity system has gone through a paradoxical development since the middle

of the 1980s (Högselius and Kaijser, 2007). After almost a century of rapid development,

where the electricity demand was reduplicated every twelfth year, the impressive expansion

suddenly stopped. Ever since 1987 the electricity demand in Sweden has been almost

constant. In the nearest future, the demand for electricity most certain will not decrease at the

same time as the new regulatory changes imply that the allowed revenues will be lower than

the companies are used to. Consequently, to be able to provide the same supply of electricity

the companies need to become more cost-effective. One way to achieve this is to become

more productive. According to Tangen (2003) there are several aspects that affect a

company’s costs. As an example the author (ibid) argues that an organization can decrease its

costs, i.e. become more cost-efficient by increasing its productivity.

In addition, Enflo, Kander and Schön (2009) describe how an organization can increase its

productivity by producing more with a definite quantity of inputs. Further the authors (ibid,

2009) describe that productivity involves different aspects, for instance labor, capital and

materials. According to Enflo et al (2009) there is a need to increase the productivity in the

2

energy sector due to compensation for the greenhouse gas emissions. One interesting aspect

with this thought is that the revenue frameworks for the Swedish electricity distribution

companies are 35 billion less than the companies have requested (DI, 2011), making the

productivity an even more important factor for the companies.

However, it is necessary to point out that there is nothing unique for companies, which the

state has an interest in, to receive demands about increasing their productivity. The problem is

not the fact that these companies feel pressured to increase their productivity. When

scrutinizing the area it appears as the actual problem lies in how to measure a company’s

productivity. Several studies have been made within this particular area of research. For

instance, Hjalmarsson and Veiderpass performed a study in 1992 where they examined

productivity change in Swedish electricity retail distribution. According to the authors (ibid)

productivity is an important concept in the electricity industry. For instance their study shows

a high rate of productivity growth in this specific sector. In addition the authors (ibid)

emphasize that productivity can be measured in several ways. However they chose to use the

so called data envelopment analysis (DEA) method, the method used by the Swedish Energy

Market Inspectorate (Energy Market Inspectorate, 2012). How to measure a company’s

productivity is still a topical and important area for further research. However in this

particular study we would like to shift focus in another and, as far as we know, yet unexplored

area of research namely the introduction of the new revenue framework developed by the

Energy Market Inspectorate.

The Swedish electricity market has received a lot of media attention during the last couple of

years due to, among other things, high prices and large storms (2011- ett synnerligen

dramatiskt elår, 2012). The monitoring part for the electricity market and the electricity

distribution companies is the Energy Market Inspectorate, an authority of oversight (EI,

2011b). The authority’s function is to facilitate for the customers and also to control the

distribution companies’ monopoly situation, e.g. make sure that they do not let their

customers pay unreasonable prices.

In the middle of 2009, the Swedish parliament decided to change the electricity law in order

to give the customers a better overview of the electricity charges (SOU 2007:99). The main

change is that the electricity distribution companies’ financial reports nowadays are audited in

advance rather than retrospectively, as they have been up to the year of 2011. Further, the

2003/54/EC directive was replaced by 2009/72/EC directive. Due to the changes in the

electricity law the Energy Market Inspectorate developed a quadrennial revenue framework

for each electricity distribution company for the years 2012-2015. The new revenue

framework became mandatory in 2012 and defines the maximum allowed revenues during the

period and is based on addressable costs (SOU 2007:99).

With this as a backdrop the aim of the thesis is to analyze how the Swedish electricity

distribution companies have adopted and reacted to the revenue framework developed by the

Energy Market Inspectorate as a result of the 2010:304 regulation. The research question of

this thesis is as follows:

How has the revenue framework affected the productivity and efficiency in the Swedish

electricity distribution companies?

3

1.3 Outline The rest of the thesis is organized as follows. The next section provides a short explanation of

the Swedish electricity market. Section three is a description of the method used in order to

perform this study. In section four the literature review is presented followed by section five

which provide the empirical study. In chapter six we analyze and discuss the results. Section

seven concludes the thesis.

4

2. THE SWEDISH ELECTRICITY MARKET This chapter contains a description of the Swedish electricity market and the Energy Market

Inspectorate in order to provide the reader with a fundamental basis of how the electricity

market works and how it is constructed. This part will not be concerned in the analysis.

However we believe that if the chapter would be removed, the reader would have difficulties

understanding and relating to the study.

The electricity market in Sweden consists of four main groups of actors; electricity producers,

electricity traders, electricity users and electricity distribution companies (SOU, 2004).

2.1 The Energy Market Inspectorate The Energy Market Inspectorate is a regulatory authority with the task to oversee the

electricity-, natural gas- and local heat markets in Sweden. The role of the Energy Market

Inspectorate is to make the energy markets to function as good as possible but also to look

upon the competition and the customers’ situation, making sure that they do not pay to high

charges. The authority also needs to look upon the power outages and try to discourage the

long outages or if it is possible even attempt to prevent all of them (EI, 2012). It is also the

Energy Market Inspectorate that decides the revenue frameworks for the electricity

distribution companies.

There are some certain aspects to take into consideration when it comes to the revenue

frameworks. When the authority took the decisions regarding the revenue frameworks it first

looked at the capital costs and the affectable costs that are relevant for the operation. Then the

Energy Market Inspectorate also took the statutory return of the companies into consideration

(SFS 1997:857). These aspects are what the Energy Market Inspectorate regards when the

authority decides the revenue frameworks for the electricity distribution companies. If the

companies exceed their framework with more than five percent, they will have a lower

framework for the next four years and also a supplement for the period when they exceed the

framework (EI, 2011a).

2.2 Electricity producers, traders and users It is the electricity producers that own the production facility where the electricity is produced

and they sell it to the electricity trade companies and the electricity exchange Nordpool or

directly to the customers (SOU, 2004).

The electricity trading companies buy the electricity from the producers or from the exchange.

The next step is that these traders sell the electricity forward to the final customers. The

electricity is sold freely on the market and there is no price control but the price is determined

in the agreement between the customer and the electricity seller (SOU, 2004).

The electricity users have two agreements, one with the electricity distribution company and

one with the trade company. The agreement with the trade company is not locked to any

company but on the other hand the contract with the distribution company is locked because

of the geographical monopoly situation on the market (SOU, 2004). Every single customer

pays a network charge and this charge consists of a variable and a permanent part. The

permanent part is dependent on the chartered power and the variable part is dependent on how

much electricity the customers use (EI, 2010a).

5

2.3 Network owners The Swedish electricity network is divided into three different stages, national grid, regional

network and local network. In total the Swedish electricity network consists of 530 000

kilometer lines. These lines have to transfer electricity from the producers to the customers

(SOU 2004).

The Swedish national grid – This is the base network that covers entire Sweden and

the net transfer electricity throughout the country from large hydropower plants for

example. In this network the voltage is 400 000 V (SOU 2004).

The regional networks – It is the regional networks that take electricity from the

Swedish national grid and deliver it to the local networks (SOU 2004). The networks

can also deliver directly to the customers but only to large customers such as

industries. Today there are six regional networks in Sweden (SOU 2004).

The local networks – This is the last link before all the customers receive their

electricity. The voltage is now 230 V which is the same voltage as we have in our

receptacles in our homes in Sweden (SOU 2004).

It is the network owners’ responsibility to transfer the electricity from producers to customers.

But the owners need a permission i.e. concession granted by the Energy market inspectorate.

The owners need this concession so that they can build and use the power lines (SOU 2004).

It is also the network owners that calculate and give the customers information about their

electricity consumption. This is the fundament for the consumers’ network charges (SOU,

2004).

Figure 1 This figure clarifies the role of the different actors on the electricity market (SVK, 2012)

.

6

2.4 A monopoly position Monopoly implies that only one company has the supply of the whole market. The electricity

distribution market in Sweden is a natural monopoly where the electricity distribution

companies have the sole rights to their geographical area (EI, 2010b). The reason why the

Energy distribution industry still is a monopoly is because it is not socioeconomically or

environmentally defensible to build parallel networks all over the country.

Natural monopolies are most common in the infrastructure industry were the companies have

scale economy advantages. In other words, that they have cost benefits relative other

companies (Bergman, Doyle, Gual, Hultkrantz, Neven, Räller & Waverman, 1999).

7

3. RESEARCH DESIGN This study has investigated how the new changes, i.e. the new revenue framework, in the

electricity law and the new directive from the Energy Market Inspectorate have affected the

productivity among Swedish distribution companies. It is a complex thus important area of

research which has received a lot of public attention and critique during the recent years.

However, the area of research is as far as we know yet unexplored. To address the research

objective we chose to perform a qualitative study. We believed that the qualitative approach

best suited our aim though it made it possible for us to catch the companies’ opinions on the

subject. In contrast, we believed that a quantitative study would not have given us the

information that we needed in order to answer the research question.

3.1 Data collection The first step was to decide which area of research we wanted to investigate. After several

group discussions we chose to focus on the Swedish electricity industry, most specifically on

the electricity distribution companies in Sweden and how they have been affected by the new

revenue framework and the implementation of the new revenue framework. We then decided

to focus on the concepts of productivity and efficiency. To explain the companies’ reaction to

the new changes we also chose to use the institutional theory. We believed that this theory

would be a helpful tool when explaining how the new framework have affected the companies

and in particular their productivity.

With this background, we started to search for theoretical material on the institutional theory

and the concept of productivity and efficiency. Our next step was to contact the Energy

Market Inspectorate in order to get hold on information about the subject and the electricity

distribution companies. We also asked the Energy Market Inspectorate if it was possible to get

an interview with the authority. As a result we received a list of all electricity distribution

companies operating in Sweden, in total a number of 174 companies. We then continued by

dividing these companies into two groups, small and large companies, depending on their

turnover. Our definition of small and large companies was based on the EU commission

definition (European Commission, 2012). Small companies are companies with a turnover of

maximum ten million euro and large companies are companies with a turnover larger than ten

million euro.

3.2 Sample After several discussions in our group and with our supervisor we decided to perform

approximately 12 interviews. The decision to perform 12 interviews is motivated by the fact

that we wanted to perform more in-depth interviews with a smaller amount of companies

because we thought that this would create a wider base for the analysis. However, we decided

to contact the double amount of companies just to make sure that we would have a marginal

in case of some of the companies would refuse us their participation.

Consequently, of the total amount of companies we started by randomly select 24, 12 large

and 12 small. The selected companies were first contacted by e-mail, given a short

presentation of the thesis and the aim of the study. The companies which did not respond to

our e-mail were then contacted by phone. After receiving, and performing, 12 interviews we

compared the answers and realized that the answers were quite consistent, suggesting that we

probably would receive the same answers from the rest of the companies.

8

Consequently, the sample of distribution companies reviewed in this investigation consists of

12 companies, six large and six small. These interviews were then supplemented by one

interview with a representative from the Energy Market Inspectorate.

In order to receive efficient and goal-oriented interviews, we constructed two types of

questionnaires, one addressed to the companies (see appendix 1) and one for the Energy

Market Inspectorate (see appendix 2). We mainly used the questionnaire as a guideline for the

representatives and ourselves. The aim of that mentioned questionnaire was to enhance a well

prepared interview with the representatives and to get more detailed answers. The

questionnaire was divided into two sections. The first section focused on productivity while

the second part focused on institutional theory. The questionnaire was sent to the

representatives a few days before the interview in order to give them a chance to be as

prepared as possible. The fact that the questionnaire was given to the representatives before

the interview may bias the results due to less spontaneous answers and answers that are

constructed after what the representatives think that the interviewers want. Further, the fact

that we just interviewed one person from each company might bias the results though only

one person is held accounted for the entire company.

A large risk with this type of method, i.e. sending out the questionnaire in advanced, is that

the answers we receive from our representatives do not have to correspond with the truth. The

representatives could be giving false information for various reasons. Clearly there is a risk

that the representatives say that they follow the rules and regulation strictly when the truth is

that they do not. Another point of view is that the companies always strive for improving their

productivity.

In their study, Bryman and Bell (2005) discuss the concepts reliability and validity. However

the authors (ibid) argue that these concepts are more suitable for quantitative studies. Instead

Bryman and Bell (2005) stress dependability and credibility as similar concepts to validity

and reliability and argue that these are more suitable for qualitative studies. What the authors

mean with the concept credibility is that there could be several descriptions about how the

reality looks like and it is how trustworthy the representatives description is that decide if the

researcher can accept that or not. It is also the researchers that spread the description from the

representatives to the rest of the society. This is a large reason why it is important with a high

credibility in the thesis. In addition, the concept credibility is the same as internal validity in

quantitative studies.

To minimize the risks with only one interview per company we chose the representatives due

to our aim and research question. We thought that the representatives should be persons with

good knowledge regarding the companies’ financial position. However, the representative

should also possess knowledge regarding the new law changes and about the revenue

framework developed by the Energy Market Inspectorate. All the representatives interviewed

in our study are also contact persons to the Energy Market Inspectorate. Consequently, the

majority of the representatives are controllers or chief financial officers. The representative

from the Energy Market Inspectorate is a person with a good insight in the working process

with the revenue framework. The representative from the Energy Market Inspectorate is an

assistant departmental manager for the department of tariff surveillance. Due to sensitive

information all respondents was given anonymity. The companies are referred to as A-L.

Companies A-F are large companies and companies G-L are small companies.

9

When Bryman and Bell (2005) talks about dependability they mean that it is important to give

the reader a good explanation of the processes in the report and how we got the results that we

got and why we chosen the methods that we did and so on. The authors also equalize this

concept with reliability in quantitative studies.

Regarding interview method we chose to perform structured telephone interviews due to the

fact that the companies are located all over the country. Further, we thought that telephone

interviews would provide us with better information in contrast to, for instance, e-mail

conversations since it gave us the opportunity to ask follow-up questions. Telephone

interviews also gave the representatives the opportunity to explain if there was something that

we did not understand. In also reduced the risk for misunderstandings. Further, telephone

interviews are time saving.

However, telephone interviews might bias the results. For instance it might be hard for the

interviewer to remain objective during the entire process. The chosen method might also lead

to less detailed answers and it can be hard for the person who interview to catch all the

information provided by the representative. Further, telephone interviews make it impossible

to read the responders facial expression, instead one have to rely on the tone of voice.

In our study we thought that we have tried as much as we could to make the results as credible

as possible and tried to have a reviewing approach during the whole process. With the

dependability concept has we tried to give the reader as much information as possible about

the pros and cons with the chosen method but also the entire process.

10

4. PREVIOUS RESEARCH On the free market companies are exposed to competition forcing them to constantly improve

and become more effective. In contrast, on the regulated monopoly market companies are

instead more affected by current rules and regulations but also by pressure from the society.

Since our aim is to analyze how the Swedish electricity distribution companies have adopted

and reacted to the revenue framework developed by the Energy Market Inspectorate it is

important to use a theory which is applicable to the electricity distribution industry. Our

choice of theory fell on the institutional theory. In the first part of this chapter this theory will

be discussed.

4.1 The institutional theory During the latter half of the 19

th century as well as the first two decades of the 20

th century the

political scene in both Europe and America was dominated with institutional approaches

(Scott, 2008). However, in the beginning of the middle of the 1930s and on to the 1960s, the

institutional perspective was challenged and largely replaced by the so called behavioralist

approach, an approach which aimed to shift focus away from institutional structures and on to

political behavior. As a reaction, the ‘new institutionalism’ was developed and since the

middle of the 1970s one have been able to witness how the ‘new’ institutional theory has

burst on the organizational scene, generating attention and interest at the same time as it has

raised provocative questions regarding the area of organizations.

4.1.1 The three pillars of institutions

Institutions are comprised of regulative, normative and cultural-cognitive elements which

Scott (2008) refers to as ‘the three pillars of institutions’. Within the regulative pillar force,

expedience responses and sanctions are central ingredients. However, these components are

often tempered by the existence of formal as well as informal rules and laws. Institutions are

regulated by laws or social rules for human actions, or by a mixture of both. Scott (2008)

describes how the primary mechanism of control observed within this pillar is coercion.

According to DiMaggio and Powell (1983) coercion often arises when organizations face both

formal and informal requests from other organizations or institutions, which they are

dependent on. Coercive isomorphism is a respond to the pressure an organization may

experience from another organization. However it is also a response to the pressure to confirm

to the society’s expectations on the organization.

Within the normative pillar emphasis is placed on normative rules (Scott, 2008). Normative

systems include both norms, how things should be done, and values, something that is

considered desirable to achieve. The normative mechanism is the essential mechanism within

the normative pillar and DiMaggio and Powell (1983) describe how it is caused mainly by

professionalization. According to the authors (ibid) it refers to organizational change as a

respond to exchange with professional associations and peer organizations.

In turn, the cultural-cognitive pillar highlights an institutions culture and experiences of

reality as crucial to its emergence and survival (Scott, 2008). Scott (2008) describes how the

key mechanism within this pillar is mimetic. This mechanism is a response to organizational

uncertainty when it comes to identifying the best way of action (Carpenter and Feroz, 2001).

An example is when management is set under the pressure to improve a company’s

performance but does not know how it is about to reach this objective. Uncertainty is a

powerful force which encourages companies to imitate performance, practices and structures

11

of other organizations that are seen as successful in their organizational field. When

companies are facing situations where there is no precise course of action they may choose to

use structures or practices that are used by companies who are seen as successful in the

institutional environment.

Organizations clearly need more than technical information and material resources in order to

survive and thrive in their social environments (Scott, 2008). Social acceptability and

credibility is also needed. Sociologists use the concept of legitimacy when referring to these

conditions. Each of the three pillars of institutions provides a basis for legitimacy, although

different ones.

The new institutional theory is based on the idea that companies respond to different factors

from their institutional environments and also implement structures and/or procedures that are

socially accepted (Länsiluoto and Järvenpää 2010). Earlier studies of the institutional theory

have shown how companies conform and adapt to institutional environmental pressures in

order to achieve legitimacy. In addition Carpenter and Feroz (2001) believe that the

institutional theory may increase our understanding regarding organizations’ accounting

choices. According to the authors (ibid) prior research within the area of accounting research

based on economic theory often ignores how institutional and organizational pressure may

limit organizations’ accounting choices. Clearly one should not underestimate the power of

institutions.

The institutional theory explains the electricity distribution companies’ actions in a wider

perspective. However, in order to narrow down the research area we have decided to focus on

how the companies have reacted on the new revenue framework and especially how it has

affected their productivity and efficiency.

Our theoretical model is based on the institutional theory but to be able to go even deeper into

the companies we have chosen to investigate them with focus on their productivity and

effectiveness. The companies have efficiency demands included in the revenue framework,

demands that more or less will force them to increase their productivity. In order to get an

answer to our research question it is important to sort out the two concepts, productivity and

efficiency and we aim to investigate if the revenue framework has changed the way the

companies work with our main concepts productivity and efficiency.

4.2 Productivity and efficiency After scrutinizing the area productivity appears to be an ambiguous term. The concept of

productivity is frequently discussed but at the same time vaguely defined and poorly

understood (Tangen, 2002). Consequently, the lack of a widely accepted definition may lead

to misunderstandings concerning the actual meaning of the concept, resulting in people

confusing it with similar terms. According to Tangen (2002) this may explain why

productivity seldom is measured in an appropriate way. ‘[…] if we do not fully understand

what productivity is, how can we decide what productivity measures to use? How can we

interpret them correctly? How can we know what action to take to improve productivity?’

(ibid, p. 1, 2002).

Despite the fact that the area of productivity seems highly confusing, Tangen (2002) has

successfully identified some characteristic features that represent the concept of productivity.

In industrial engineering, productivity is defined as the relation between output and input. On

the one hand one can say that productivity is closely connected to the availability and use of

12

recourses and, if not properly used or if there is a lack of them, those resources may reduce

a’s productivity. On the other hand Tangen (2002) emphasizes that productivity may be

strongly linked to the creation of value and that high productivity is achieved when resources

and activities in the ‘manufacturing transformation process’ add value to the products

produced.

In addition, Enflo et al (2009) describe how an organization can increase its productivity by

producing more with a definite quantity of inputs. Further, the authors (ibid, 2009) describe

that productivity involves different aspects, for instance labour, capital and materials.

According to Enflo et al (2009) there is a need to increase the productivity in the energy

sector. One interesting aspect with this thought is that the revenue frameworks for the

Swedish electricity distribution companies are 35 billion less than the companies have

requested (DI, 2011). According to Enflo et al (2009), is it possible for the electricity

distribution companies to be as productive as they have been up to today, or even more

productive, with a definite quantity of inputs in terms of revenues?

Kirikal (2005) describes productivity as an important component of the monitoring,

supervision and analysis of company performance. ’By defining the productivity of a firm as

the ratio of outputs that it produces to the inputs used, the larger values of this ratio are

associated with better performance’ (Kirikal, 2005, p. 111). Therefore, Kirikal (2005) argues

that a company’s productivity in the present year can be measured relative to its productivity

the year before, or it can also be measured relative to the productivity of an additional

company in the same year. According to the author (ibid) it is even possible to compare an

industry’s productivity over time or across countries. Kirikal (2005) also mentions that

productivity is important everywhere in the society for the industries, which in our case is the

electricity distribution industry, in the single company but also at national level. One of the

main reasons why high productivity is important at industry level is that it can decrease costs

resulting in lower prices for the same service as before the increased productivity.

In addition Tangen (2002) describes how there is a good connection between high

productivity and the creation of value, which is achieved when resources and activities in the

manufacturing transformation process add value to the products produced. This is an

explanation that we have embraced and hence will use in this thesis.

Further, Tangen (2003) says that the traditional ways to measure productivity have some

shortcomings but they do not have to be rejected because they are objective and they can be

combined with other non-financial measurements. Tangen (2003) further describes two sorts

of productivity that are the most commonly used when describing the concept of productivity;

partial- and total productivity. According to the author (ibid), partial productivity measures

the relation between output, to one source of input (such as capital, or in this case: energy).

Tangen (2003) states that partial productivity often is much more precise and therefore can

detect improvements and also the reasons behind them more easily than broader measures.

Simplicity to understand and make measurements in reality are two other arguments that

Tangen (2003) stresses. On the other hand, total productivity trials the correlation of total

output against the sum of all the input variables. In contrast, the advantages to measure the

total productivity are that they count in the capital-labour substitution, while a disadvantage is

the difficulties to perceive and to measure the total productivity (Tangen, 2003).

Efficiency, a closely related concept to productivity, is another word that is quite difficult to

pin down because of its often vague and many definitions. Tangen (2002) establishes

13

efficiency as connected to utilization of resources that mainly influences the contribution of

the productivity ratio. Further, the author (ibid) describes efficiency as ‘the minimum resource

level that is theoretically required to run the desired operations in a given system, compared

to how much resources are actually used’ (ibid, p. 3, 2002).

In contrast Ax, Johansson and Kullvén (2007) define the concept of efficiency as the degree

of target. Therefore, efficiency is an expression of the extent to which companies achieve

their objectives. A company’s efficiency is determined by the ratio between the value of the

resources and the value of what is achieved. Which have been put in and the actions that are

made to perform the result in relationship with the company’s goal. If the company performs

a goal it is said that the company has high efficiency respective low efficiency if the

corporation does not perform its goal.

Sometimes internal and external efficiency are discussed in the concept of efficiency where

internal efficiency is connected to productivity, cost effectiveness and well operating systems

and routines. In turn, external efficiency is connected to concepts like growth, quality and

service. However, Ax et al. (2007) mention that it can be hard to establish whether an

organization is efficient or not. For instance, it can be hard to establish if a company is

efficient or not due to the fact that it can depend upon several circumstances beyond the

company’s control.

4.3 The revenue framework The revenue framework for the 180 electricity distribution companies in Sweden are mainly

based on affectable costs, non affectable costs and the capital base. The affectable costs have

a general demand for cost-effectiveness (Werther, 2009). These costs together with the non-

affectable costs constitute the running costs for the companies. The capital base is divided into

depreciations and return, Weighted Average Cost of Capital (WACC) which is a way to

calculate the return. The return is then adjusted considering the quality of the capital base.

These components together constitute the company’s capital costs.

14

Affectable

costs

Non affectable

costs

Capital

base

Demand of

effectiveness Depreciations Return, WACC

Quality

adjustment

Running

costs

Capital

costs

Adjustment

for earlier

periods

The

revenue

framework

Figure 2: Schematic structure of the revenue framework (Werther, 2009).

4.3.1 Capital costs

To calculate each company’s capital costs you need to calculate the capital base of the

company (Werther, 2009). A capacity conserving method was chosen which does not

consider the history but considers the capacity and quality of the company’s capital. The

method focuses on the capital assets current price. The company’s capital costs have also been

adjusted according to the quality of their facilities. This gives that companies with low quality

assets with many or long failures will be given a lower revenue guide than companies with

high quality facilities. Capital costs are generated based on investments needed for the

operation of the electricity net such as wires and meters.

A real annuity is also used which means that the company’s capital costs will be constant

regardless the age of the facilities (Werther, 2009). This capital cost can also be included in

the capital base even if the facility is completely depreciated.

The cost for capital binding is calculated with costs of capital (Werther, 2009). The costs of

capital are calculated with a contexture of required rate of return together with the costs of

borrowed capital. This way to calculate is called WACC – Weighted Average Cost of

Capital.

4.3.2 Running costs

The allowed running costs of the companies will be based on historical data with price

increases taken into account (Werther, 2009). The non-affectable costs such as electricity nets

and taxes will be fully covered in the revenue framework while the affectable costs will have

15

a cost-effectiveness demand during the surveillance periods. During the first surveillance

period a general cost-effectiveness demand will be applied to all electricity distribution

companies.

The running costs are also depreciations and interest costs on the companies’ assets in the

capital base (Werther, 2009). There are also costs that seem to be capital costs, like office

space and cars, but the Energy Market Inspectorate has decided to view these as running cost

the companies have the opportunity to change to a cheaper alternative. The cost-effectiveness

demand has the purpose to give the customers lower prices and more productive companies.

16

5. EMPIRICAL STUDY

5.1 The institutional theory

5.1.1 The Energy Market Inspectorate

The revenue framework and its establishment Simplified, the idea of the revenue framework is to go from post- to prior regulation. The

prior regulation consists of periods of four years, which earlier has been one year. The

regulations mean that the inspectorate has to adapt to this. An important point before the

regulation was that Sweden did not follow the regulations concerning the review in advance,

which resulted in a notification against the country and also caused that the country was

notified to the European Court of Justice. After the incident, a report was made concerning

how to make decisions. After the preparatory work, the companies did report about their

numbers in March and in the last of October in 2011, the Energy Market Inspectorate had

made a decision regarding a revenue framework.

The new income frameworks A little different, they will analyze and see how the companies’ records are like and also

comparative measurements from the year of 2010. One of the variables is where the company

is in its investment cycle. Mainly there are large connection fees, some may find it tough

when it appealed and what many of the companies have highlighted as they complain is

referring to the method selection. The Energy Market Inspectorate uses the spreadsheet rows

to calculate fair compensation regarding return of capital is too low. The representative means

that the companies have to realize that it is not linked to Energy Market Inspectorate when it

appears red figures in the accounts, which the representative points out as general criticism.

Another point is a little difficult to do something proactive, though it is difficult to predict

how the business will look like in the future.

5.1.2 The electricity distribution companies

The companies all agree that rules and regulations have a huge impact on the organizations

and their daily work. As Company F describes it ‘We are hugely affected by rules and

regulation, the entire organization is ruled by the electricity law. Our decisions are taken

strictly according to the law’. According to Company E this impact of rules and regulations

will continue to increase due to both national and international pressure. Further, the results

show that companies A-F all agrees that the new law changes have had an impact on the

management control. Company C emphasizes that it has to audit its business plan as well as

reduce its costs. Company A believes that it is positive to get knowledge regarding how the

revenues will be divided before a new period starts. The company describes how it believes

that the model will work. However the decision came as a surprise.

In contrast companies G-L do not feel any appreciable impact on its management control, at

least not at the moment. However, the companies agree that the changes have led to increased

bureaucracy. For instance, Company G describes that the amount of administrative tasks have

grown. In addition Company F argues that the implementation process has been resource-

demanding. For instance the implementation has forced the company to reallocate a lot of

human resources and this process has been both time consuming and costly. However not all

companies have solely negative opinions regarding the new model. Company A believes that

this is a step in the right direction. According to the company the energy market has to adapt

to the European market

17

Few of the companies have noticed any reaction from its customers regarding the new law

changes and its impacts. Company A believes that it might be too early to notice any reaction

from them yet. When asking if the companies have communicated the changes to its

customers the majority reply that they have not. However there are some exceptions.

Company H describes how it has communicated to its customers through media, information

letters and both Company B and H have also used press releases to communicate the new

changes. Company B has also emphasized the new changes at the company’s website, the

same with Company A and E. Company A describes how it has tried to be as open as possible

in the communication to its customers. However the company feels that their customers

sometimes have trouble understanding what they actually are paying for.

The companies agree that it is too early to see the actual effect of the implementation of the

new revenue framework. However, the reactions regarding the development and

implementation of the model are strong. The general opinion is that there is a good

relationship between the companies and the Energy Market Inspectorate. The majority

describe the authority as accommodating. They all agree that the Energy Market Inspectorate

has been transparent throughout the large parts of development process. For instance several

of the companies describe how it has been possible to follow the development and reach

information on the Energy Market Inspectorate’s website. However several of the companies

are dissatisfied with the development process of the revenue framework.

A majority of the companies emphasize how the revenue model was changed in the last

minute resulting in several ambiguities and a high level of confusion. Company F describes it

as follows. ‘The Energy Market Inspectorate has become better in their communication with

us. But there is still some ambiguities concerning the decision. The Energy Market

Inspectorate changed the conditions during the process which was confusing’. Further, the

allowed revenues for a majority of the companies are much lower than the companies have

applied for. As a result some of the companies describe how intended large investments have

to be postponed. As an example Company B and company C describe how its investments

plans have been reduced. Company F agrees, arguing that it have to review its investment

plans for the next ten years due to the reduction of the allowed revenues. Company C explains

it as follows; ‘Our task is to be effective, to constant maintain and expand the electricity net.

This will not be possible if we have to downsize our investments’. Company A describe how

there was a lack of dialogue in the end of the development process. The company hopes that

the Energy Market Inspectorate will embrace the critique and give answers to the companies’

questions.

The new model has also amount in an increase of administrative tasks. Company H describes

the decision to implement the new model as short-termed which will force the companies to

introduce different cost-saving measurements. However, Company E believes that the basic

idea with the revenue model is good. The problem is that the model is based on historical

numbers. For instance Company E describes how it has increased the number of customers

during the last couple of years but according to the new directive it has to decrease its allowed

revenues.

Company F describes the decision to develop the revenue model as unclear. The company is

aware that that the Energy Market Inspectorate has to focus on the final customer. However

the company feels that the Inspectorate makes it hard for them (and the other distribution

18

companies) when preventing them from charge the clients what is necessary in order to

maintain a proper standard.

In contrast Company I and Company J have not noticed any major difficulties with the model.

Company I describes the model as ‘one in the crowd of new changes’. However, it also

emphasizes that in the end it is probably the client that will have to pay the price. Company H

also express its concern regarding the fact that it is most certain the customers who will suffer

the most. The company describes that it is aware that it is hard to develop a model that suits

all. However, just looking at the own organization the administrative tasks have grown in

proportion and the employees have difficulties to embrace the new model due to its

complexity. Consequently the prices will rise. Company E follow the same line of argument

describing how the new model force companies to decrease its costs on a short-term which

may lead to higher costs in the future. Consequently the customers have to pay higher prices

in the end.

According to some of the companies the public seems rather unaware of the new changes

regarding the implementation of the new revenue model. In contrast several of the companies

emphasize that the electricity market in general possess a negative attitude against the new

model. ‘It is about 80 companies that have appealed. That says quite a lot about the

electricity distribution companies’ opinion’ (Company B, 2012).

5.2 Productivity and efficiency

5.2.1The Energy Market Inspectorate

Before the implementation The representative from the Energy market inspectorate talks about the structure in earlier

years, where the authority made so called DEA-analyses (Data-Evelopment Analysis) to

measure the productivity. The method is based on capital costs that electricity distribution

companies have coverage for in the regulation and that they should reflect the costs necessary

for efficient operation, exploitation and expansion of the company’s electricity distributions.

The ex-ante regulation is about the ongoing affectable costs, which is about making the

organization about one percent more effective per year. Generally it is possible for a company

to become about two percent more effective each year, according to a report available at the

authority’s website ei.se. The reasoning is that generally or per company, Energy Market

Inspectorate needed to judge which method that was the best to use due to the fact that the

turnover/size is a factor that may differ quite much between the companies.

The standardized method and the revenue framework The representative talks about the standardized method, a method to calculate the revenue

frameworks, which gives the companies an all too big rise in the short term. How have the

companies handled this historically? Through an interim solution. The interviewed person is

careful to point out that if the Energy Market Inspectorate had agreed in the decision

according to the standardized method, many of the companies could have raised their

revenues with the whole of 10-15 percent. The aim with the method is to hold it transparent in

relation to the businesses. According to the Energy Market Inspectorate, an increased

productivity has resulted in a decreased cost per units produced. The interviewee means that

as a company, it is possible to become about one percent more effective per year- translated

into this industry improve the revenue framework with about one percent a year.

19

Affection on companies and customers The representative explains that the authority believed that the new framework would be very

beneficial, and that the companies were informed in how to account. The person continues by

telling that if the Energy market inspectorate would have followed the companies’

suggestions, the inspectorate would be in trouble. (By that it means that the companies’

customers’ costs would increase that fast). By now, there is a transition solution that makes

the companies by time know what revenue framework to have. The person explains the

customer representatives as very grateful that this year’s increase was a little bit more normal

than it could otherwise have been. Apparently it is now very quiet, which is interpreted as

customer and their representatives as very satisfied persons.

Difficulties with the method Some of the difficulties in making forecasts concerning the future development are that you

normally are referred to investigate the historical development. The Energy market

inspectorate means that the term productivity often refers to the ratio of the volume produced

by one or more products and resources that are consumed in this production. Concerning the

cooperation between the Energy Market Inspectorate and the companies, the representative

thinks that it is quite well. One of the things that the Energy Market Inspectorate has done is a

quite massive information campaign including reporting, booking of locals for lecturers

containing information about how the reporting should be performed. When the reporting

was to be performed the KENT method, a program for disruptive reporting, was the one to be

used and the whole procedure were moving well. The representative mentions the

communication between the companies and the Inspectorate as quite good and state that some

clarifications have had to be done and that some companies might have been slow in the

reporting procedure. But finally the person says that none of the companies have been

noticeably awkward.

The concept of efficiency according to EI The concept of efficiency means comparisons of companies’ productivity relatively a norm

which is made by the most productive companies in a certain industry, i.e. the companies

produce the same things during similar conditions. It is an ability for the companies to do

things right through comparing every single company against a benchmark where the most

productive companies in the group of companies being compared form the benchmark. The

productivity increases if more is produced and/or through that fewer resources are used.

Consequently, productivity will increase if more is produced and/or by fewer resources are

used. A rise in productivity can be explained by various factors. It is common to divide a

change in the productivity in things that depends on; 1. Efficiency improvements (less

resources are spent for the same production through successive rationalization, ‘everyday

rationalization’). 2. Technological change that expands the possibilities for greater

productivity (new technologies and new organizational forms that move the cost front). 3.

Realization of economies of scale by expanding the business through for example company

fusions.

5.2.2 The Electricity distribution companies

Concepts Regarding the concepts efficiency and productivity, most of the companies said that they

work with both concepts in different ways when they try to develop their organization. But a

tendency was that a few numbers of companies talk specifically about efficiency.

20

Other companies, like Company C talked much about how to measure profitability and

explain this like a different way to see upon efficiency but they do not talk that much about

productivity. Company E, on the other hand does not mention any of these two concepts but

they always try to improve the organization. The way it tries to improve the organization is

that it trying to cut their costs as much as possible. The company also stress that the electricity

distribution is in need of constant improvements to get as productive as possible.

Company F almost talks about doing the right things and not at all about the concepts

productivity and efficiency. The representative from Company G emphasizes ‘We use both

productivity and efficiency but the main focus in our business is to do the right things’. Other

companies, like Company I, said that they look at their activities and if they are profitable

according to their revenues in both the short- and the long term. Company H and Company L

has just started to look at these concepts and they emphasize how important it is to do the

right things. Company K stresses that these two concepts are connected to each other and

both of them are important for their operation in the industry of electricity distribution.

Measurements Few of the companies have a definition of productivity however the majority of the

companies have not a clear definition of the concept. Instead, the companies describe that

productivity is not a concept commonly used in the organizations. Those who have defined

productivity mentions interrupt periods as a method to measure it. To exemplify, none of the

companies B, C, E, J, K and L mention that they have an own definition of productivity.

Company I also says that it works with interrupt periods in its activities with productivity but

it does not have any routines to monitor the interrupt periods. Other companies that either

have special routines to monitor their productivity are B, C, E, F, K and L. On the other hand

Company J looks upon how it can save costs and also emphasize that efficiency have a strong

link to electricity distribution.

Two of the companies differentiate themselves from the other companies and it is Company H

and Company G. Company H says that it looks much upon the return of employed capital.

But it also stress that it follow up the interrupt periods and would be even better on

monitoring its activities. Company G on the other hand follow up its activities economically

every month and in that way harmonize with its budget.

One of the largest of our companies, Company A, states that it tries to develop its systems as

much as possible and in the long run become more productive. It also says that it may be able

to have economies of scale because of its size. But it also stresses that it is important to

maintain and develop the network to reduce the risk for enormous interrupt periods. The

importance of maintaining the network is likewise something that Company D emphasizes.

Company A further describes how the business may be able to have economies of scale

because of its size. The representative states that ‘If the efficiency in our systems will be

improved it will be possible for us to increase the amount of customers with at least ten

percents without any significant increase of our costs’.

Impact In general, the companies only see negative impacts as a result of the new changes in the

regulation about the revenue frameworks. An example is Company E and Company H says

that investments are not possible in the same way right now because of the framework. It says

that it is impossible to do investments in equal extend as before. Company H and Company K

21

also stress that the framework can become more extensive in the future and it has to do the

investments at that point instead of right now when it may is needed to do some investments.

On the other hand, Company C says that electricity distribution means to be effective in the

way of maintains and expands the network and mean that it would be harder than before

because of the limited income. The representative from Company G says that it has one of the

lowest tariffs in the country. ‘We have counted with an increase of eight to nine percent but

with the new framework from the Energy Market Inspectorate, we can only increase the tariffs

with less than four percent leading to a less productive organization’ (Company G, 2012).

Company F emphasize that it has taken very much resources from other activities in the

organization initially. Then there are several companies that do not have any opinion because

of the short period since this new regulation started i.e. these companies, B, I, J and L, cannot

see any impacts so far.

In the interview with A it lay emphasis on its budget process and the monitoring which has

become a very important aspect to work with since the revenue frameworks became

mandatory. It also stress that monitoring is a new feature for this company. Company D also

laid emphasis on the ongoing monitoring as a very important aspect in its work with its

revenue framework.

22

6. ANALYSIS AND DISCUSSION

6.1 Institutional theory Länsiluoto and Järvenpää (2010) stress that the new institutional theory is based on the idea

that companies respond to different factors within their institutional environment. In this case

the EU commissions and the Swedish law are some of the major factors that the companies in

our study have to adapt to. According to the representatives from the electricity distribution

companies, they all agree on that rules and regulations have a huge impact on their daily

work. In their article Länsiluoto and Järvenpää (2010) describe how earlier studies have

shown how companies adapt to institutional environmental pressures in order to achieve

legitimacy.

The electricity distribution companies are affected by the regulative and normative pillars in

the institutional theory. We believe that the regulative pillar is the most dominating one. An

example of how the regulative pillar affects the companies is Company F which stresses the

following; ‘We are hugely affected by rules and regulations, the entire organization is ruled

by the electricity law. Our decisions are taken strictly according to the law’. This opinion is

more or less shared with the rest of our studied companies. Even though it is a geographical

monopoly market, the companies feel a strong pressure from the society to constantly become

more effective.

Scott (2008) uses a wider description of the theory when he describes formal and informal

rules and laws and how institutions are regulated by laws, social rules for human actions or

even a mixture of both. Connected to our findings in the distribution companies, what we can

see is as a pattern among them that fits this description where a majority of them confirm this

statement. Some of them even describe how they have been navigated by the decision so that

parts of the organization in question and investments have been largely decreased due to this

law change and regarding the social part- how consideration concerning their stakeholders

needs to be taken before any decision or new can be taken. As company A expresses; ‘We

need to have an external environment monitoring and be updated with the expectations and

requirements of the organization’.

The results also show that the impact from the regulative pillar will increase due to the need to

adapt to the European market. However in the case of the revenue framework the results show

that the companies are not that affected. Our opinion is that it is too early to see any effects

from the framework implementation. This may be explained by the fact that the new

framework became mandatory this year and that a majority of the companies have appealed

the decision concerning the individual revenue frameworks. Therefore we believe that the

companies will not take any certain actions before their appeals have been evaluated and

decisions have been taken.

Our impression is that it is important to always improve and become more effective within

these organizations. Several of the companies emphasize the importance of investments and to

always maintain and extend the network. But this view is in conflict with the regulative pillar.

The new regulations mean that the companies have to be more cost-effective. At the same

time the companies are not allowed to have as high revenues as they desire, which leads to

less investments for a huge part of the companies. Scott (2008) emphasizes that normative

systems include norms, how things should be done and values, something that is considered

desirable to achieve. We believe that the norm among distribution companies is the

23

importance of investments for them to be able to maintain and extend their networks.

Furthermore it can be the way things should be done in the electricity distribution industry

that creates values for the customers because without the electricity distribution the customers

can not receive any electricity at all.

The cultural-cognitive pillar concerns the tendencies to mimic other companies’ performance,

structures and practices. Though the electricity distribution companies possess geographical

monopoly they are not exposed to competition. Therefore our intuition is that the regulative

and normative pillars are more suitable when explaining the companies’ behavior. But we

also believe that the companies have a need of comparison between themselves and other

companies in order to become more productive and effective. Even if the cultural-cognitive

pillar is not the most suitable one for the electricity distribution companies, it still affects the

companies in some way. To clarify, the companies want to compare its actions which are

quite similar with competition on the free market.

6.2 Productivity and efficiency As we understand, the purpose with the new revenue model is that the end-customer should

not have to pay unreasonable charges. To achieve this, the Energy Market Inspectorate means

that the electricity distribution companies need to decrease their costs and become more

productive. As Enflo et al (2009) state; an organization can increase its productivity by

producing more with a definite quantity of inputs.

However it seems like the majority of the companies have difficulties embracing the model.

We believe that one major reason for this is that the Energy Market Inspectorate has failed in

its communication with the companies, especially when it comes to communicate the actual

purpose with the model. However, the Energy Market Inspectorate possesses an important

role in the electricity distribution industry, especially for the customers. It is a security for the

customers to know that there is an authority that affirms their interests and prevent the

companies to not set unreasonable prices. One more important issue for the Energy Market

Inspectorate, according to us, is to interpret laws and regulations and make them usable in

practice and thus easier for people and companies to understand. However, this is another area

that needs further improvement and the revenue framework is a clear example of that

concerning its structure and how people interpret it.

Regarding efficiency the Energy Market Inspectorate believes that the companies can, and

should, increase their efficiency. This is one of the reasons why they developed the new

revenue framework. According to the representative from the Energy Market Inspectorate, the

companies can increase their efficiency with about two percent each year. The companies are

aware that it is important for them to be effective in order to achieve the purposed revenue

framework. For instance, Company G and Company K stress that productivity and efficiency

are connected to each other and that both concepts are equal important for the industry. This is

in line with what Tangen (2002) says, the concepts efficiency and productivity are closely

related to each other. However, even though the companies are aware of the fact that it is

important to be more effective it is nothing we can see at this moment.

However, Tangen (2002) stresses that it is hard to define both efficiency and productivity.

Without a clear definition of the concepts misunderstandings and confusion most probably

will arise. ‘[…] if we do not fully understand what productivity is, how can we decide what

productivity measures to use? How can we interpret them correctly? How can we know what

action to take to improve productivity?’ (Tangen, p. 1, 2002). We believe that this quote

24

explains the companies’ situation in a good way. If the purpose is to achieve higher

productivity the distribution companies needs clear guidelines and a clear definition of the

concept.

According to the Energy Market Inspectorate the term productivity often refers to the ratio of

volume produced and resources consumed in production. The representative from the Energy

Market Inspectorate describes the concept of efficiency as ‘[…] comparisons of companies’

productivity relatively a norm which is made by the most productive companies in a certain

industry, i.e. the companies produce the same things during similar conditions’. Even though

some companies emphasize that the concept becomes more and more important, few of them

measure its productivity today.

Consequently it is hard to reach the aim with the new revenue framework. If the purpose is to

achieve higher productivity the distribution companies needs clear guidelines and clear

definitions of the concepts. A first step on the way could be to come up to a single definition

of the concept and clear guideline on how to use and measure it. The easiest way to get a clear

single definition is if the Energy Market inspectorate come up with a single definition for the

entire industry and communicates it out to the distribution companies and establishes it in the

industry. In that way it will be easier for the companies to compare and learn from each other.

Kirikal (2005) describes productivity as an important component of the monitoring,

supervision and analysis of company performance. ’By defining the productivity of a firm as

the ratio of outputs that it produces to the inputs used, the larger values of this ratio are

associated with better performance’ (Kirikal, 2005, p. 111). According to the representative

from the Energy Market Inspectorate the companies have the ability to become more

productive and as a result decrease its costs. In contrast a few companies mean that its

productivity will decrease as a result of the revenue framework. The reason why the

companies thought that the productivity will decrease is because of that they cannot increase

its tariffs as much as they wanted. Which lead to decreased investment plans and in the end it

will be costly which could affect the customers.

The representative from the Energy Market Inspectorate describes how the authority believes

that the new revenue framework would be beneficial for the distribution companies and that

the companies were informed in how to account their numbers. In general, the companies

only see negative effects as a result of the new law changes and the implementation of the

revenue framework. For instance some of the companies emphasize that the changes had led

to an increase of administrative tasks. Furthermore several companies stress that they have to

downsize their investments. Company C says that electricity distribution means to be effective

in the way of maintains and expands the network and means that it would be harder than

before because of the limited income. Company G says that it has one of the lowest tariffs in

Sweden. It has counted with an increase of eight to nine percent but with the new framework

from the Energy Market inspectorate, it can only increase the tariffs with less than four

percent. In the interview with Company A it lays emphasis on its budget process and the

monitoring which has become a very important aspect to work with since the revenue

frameworks became mandatory. It also stress that monitoring is a new feature for this

company. Company D also laid emphasis on the ongoing monitoring as a very important

aspect in its work with its revenue framework.

Through the large parts of the development process of the new revenue framework the Energy

Market Inspectorate was transparent and had a dialogue with the companies. However, in the

25

end of the process the authority decided to change model without involving the companies.

We believe that the negative attitude to the changes may be dependent on the fact that the

companies do not understand the underlying cause of the change. Furthermore, not involving

the companies may have led to a loss of confidence for the Energy Market Inspectorate.

26

7. CONCLUSIONS AND CONTRIBUTIONS

The aim of the thesis is to analyze how the Swedish electricity distribution companies have

adopted and reacted to the revenue framework developed by the Energy Market Inspectorate

as a result of the 2010:304 regulation. This aim was addressed by the following research

question; ‘How has the revenue framework affected the productivity and efficiency in the

electricity distribution companies?’

It appears that the revenue framework has not had a major impact on the electricity

distribution companies. The results show that the majority of the companies in our study have

not adopted the framework in the magnitude as expected by the Energy Market Inspectorate.

Our study also shows that most of the companies are dissatisfied with the framework mainly

because of the decrease of allowed revenues. As a consequence, about half of the companies

have appealed the decision and are awaiting the decision from higher authority.

It is clear that the Energy Market Inspectorate possesses an important role on the electricity

market in Sweden. The results show that the distribution companies act like real monopolists.

A majority of the companies have appealed the framework and are at the moment awaiting the

decision. As a result it is hard to distinguish any improvements regarding the companies’

productivity and efficiency.

Even though the companies not has been affected to any greater extend yet, the results show

that the institutional theory is useful when explaining how the Swedish distribution companies

in general conform and adapt to new rules and regulations. When discuss the influence of the

institutional theory it is however important to distinguish the three pillars within the theory.

Generally the regulative pillar has large impact on the companies and, as we can see it, this

pillar is the most dominating one. All companies described how they are highly affected by

rules and regulations in their daily work.

In contrast the cultural-cognitive pillar do not has the same strong effect on the companies.

This may be explained by the companies geographical monopoly situation. When possessing

this monopoly position it appears non-important to focus on how other companies, within the

same industry, operates. Instead of comparing themselves with other companies the main

focus is to adapt to society’s expectations and demands. For instance the results show that it is

important to always improve and become more effective.

However, even though the institutional theory is a helpful tool when interpreting the results it

is important to point out that it is impossible to fully explain people’s reactions with help of

different theories. People often act irrational which means that they sometimes, maybe quite

often, act upon their own experiences and the well know so called gut feeling. The result

shows that the companies are affected by different institutions however it is important to

emphasize that people tend to react just the opposite when feeling too controlled.

Consequently we believe that it is important to highlight the possibility that the electricity

distribution companies may make resistance against control from for instance the state when

feeling too controlled.

We believe that further research within this area of research is necessary. It is important to

follow up the actual effect of the revenue framework, for instance in the end of the first period

i.e. in the end of 2015. However, we also believe that it is important to perform regularly

27

studies in order to be able to follow the development of the framework but also discover

eventual defects.

28

REFERENCES

Ax, C., Johansson, C., & Kullvén, H., 2007. Den nya ekonomistyrningen, Liber ekonomi,

Malmö.

Bergman, L., Doyle, C., Gual, J., Hultkrantz, L., Neven, D., Röller, L., & Waverman, L.

1999. Europas nätverksindustrier Telekommunikationer Avregleringen i Europa.

Smedjebacken. SNS Förlag

Bernanke, B. & Frank, R. 2007. Principles of micro economics. Mc Graw-Hill/Irwin. New

York.

Bryman, A. & Bell, E., 2005. Företagsekonomiska Forskningsmetoder, Liber AB.

Carpenter, V.L. & Feroz, E.H. 2001. “Institutional theory and accounting rule choice: an

analysis of four US state governments’ decisions to adopt generally accepted accounting

principles”, Accounting, organization and society, Vol. 26, pp. 565-596.

DI, 2011. “Elnätsbolagen missar miljarder”. Retrieved April 24, 2012 from:

http://di.se/Default.aspx?pid=3866&epslanguage=sv&referrer=http%3A%2F%2Fdi.se%2FDe

fault.aspx%3Fpid%3D3866%26epslanguage%3Dsv%26referrer%3Dhttp%253A%252F%252

Fdi.se%252F

Dimaggio, P.J. & Powell, W.W. 1983. “The iron cage revisited: institutional isomorphism and

collective rationality in organizational fields.” American sociological, (48), pp. 147-160

Directive 2003/54/EG, Retrieved May 10, 2012 from:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2003:176:0037:0055:SV:PDF

Directive 2009/72/EC, Retrieved May 23, 2012 from:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:211:0055:0093:EN:PDF

EI, 2010a. “Elnätsföretagens avgifter”, Retrieved February 14, 2012 from:

http://www.ei.se/upload/Rapporter/Faktablad__Elnatsforetagens_avgifter.pdf

EI, 2010b. “Vi övervakar energimarknaderna”, Retrieved February 14, 2012 from:

http://www.ei.se/upload/Rapporter/Vi_overvakar_energimarknaden.pdf

EI, 2011a. “The Swedish electricity and natural gas markets 2010”, Retrieved January 24,

2012 from:

http://www.ei.se/upload/Rapporter/Engelska%20rapporter/The_Swedish_electricity_and_natu

ral_gas_markets_2010.pdf

EI, 2011b. “Årsredovisning 2010”, Retrieved January 27, 2012 from:

http://ei.se/upload/%C3%85rsrapport/EI_%C3%85rsredovisning_2010.pdf,

EI, 2012. ”Välkommen till Energimarknadsinspektionen”, Retrieved February 15, 2012 from:

http://www.ei.se/Om-EI/

29

Enflo, K., Kander, A. and Schön, L. 2009. “Electrification and energy productivity”,

Ecological Economics, Vol 68 pp. 2808-2817

European Commission, 2012. “Small and medium-sized enterprises (SMEs)”, Retrieved April

15, 2012 from:

http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-definition/index_en.htm

Hjalmarsson, L. and Veiderpass, A. 1992. “Productivity in Swedish Electricity Retail

Distribution”, The Scandinavian Journal of Economics Vol. 94, pp. 193-205.

Högselius, P. and Kaijser, A. 2007. När folkhemselen blev internationell: Elavregleringen i

historiskt perspektiv. SNS Förlag

Kirikal, L. 2005. “Productivity, the Malmquist Index and the Empirical Study of

Banks in Estonia”, PhD Thesis, Tallinn Technical University. Tallinn: Tallinn Technical

University

Länsiluoto, A. and Järvenpää, M. 2010.”Collective action in the implementation of a

“greener” performance measurement system”, Journal of accounting & organizational

change, Vol. 6, no. 2, pp. 200-227.

Regulation 2010:304, 2012, Retrieved May 23, 2012 from:

http://www.riksdagen.se/sv/Dokument-Lagar/Lagar/Svenskforfattningssamling/Forordning-

2010304-om-fasts_sfs-2010-304/

Scott, W. R. 2008. Institutions and Organizations: Ideas and interests. 3rd

ed. Thousand Oaks,

California: Sage Publications, Inc.

SFS 1997:857, The electricity law

SOU 2004:129. 2004. El och naturgasmarknaderna, Energimarknader i utveckling, (Bilaga

och rapporter), Stockholm: Fritzes

SOU 2007:99. Förhandsprövning av nättariffer m.m., Stockholm: Fritzes

SVK, 2012. ”Stamnätet”, Retrieved April 29, 2012 from:

http://www.svk.se/Om-oss/Var-verksamhet/Stamnatet/

2011- ett synnerligen dramatiskt elår, 2012. Retrived February 2, 2012, from:

http://www.svenskenergi.se/upload/Svenskenergi.nu/2012/Pdf-

filer/SvenskenergiNU_nr1_12.pdf, 2012-02-22

Tangen, S. 2002. “Understanding the concept of productivity”, Proceedings of the 7th

Asia-Pacific Industrial Engineering and Management Systems Conference, Taipei, 18-20

December 2002.

Tangen, S. 2003. “An overview of frequently used performance measures”, Work Study, Vol.

52, no. 7, pp. 347-354.

30

Werther, L. 2009. Förhandreglering av elnätsavgifter – principiella val i viktiga frågor.

Retrived June 15, 2012 from:

http://ei.se/Documents/Publikationer/rapporter_och_pm/Rapporter%202009/Forhandsreglerin

g_av_elnatsavgifter_principiella_val_i_viktiga_fragor_EIR_2009_09.pdf

Interviews Company A, 2012. In personal communication, March 23, 2012

Company B, 2012. In personal communication, March 27, 2012

Company C, 2012. In personal communication, March 23, 2012

Company D, 2012. In personal communication, April 2, 2012

Company E, 2012. In personal communication, April 3, 2012

Company F, 2012. In personal communication, March 29, 2012

Company G, 2012. In personal communication, March 28, 2012

Company H, 2012. In personal communication, March 23, 2012

Company I, 2012. In personal communication, March 23, 2012

Company J, 2012. In personal communication, April 11, 2012

Company K, 2012. In personal communication, April 12, 2012

Company L, 2012. In personal communication, April 11, 2012

Energy Market Inspectorate, 2012. In personal communication, march 28, 2012

31

APPENDIX 1 Questions to the companies

Productivity

1. What is your view of productivity, what is that for you? Do you have any own

definition of the term?

a. If you do, how do you measure productivity?

b. How much impact does productivity have on your business and its formation?

c. Do you have any special routines to measure/how the productivity in the

company change over time?

2. Have you noticed any differences in the company because of/due to this new

regulation about the revenue framework in the management control systems?

a. If, how are your feelings on the company that productivity has changed during

this period? Increased/decreased/unchanged?

Institutional theory

3. Has the new regulation affected your management control systems?

a. If, in what way has it been affected?

b. Do you feel impact of norms and values relating to environment other that

would affect the management control system?

c. Have you taken any special measures as a result of the changes? What kind of

action in that case?

d. Do you feel a lot of impact from rules and regulation in your business?

e. Negative effects of the implementation?

4. The general view of the new regulation among you/competitors/employees/customers?

a. How do you think that the electricity market as a whole has been affected by this

decision?

5. Do you feel that the customers have responded positively to the change/have you

communicated this to your customers?

6. Some things that you feel can be improved by the Energy Market Inspectorate? Things

that you as a company feel that you can do better than it does today?

7. Changes that you would like to see in form of laws/regulations/rules to reach such an

optimal utilization of resource/optimum productivity on the company as possible?

8. Was the decision made clear or has it been any ambiguity, in that case what?

9. What are your feelings about the contact/cooperation with the Energy Market

Inspectorate?

32

APPENDIX 2 Questions to the representative at the Energy Market Inspectorate

1. Tell us about the new revenue frameworks!

Productivity

2. What is your view of productivity, what is that for you? Do you have any own

definition of the term?

a. If you do, how do you measure productivity?

b. Do you have any special routines to measure/see how the productivity in the

companies changes with time? Have you experienced that the productivity in

the companies has increased/decreased/been unchanged during the

implementation?

Institutional theory

3. How do you think that the cooperation has been with the companies? Are there some

companies that are easier/more complicated to work with?

4. Do you think that the customers have reacted positive on the change/have you

communicated this out to the customers?

5. How do you think companies will cope with limited revenue frameworks?