Profitability Analysis of Electricity Distribution Networks in Russia

This paper analyzes profitability of electricity distribution utilities in Russia. Profitability is examined in the framework of one dimensional (profitability ratios and level of profit) and multi-dimensional analysis (Stochastic Frontier Analysis (SFA) and Data Envelopment Analysis (DEA)) on several samples including a sample with electricity distribution networks from Great Britain and the Netherlands, selected peers for Russian electricity distribution firms. The findings suggest that currently Russian firms hardly demonstrate sufficient level of profitability to attract private investments. But their profitability could be increased as there exist inefficiencies. Size of a firm, age of assets, level of losses and excessive length of electricity lines are associated with lower level of efficiency and thus with lower profitability. Regular profitability analysis can help to determine best practice firms and improve regulatory framework in order to attract investments, increase government proceeds in taxes and prevent overcompensation of regulated electricity distribution networks. Key words: DEA, SFA, electricity distribution, profitability analysis.