Efficiency of Electricity Distribution

Abstract

In this chapter we show that, because of utility heterogeneities efficiency measurement is a demanding task. Electricity distribution is a natural monopoly industry and consequently there is a need for regulation. Efficiency measurement of distribution utilities is essential to achieve accurate information of ingredients for the efficient regulation. Unless heterogeneities are explicitly modeled inaccurate information can be produced for the regulators to use. We present Data envelopment analysis (DEA) and Stochastic frontier analysis (SFA) models, which are the basic models of frontier efficiency analysis. We show by using consistency measurement techniques how these models produce inconsistent results. We also show by testing traditional Cobb-Douglas and flexible form Translog frontier specifications that the frontier functional form specification is not crucial in identifying the inefficiencies once observed heterogeneity is included into the model. © Springer-Verlag London 2012.