Benchmarking With An Application to Electricity Distribution GAP Workshop 14 December 2005, Berlin Astrid Cullmann , DIW Berlin

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BenchmarkingWith An Application to Electricity
DistributionGAP Workshop14 December 2005,
BerlinAstrid Cullmann , DIW Berlin
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Agenda

• 1. Overview - Benchmarking Methodologies
• 2. Application in the Electricity Sector
• 3. Transfer to the Airports
• Literature

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Overview of Benchmarking Techniques
Benchmarking
PartialApproaches(one-dimensional)
Multi-dimensional Approaches
Average Approaches
Frontier Approaches
InducedApproach
Parametric
Parametric
Non-Parametric
DataEnvelopmentAnalysis(DEA)
StochasticFrontierAnalysis(SFA)
ModifiedOrdinaryLeast Squares(MOLS)
OrdinarayLeast Squares(OLS)
CorrectedOrdinaryLeast Squares(COLS)
Total FactorProductivity(TFP)
Stochastic DEA(SDEA)
PerformanceIndicators
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Data Envelopment Analysis (DEA) (I)
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Data Envelopment Analysis (II)

• Advantages
• - Identifies a set of peer firms (efficient
  firms with similar input and output mixes) for
  each inefficient firm.
• - Can easily handle multiple output.
• Does not assume a functional form for the
  frontier or a distributional form for the
  inefficiency error term.
• Drawbacks
• - May be influenced by noise.
• - Traditional hypothesis tests are not
  possible.
• Requires large sample size for robust estimates,
  which may not be available early on in the life
  of a regulator.
• ? Sensitivity Analysis by Bootstrapping

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Stochastic Frontier Analysis (SFA) (I)

• SFA Assumption about the residuals
• vi are random variables
• assumed to be iid, independent of the
• ui usually assumed to be half normal distributed
  (truncated)
• accounting for technical inefficiency

X
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Stochastic Frontier Analysis (SFA) (I)

• Specify production (or cost) function
• Cobb Douglas
• 2) Translog Functional Form
• Shortcoming
• Can handle only one output
• ? Aggregation
• ? Distance Functions
• - The decomposition of the error term into noise
  and efficiency component may be affected by the
  particular distributional forms specified.

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Agenda

• 1. Overview - Benchmarking Methodologies
• 2. Application in the Electricity Sector
• 2. Transfer to the Airports
• Literatur

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Efficiency Analysis in the Electricity
Distribution

• 1) Efficiency Analysis of German Local
  Distribution Utilities
• 2) Efficiency Analysis of East European
  Distribution Companies (Poland, Hungary, Czech
  Republic, Slovakia) in Comparison to Germany
• The Issue
• - Increased use of efficiency analysis in the
  regulation of network industries
• - Reform of the electricity sector Incentive
  based regulation
• - EU Directive 2003/54/EC and German Energy Law
  (July 2005)

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Choice of Variables

• Inputs
• LABOR number of employees
• NETWORK LENGTH approximation for capital input
  (factored high-, medium- and low-voltage lines
  51.61)

Outputs UNITS SOLD (in MWh) NUMBER OF
CUSTOMERS (residential) INVERSE DENSITY INDEX
(supplied area in square kilometres per
inhabitants)

• Number of customers is determined by industry
  and households within the supply area can be
  considered as a given date
• Demand of the end users is quite inelastic and
  must be satisfied

Output is fix, input has to be minimized
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Our Empirical Application

• I) We analyze technical efficiency (no cost data
  is available, VDEW data 2001)
• DEA is applied as main productivity analysis
  technique
• Constant Returns to Scale (Variable Returns to
  Scale for verification)
• Input-orientated approach
• Input distance function approach with SFA for
  verification

II) Specify a translog functional form, general
unrestricted form Truncated normal distribution
for the technical inefficiency random
variables Specification of Battese and Coelli,
1995 Maximum likelihood method to estimate the
parameters (Frontier Version 2.1, Coelli)
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Selected Results

• German local distribution
• East German Utilities more efficient

• East European regional Distribution
• Poland features by far the lowest efficiency
  scores
• Scale inefficient

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Measurement of Scale Efficiency

• Difference Model 2, DEA VRS CRS
• Economies of Scale seem to be limited, big is
  not necessarily beautiful

• Evidence for economies of scale in Poland (area
  of increasing returns to scale)
• Slovakia scale inefficiency due to decreasing
  returns to scale

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Agenda

• 1. Overview - Benchmarking Methodologies
• 2. Application in the Electricity Sector
• 3. Transfer to the Airports
• Literatur

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Transfer to Airport Benchmarking

• Decide which methodologies to use
• Stochastic Frontier Analysis not widely used.
  Integrate SFA, at least for verification and
  validation method
• Focus on technical efficiency or allocative
  efficiency?
• Dynamic analysis with panel data?
• Special Issue ? technical change
• Panel Data Models
• Choose appropriate input and output factors
• Difficult task ? many activities,
  heterogeneous

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Literature

• Aigner, Dennis J., Lovell Ashley C., Schmidt
  Peter, 1977. Formulation and Estimation of
  stochastic Frontier Production Function Models.
  Journal of Econometrics 6/1, 21-37.
• Christensen, L.R., Jorgensen, D.W. and Lau, L.J.
  1971. Conjugate Duality and the Transcendental
  Logarithmic Production Function. Econometrica 39,
  225-256
• Coelli, Tim, Prasada Rao, Dodla S., Battese,
  George E., 1998. An Introduction to Efficiency
  and Productivity Analysis. Kluwer Academic
  Publishers, Bostron/Dordrecht/London,
• Coelli, Tim, 1996. A Guide to Frontier Version
  4.1 A Computer Program for Stochastic Frontier
  Production and Cost Function Estimation. CEPA
  Working Paper 96/7, Department of Econometrics,
  University of New England, Armidale NSW
  Australia.
• Estache, Antonio, Rossi Martin A., Ruzzier
  Christian A., 2004. The Case for International
  Coordination of Electricity Regulation Evidence
  from the Measurement of Efficiency in South
  America. Journal of Regulatory Economics 25/3,
  271-295.
• EBRD, Transition Report 2004, London.
• Filippini, Massimo, Hrovatin, Nevenka, Zoric,
  Jelena, 2004. Regulation of the Slovenian
  Electricity Distribution Companies. Energy Policy
  32, 335-344.
• Jamasb, Tooraj, Pollitt, Michael, 2003.
  International Benchmarking and Yardstick
  Regulation An Application to European
  Electricity Distribution Utilities. Energy Policy
  31, 1609-1622.
• Kocenda, Evzen, Cabelka, Stepan, 1999.
  Liberalization in the Energy Sector in the
  CEE-Countries Transition and Growth.
  Osteuropa-Wirtschaft 44/1, 196-225.
• Shephard, Ronald W., 1970. Theory of Cost and
  Production Functions. Princeton University Press,
  Princeton.
• Frontier Economics, and Consentec (2003)
  Netzpreisaufsicht in der Praxis, Abschlussbericht
  für VIK und BDI, London.
• Riechmann, C. (2000) Kostensenkungsbedarf bei
  Deutschen Stromverteilern, Wirtschaftswelt
  Energie, 55, 6-8.
• Schiffer, H-W. (2002) Energiemarkt Deutschland,
  8. Auflage, Köln, TÜV-Verlag GmbH.