Modelling Efficiency of Electric Utilities Using Three Stage Virtual Frontier Data Envelopment Analysis with Variable Selection by Loads Method

Electric utility regulators and policy makers implement incentive-based regulation to improve electric utilities efficiency or to manage the cost of electricity. However, poorly implemented regulation may produce undesired results such as low reliability or poor quality of service. Moreover, the competition within the electricity sector is likely to be low because of the high barriers to entry, vertically integrated electric utilities, and high capital requirements. Therefore, benchmarking exercises allow policy makers and regulators to gauge the relative efficiency of electric utilities and help them to reward or penalize the electric utilities accordingly. In this study, we examined the variables that significantly influence the efficiency of electric utilities and developed an optimum method to measure the efficiency of the electric utilities. The results of the efficiency measurement were then used to rank the electric utilities. The result of this study indicates that there are 13 variables that significantly affect the efficiency score of electric utilities and three stage virtual frontier data envelopment analysis (3S-VF-DEA) is the optimum method to measure the efficiency of the electric utilities.

Automated summary

This study explores the impact of incentive-based regulation on the efficiency of electric utilities, highlighting the importance of properly implemented regulations to avoid negative outcomes. The competition within the electricity sector is affected by high barriers to entry, vertically integrated electric utilities, and high capital requirements. Benchmarking exercises are useful for assessing the relative efficiency of electric utilities and guiding appropriate rewards or penalties.