On the regulatory choice of returns to scale in DEA Models: An application to the Argentine electricity distribution sector

GUSTAVO FERRO, JAVIER MAQUIEYRA Y CARLOS A. ROMERO

Viena, Austria

Congreso; 19 Congrés International des Réseaux Electriques de Distribution; 2007

CIRED

In the distribution activity, “High-power” regulatory regimes were adopted in most of the reformed electricity sectors. In particular, in a price cap regime with a RPI-X rule, it is commonly used a benchmarking exercise based on efficiency frontier estimations. DEA is a widely used tool to accomplish this objective. Given that DEA efficiency scores are affected by the assumption about returns to scale, it is relevant for regulators to test that assumption. In this sense, the aim of this study is to determine if there is any evidence that the scale of production is constant in the electricity distribution activity. To achieve this objective, we construct efficiency frontiers using data from Argentine distribution firms in order to use them to statistically evaluate hypotheses about characteristics of production and factors affecting productivity. We find evidence of the presence of constant returns to scale in the Argentina electricity distribution.