Parametric Versus Non-Parametric Efficiency Measures: A Consistency Conditions Analysis of the Finnish Electricity Distribution Industry

Abstract

Regulator needs reliable information on which to base its policies when practicing regulation on individual firms. Various benchmarking methods can be used to evaluate the firm specific effectiveness on the industry. In this paper we study the sensitivity problems of the benchmarking processes used in Finnish electricity distribution industry. Two methods, data envelopment analysis and stochastic frontier analysis, are applied in order to estimate firm specific efficiencies. Consistency conditions criteria among these efficiency estimates are studied. According to the results both efficiency scores and rank orders of the firms differs significantly each others. Data envelopment analysis and stochastic frontier analysis also identify clearly different firms as best practicing firms. This study strengthens the view that consistency condition criteria are difficult to satisfy in electricity distribution sector.

Keywords: efficiency measures, benchmarking, consistency conditions, electricity distribution

JEL Classification: C13, C14, D24, L51, L94