There are various methods for assessing the efficiency of regulated companies, including non-parametric and parametric approaches. Non-parametric methods like data envelopment analysis (DEA) establish an efficiency frontier based on best performing peers, while parametric methods like stochastic frontier analysis (SFA) incorporate random errors. Regulators apply benchmarking to set incentives for efficient performance and limit excessive pricing, but must consider the limitations of different methods given data quality and model specification issues. Integration of efficiency results into price controls also requires acknowledging imperfections and regulatory period specifics.

1. Training on Regulation A webinar for the European Copper Institute Webinar 6: Efficiency Assessments Dr. Konstantin Petrov / Dr. Daniel Grote 11.1.2009

2. Agenda 11/01/2010 a) TOTEX versus OPEX benchmarking 3. Application of efficiency results a) Overview 2. Methods for efficiency assessments c) Data Envelopment Analysis b) Performance indicators b) Efficiency convergence speed 1. Why measure efficiency? c) Supporting schemes e) Virtual network models d) Parametric Approaches

4. 1. Why measure efficiency? 11/01/2010 Definition of efficiency Efficiency = Outputs Inputs + “ Correction for Environment” Distribution Company e.g. # employees, fuel, operational costs, Input Factors e.g. # customers, delivered energy (kWh), peak load (kW) Output Factors e.g. firm size, network topology, climate, topography, terrain, task complexity Environmental Factors

8. 2. Methods for efficiency assessments 11/01/2010 Overview (1) Benchmarking Methods Partial Methods Total Methods Non-parametric Parametric Reference Networks (Virtual Networks) Index Methods Data Envelopment Analysis (DEA) Stochastic Frontier Analysis (SFA) Ordinary Least Squares (OLS) Corrected Ordinary Least Squares (COLS) Total Factor Productivity (TFP) Uni-dimensional ratios Performance Indicators Linear programming Econometrics Engineering Models Total methods can be based on the average performance or the efficient frontier of comparable companies

10. 2. Methods for efficiency assessments 11/01/2010 Overview (3) Efficiency Score A B C D E Measures of relative inefficiencies towards best performance Conversion (definition of efficiency increase targets) Companies

14. 2. Methods for efficiency assessments 11/01/2010 Data Envelopment Analysis (DEA) (1) Output 1 Input 1 Input 2 Data Envelope A B C D E most efficient companies F F’ Inefficiency Input minimisation Inefficiency Output 2 Data Envelope A B C D E F most efficient companies F’ Output maximisation G G’

18. 2. Methods for efficiency assessments 11/01/2010 Parametric / Econometric approaches – Regression analysis Corrected OLS (COLS) Ordinary Least Square (OLS) Most efficient observation Input (Costs) Output Stochastic Frontier Analysis (SFA)