Benchmarking the Efficiency of Philippines Electric Cooperatives Using Stochastic Frontier Analysis and Data Envelopment Analysis

This paper attempts to determine alternative methods of benchmarking the efficiency of electric companies to aid the regulator in crafting policies in enticing them to pursue more efficient production. This paper utilizes the data of electric cooperatives (ECs) in the Philippines, the one in charge of missionary electrification yet the smallest and most heavily indebted part of distribution sector. Using a panel composed of 119 cooperatives from 1990 to 2002, a cost function is estimated for the ECs. This estimation was used to identify appropriate cost variables that will determine the frontier. It was found out that the main cost drivers (as represented by total operating and maintenance costs) are total sales, prices of labor and capital, distribution network, transmission capacity, actual billed customers, service area, demand structure, and system losses. Based on this specification, efficiency frontiers are computed using Stochastic Frontier Analysis (SFA) and Data Envelopment Analysis (DEA). The efficiency of each cooperative was then ranked and compared for consistency checks. The SFA reports that on the average, ECs are 34 percent away from the cost frontier while that of DEA estimates 42 percent. The panel data also allowed for DEA to calculate Total Factor Productivity changes based on the Malmquist index. On the average, TFP increased by 1.7 percent from 1990 to 2002. The rankings and productivity values will prove to be useful for the energy regulator in determining efficiency targets. The fact that DEA and SFA are based on theoretically determined cost function will lead to results that are more representative of the ECs actual performance, rather than basing them on single ratios, which, when considered alongside other ratios will lead to results that are rather misleading. 1 An earlier draft of this paper was presented at the Third East West Center International Graduate Student Conference, Hawaii, February 2004. This paper is a part of the author’s master’s thesis at Hitotsubashi University, titled “Essays on Electricity Regulation in the Philippines.” The author acknowledges the help of her supervisor, Prof. Shigeki Kunieda. Thanks are also due to Mr. Hua Changchun for his valuable comments and contribution as well as to the moderators and participants of the International Conference.