Annals of Operations Research

, Volume 121, Issue 1–4, pp 105–122

Evaluation of Cost Efficiency in Finnish Electricity Distribution


This paper describes the process of developing an approach to evaluating the cost-efficiency of Finnish electricity distribution companies based on Data Envelopment Analysis (DEA). The process consisted of three main stages (1) describing of the problem and exploring the key factors, (2) finding measurable quantities for the most essential factors, and (3) selecting the final model to be used in the regulation. Especially the selection of environmental variables, which allow the comparison of distribution companies operating in different environments, played a key role in the process. The selected model is used as a part of the regulation of distribution pricing.

data envelopment analysis cost efficiency electricity distribution 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. [1]
    P.J. Agrell, P. Bogetoft and J. Tind, Multi-period DEA incentive regulation in electricity distribution, Discussion Paper 2000–13, Centre for Industrial Economics, University of Copenhagen (2000).Google Scholar
  2. [2]
    N. Bagdadioglu, C.M. Waddams Price and T.G. Weyman-Jones, Efficiency and ownership in electricity distribution: A non-parametric model of the Turkish experience, Energy Economics 18 (1996) 1–23.Google Scholar
  3. [3]
    R.D. Banker, Maximum likelihood, consistency and data envelopment analysis: A statistical foundation, Management Science 39 (1993) 1265–1273.Google Scholar
  4. [4]
    R.D. Banker, Hypothesis testing using data envelopment analysis, Journal of Productivity Analysis 7 (1996) 139–159.Google Scholar
  5. [5]
    R.D. Banker, A. Charnes and W.W. Cooper, Some models for estimating technical and scale ineffi-ciencies in data envelopment analysis, Management Science 30 (1984) 1078–1092.Google Scholar
  6. [6]
    R.D. Banker and R.C. Morey, Efficiency analysis for exogenously fixed inputs and outputs, Operations Research 34 (1986) 513–521.Google Scholar
  7. [7]
    P. Bogetoft, DEA-based yardstick competition: the optimality of best practice regulation, Annals of Operations Research 73 (1997) 277–298.Google Scholar
  8. [8]
    A. Charnes, W.W. Cooper and E. Rhodes, Measuring the efficiency of decision making units, European Journal of Operational Research 2 (1978) 429–444.Google Scholar
  9. [9]
    W.W. Cooper, L.M. Seiford and K. Tone, Data Envelopment Analysis: A Comprehensive Text with Models, Applications, References and DEA-Solver Software (Kluwer Academic, Dordrecht, 1999).Google Scholar
  10. [10]
    DTE, Choice of model and availability of data for the efficiency analysis of Dutch network and supply businesses in the electricity sector, Netherlands Electricity Regulatory Service (2000), http://www., Publications, accessed 16.10.2000.Google Scholar
  11. [11]
    R.G. Dyson, R. Allen and A.S. Camanho, V.V. Podinovski, C.S. Sarrico and E.A. Shale, Pitfalls and protocols in DEA, European Journal of Operational Research 132 (2001) 245–259.Google Scholar
  12. [12]
    EMA, A precedent set by the electricity market authority concerning reasonable pricing of electricity distribution, Decision by the Finnish Electricity Market Authority, February 9, 1999,, accessed 27.5.2002.Google Scholar
  13. [13]
    F.R. Försund and S.A.C. Kittelsen, Productivity development of Norwegian electricity distribution utilities, Resource and Energy Economics 20 (1998) 207–224.Google Scholar
  14. [14]
    L. Hjalmarsson and A. Viederpass, Efficiency and ownership in Swedish electricity retail distribution, The Journal of Productivity Analysis 3 (1992) 7–23.Google Scholar
  15. [15]
    L. Hjalmarsson and A. Veiderpass, Productivity in Swedish electricity retail distribution, Scandinavian Journal of Economics 94 (1992) 193–205.Google Scholar
  16. [16]
    J. Honkatukia and P. Sulamaa, Tekninen tehokkuus ja kokonaistuottavuus Suomen sähköjakeluverkkotoiminnassa 1996–1998, Elinkeinoelämän Tutkimuslaitos, Keskusteluaiheita, No. 692 (1999).Google Scholar
  17. [17]
    S.A.C. Kittelsen, Stepwise DEA; Choosing variables for measuring technical efficiency in Norwegian electricity distribution, Memorandum 6/1993 (1993),, accessed 27.5.2002.Google Scholar
  18. [18]
    T. Langset and A.M. Torgersen, Effektivitet i distribusjonsnettene 1995, Norges Vassdrags og Energiverk, No. 15 (1997).Google Scholar
  19. [19]
    K. Lavaste, Summary: Consideration of efficiency in the assessment of the reasonableness of distribution pricing, Finnish Energy Market Authority, Helsinki, 17.9.2001 (2001), http://www., accessed 27.5.2002.Google Scholar
  20. [20]
    London Economics, Efficiency and benchmarking study of the NSW distribution business, Final-Annex 3, Literature Review Annex (February 1999).Google Scholar
  21. [21]
    London Economics, Efficiency and benchmarking study of the NSW distribution business (February 1999).Google Scholar
  22. [22]
    T.G. Weyman-Jones, Problems of yardstick regulation in electricity distribution, in: M. Bishop, J. Kay, C. Mayer and D. Thompson, Privatisation and Regulation, Vol. 2 (Oxford University Press, Oxford, 1992).Google Scholar

Copyright information

© Kluwer Academic Publishers 2003

Authors and Affiliations

  1. 1.Helsinki School of EconomicsHelsinkiFinland

Personalised recommendations