Extensions to measures of technical efficiency with an application to U.S. electric utilities

This dissertation has two major objectives. The first objective is to propose a methodology to decompose the technical efficiency into two new measures: input and output scale efficiencies, which can indicate how an observed facility departs from its corresponding efficient point in the input and output levels respectively. The major application of scale efficiency is to determine the source of inefficiency. If input (or output) scale efficiency of an observed facility is less than one, then the source of inefficiency of the facility is shown to be from input over-utilization (or output under-production). Based on the two scale efficiency measures, we introduce a measure of returns to efficiency to provide general guidelines for inefficient facilities about input/output adjustments to improve efficiency. The second objective is to present a comprehensive model for the evaluation of efficiency. The model includes the three electric operations: generation, transmission and distribution. In contrast, many existing studies focus on the plant-level analysis or the generation at the utility level. The model also considers multiple-output production in the utility level to make the efficiency measurement more meaningful. The empirical analysis of this study includes a sample of 94 fossil-fueled utilities in 1981 and 1982. The analysis of technical efficiency indicates the following results with respect to selected policy variables: (1) The efficiency score is positively associated with the utility size. (2) The utilities\u27 diversification activities do not have significant effect on the efficiency index. (3) The two components of the bulk power markets, wholesale electricity sales and transmission of power for other systems, do not have negative effects on the efficiency. The distributions of the scale efficiencies and returns to efficiency show that the major sources of inefficiency come from the input over-utilization. Based on the empirical results, the relevant policy implications are also discussed