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Cost Efficiency Analysis of Electricity Distribution

This paper discusses a Bayesian approach to analyzing cost efficiency of Distribution System Operators when model specification and variable selection are difficult to determine. Bayesian model selection and inference pooling techniques are adopted in a stochastic frontier analysis to mitigate the problem of model uncertainty. Adequacy of a given specification is judged by its posterior probability, which makes the benchmarking process not only more transparent but also much more objective. The proposed methodology is applied to one of Polish Distribution System Operators. We find that variable selection plays an important role and models, which are the best at describing the data, are rather parsimonious. They rely on just a few variables determining the observed cost. However, these models also show relatively high average efficiency scores among analyzed objects.

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Energy Specializations: Energy Modeling – Sectoral Energy Demand & Technology; Electricity – Local Distribution

JEL Codes: C52: Model Evaluation, Validation, and Selection, C51: Model Construction and Estimation, Q41: Energy: Demand and Supply; Prices, D24: Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity, Q38: Nonrenewable Resources and Conservation: Government Policy

Keywords: Cost efficiency, Electricity distribution, Bayesian inference, Stochastic frontier analysis

DOI: 10.5547/01956574.39.4.kmak

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Published in Volume 39, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.