James Logan

The relative efficiency of Illinois electric utilities

Abstract The purpose of this paper is to apply a generalized version of the Farrell measure of technical efficiency to a sample of regulated electric utilities. We disaggregate the original Farrell measure (which was designed to measure lost output or wasted inputs due to underutiliziation of inputs) into three mutually exclusive and exhaustive components: (1) a measure of purely technical efficiency, (2) a measure of input congestion [overutilization of some input(s)] and (3) a measure of scale efficiency. This approach has the advantage that it provides additional information on the sources of inefficiency of production, which should be useful to decisionmakers, in general, not only in electric utilities. Simple linear programming techniques are derived and used in calculating these efficiency measures for our sample. We find that only a few of these Illinois electric utilities are technically efficient (relative to each other). The major source of inefficiency was due to production ‘inside’ the isoquant, although there were large variations across firms and years in the size and source of inefficiency. Those results suggest the regulation does not necessarily result in efficient operation of electric utilities, nor does it result in consistent performance across plants.

The Rate-of-Return Regulated Firm: Cost and Production Duality

A duality between cost and production is established for a firm subject to rate-of-return regulation. To this end, a rate-of-return regulated production function is defined and shown to exist. It is then shown how information regarding the unregulated technology can be obtained from the rate-of-return regulated cost function. With knowledge of the rate-of-return constraint, the rate-of-return regulated production function can be reconstructed.

Measuring Efficiency in Production: With an Application to Electric Utilities

Michael Farrell’s (1957) pathbreaking investigation of the structure of efficiency in production has somewhat belatedly spurred a flurry of derivative research. Most of this research has focused on technical efficiency, although some studies have investigated technical, allocative (or price), and overall (or economic) efficiency. In addition, much of this research has followed Farrell by imposing rather severe restrictions on the structure of production technology. Finally, virtually all such studies ignore the implications of change or variation in efficiency for productivity growth or variation. In this paper we focus our attention on the technical component of overall efficiency. We relax Farrell’s restrictive assumptions on the structure of production technology, and this enables us to examine the structure of technical efficiency by decomposing an overall measure of technical efficiency into its constituent parts. Finally, we mention briefly the connection between efficiency measurement and the measurement of productivity growth.

The rate of return regulated version of Farrell efficiency

Abstract In this paper Farrells notions of efficiency are formulated for a rate of return regulated firm.

The rate of return regulated version of Shephard's lemma

Abstract In this paper, the rate of return regulated version of Shephards lemma is proved.

The comparative efficiency of western coal-fired steam-electric generating plants: 1977–1979

Abstract In this paper we apply some recently developed techniques of efficiency measuring to a sample of western coal-fired steam-electric generating plants. The sample, covering 1977–1979, consists of generating plants from the western states of Arizona, Colorado, Montana, New Mexico, Nevada, Utah, Washington and Wyoming. Using linear programming techniques, we determine whether individual plants are efficient by comparing them to the best practice frontier technology. This technology is determined by the observed data of the plants in the sample. Not only do we identify which plants are efficient and which are not, but we also identify the sources of inefficiency by decomposing the overall measure of technical efficiency into scale, congestion and purely technical efficiency.

Shephard's lemma and rate of return regulation

Abstract By counter example this paper shows that in general, Shephards lemma cannot be used for the usual formulation of the rate of return regulated cost function. A solution to the problem is supplied.