Firm-Specific Productive Efficiency: A Response
30 April 2003
By Graham Shuttleworth
In this article published in the Electricity Journal, NERA Director Graham Shuttleworth analyzes and refutes a case made previously in the same publication attempting to show that data envelope analysis would simplify the task of setting the productivity offset ("X factor") in a price cap formula. Mr. Shuttleworth contends that although the attempt was a valiant one, experience of this intellectually flawed method in real regulatory procedures shows that it is at best misleading, and at worst a source of dispute and uncertainty.
In critically examining the "real world" analysis for the Maine Public Service Commission cited by the authors, Mr. Shuttleworth notes that the case to which the study referred ultimately settled without contested hearings. As a result, the study was never subject to a full critical review. In the U.S., such review involves regulatory hearings characterized by longstanding administrative, legal, and accounting procedures that sharply limit the kind of evidence upon which utility prices can be set.
The techniques offered by the previous authors, Mr. Shuttleworth concludes, do not provide a rational basis for setting actual price caps in a real regulatory hearing, and have little or no value in a regulatory system intended to provide clear economic incentives derived from robust analysis and rational debate. The continued use of such methods in Europe implies a lack of procedural restraints on regulatory decisions.
This abstract is republished with permission from the Electricity Journal, Volume 16, Issue 4, April 2003, Copyright (c) 2003 Elsevier Science, Inc., http://www.elsevier.com/locate/tej. All rights reserved.
