Abstract:
Electricity sector regulators are practicing benchmarking of electricity distribution
companies to regulate allowed revenue to each company. Mainly this is done by using the
relative efficiency scores produced by frontier benchmarking techniques. Some of these
techniques, for example Corrected Ordinary Least Squares method and Stochastic Frontier
Analysis have econometric approach to estimate efficiency scores, while method like Data
Envelopment Analysis uses Linear Programming to compute efficiency scores. Using the
relative efficiency scores, the efficiency factor (X-factor) which is a component of the
revenue control formula is calculated. The approach used by the regulators to derive X-factor
by the relative efficiency scores is varying among regulators.
In electricity distribution industry in Sri Lanka the allowed revenue for a particular
distribution licensee is calculated according to the allowed revenue control formula as
specified in the tariff methodology of Public Utilities Commission of Sri Lanka. This control
formula contains the X-factor as well, but it has been kept zero, since there were no relative
benchmarking studies carried out by the utility regulator to decide on X-factor.
In order to produce a suitable benchmarking methodology this dissertation focuses on
prominent benchmarking techniques used in international regulatory regime and analyses the
applicability to Sri Lankan context, where only five Distribution Licensees are operating at
present. The main challenge was to produce robust efficiency scores using frontier
techniques for lower sample size (i.e. five) where in contrast many countries have large
number of distribution companies or licensees (i.e. large sample size).
Importantly this discussion gives directing signals to the utility regulator on possibility to
control allowed revenue of Distribution Licensees according to their efficiencies.
