Cost Efficiency and Optimal Scale of Electricity Distribution Firms in Taiwan: An Application of Metafrontier Analysis

This paper analyzes the cost efficiency and optimal scale of the electricity distribution industry in Taiwan. Due to the substantial difference in network density, firms may differ widely in production technology. We employ the stochastic metafrontier approach to estimate the cost efficiency of 24 distribution units during the period of 1997 and 2002. Empirical results find that the average cost efficiency is overestimated using the traditional stochastic frontier model, especially for low density regions. The average cost efficiency of high density group is significantly higher than that of low density group benefited from the network economies. Both short-term and long-term optimal scale of electricity distribution firms is also calculated in this study, lending policy implications for the deregulation of the electricity distribution industry.