Evaluation of Cost Efficiency in Finnish Electricity Distribution

This paper describes the process of developing an approach to evaluating the cost-efficiency of Finnish electricity distribution companies for regulation purposes. The process consisted of three main stages 1) describing of the problem and exploring the key factors, 2) finding measurable quantities for the most essential factors, and 3) selecting the final model to be used in the regulation. The efficiency evaluation is based on Data Envelopment Analysis (DEA). The final model includes operational costs as an input variable, and amount of distributed energy and quality of distribution (interruption time) as output variables. The geographic dispersion of customers (length of lines) and the number of customers are used as environmental variables so that distribution companies operating in different environments can be compared. Based on data from year 1998, 21 out of 102 companies are classified as efficient. The average efficiency score is 76.9 % and the lowest one is 42.6 %. The Energy Market Authority uses the selected model in supervising the reasonableness of distribution pricing.