STUDY PLAN

Postdoctoral at Aston Business School, Birmingham - UK

Period: August 2015 to July 2016

Title of Research Proposal:

Technical efficiency in the Brazilian Power Sector: contributions to the regulation
costs of electricity distributors Brazilian

Proponent:
Ana Lucia Lopes Miranda, Dr..
Administration Graduate Center
Universidade Federal de Minas Gerais - UFMG

Tutor:
Prof. Emmanuel Thanassoulis, PhD.
Aston Business School, Birminham, UK.

December 2014.

Summary
The years of 2007, 2010 and 2012 were marked by major changes in the methodology that
measured the costs that businesses transmission and distribution of electric energy Brazil could
pass on to consumers through the electricity tariff - the regulatory cost. In 2007 National Electric
Energy Agency - ANEEL decided to use a methodology, already enshrined in European countries
like Norway, Austria, Germany, Belgium and the Netherlands, for calculating the efficient costs
of electricity transmission companies. The methodology called Data Envelopment Analysis DEA was then introduced in the electricity sector, replacing called cost of service. Through DEA
costs practiced in obtaining results achieved by each power utility are compared with the costs /
results of the other utilities and an efficiency of border is drawn. The result of this model is a
score efficiency indicates how efficiently each company is transforming inputs into products,
when compared to similar companies. For the transfer of business this methodology was used in
2007, 2010 and in 2012 by Law 12,783 / 2012, which anticipated the renewal of concessions. In
each of the methodological revisions performed the regulator, ANEEL, made significant changes
in DEA modeling, constantly keeping only the input - operating costs. Especially realized when
the anticipated renewal of concessions, which had a set goal of reducing by 20% the population
of bills, brought a problem for the sector. The implementation of DEA MODEL, decided by
ANEEL led companies like Furnas to have recognized for the following year, in 2013, only 51%
of operating costs performed in 2011. Studies have shown that the model had major flaws heavily
penalizing the companies of Eletrobrs system. In the distribution sector was the DEA first
implemented during the 3rd cycle of periodic tariff review (3CRTP), then come to replace the
reference business model. A DEA model in 2 stages was implemented and transition factor one of
the old model, reference company and the new model, benchmarking, It was measured and
applied. A new model for the benchmarking of the distribution is being discussed at this time
(December 2014) through the Public Hearing no. 023/2014. DEA still remains, but general
modeling change a lot. Now we have different product variables, weight restrictions of variables
and bootstrapping. The introduction of DEA in the Brazilian electric sector for benchmarking
purposes and measurement of efficiency has its merits, but also large problems that impacted the
revenues of Brazilian companies, endangering its short and long-term economic and financial
balances. The models used today by the Regulatory Agency still fail to grasp the specifics of
firms carrying out their service in a country of continental dimensions. Some features that may
impact operating costs and maintaining a distributor such as dispersion, slope, rural and urban
consumer, networking underground, climate, constant traffic in major cities, electric descragas
still do part of the model leading to ANEEL to make the end ad hoc adjustments, not compatible
with the proposed transparency it presents. Further deepening and building models for conducting
the benchmarking of Brazilian electricity distribution companies is urgent, necessary and
extremely important for businesses and for the Brazilian population that wants a service quality at
the lowest possible cost The goal, therefore, this post-doctoral research is to collect subsidies
through literature and visits to European countries using DEA or other benchmarking tools to
improve the models used in Brazil. Based on literature, proposal for the benchmarking of
distribution companies will be formulated using the and public data available on the ANEEL
website, as well as the econometric tools and available cost analysis. Interviews with European
regulators will be held. The result of this study will be published in a book that can serve as a
basis for the regulatory agency best formulate regulatory policies, thus providing a good service
to society.
Keywords: Regulation, Data envelopment analysis, Energy
1. Introduction and Background
For a long time, rate of return for regulation has been widely used in the electricity sector.
In such a regulatory regime regulators undertake to reimburse all costs energy distributors with an
additional capital related to the rate of return. For a reliable estimation of regulatory costs were

using an engineering method which identifies the costs of activities and aggregates these costs
individually for each company. The process all demand a long time and is expensive. An
important point is that in this system the power distribution companies have little incentive to
expend their efforts to innovation and lower costs.
Since the late 1980s a wave of reforms in the electricity sector has emerged in many
developed and developing countries. The goal of these reforms is to encourage companies to
increase the efficiency of its investments and its operations, maximizing welfare of the
community through these efficiency gains (Jamasb and Pollitt 2001). For this reason, instead of
the traditional cost system, the incentive regulation where the performance of companies is
compared with a reference or performance benchmarking of business best practice has been
applied in the distribution of electricity. According to research by Haney and Pollitt (2009), 51%
of respondents regulators 43 employing various countries, 2009 benchmarking methods based on
boundary or process / activity, 14% use other benchmarking techniques and only 35% do not use
such techniques.
Benchmarking based on frontier estimates the production function (or cost) at the
industry level using Data Envelopment Analysis - DEA or some parametric approaches (ex .:
minimum square ordinary (in English, OLS) or stochastic frontier analysis). For example, the
controller English, Ofgem, used corrected least squares (COLS) regressing the variable operating
costs, aggregate by means of a weighted average number of consumers, distributed units and
network length to identify the border cost efficient since 1999 (CEPA 2003, Pollitt 2005).
Currently, the regulator uses MOLS and divides the benchmarking analysis in three, two topdown and a bottom-up where performs regression procedures. However, many other European
countries, such as Austria, Belgium, Norway, Finland, Netherlands, Germany and Luxembourg
prefer to estimate the efficiency of energy distributors using DEA (Jamasb and Pollitt 2003). After
estimating the industry cost function, regulators usually set a contract incentives to companies
and reward these distributors for its productivity growth and reduced costs measured against the
border cost.
The absence of an adequate theory in this respect in Brazil led the National Energy
Agency Electrical - ANEEL to propose an econometric model for the calculation of operating
costs regulatory Brazilian electricity distribution companies at fault important. The
implementation of the model proposed by ANEEL in 2011 generated a high risk economic and
financial imbalance for these companies as well as for the Brazilian electricity sector, as will be
reported.
On 10/09/2010 the National Electric Energy Agency - ANEEL opened the Public Hearing
no. 040/2010 on the third cycle of periodic tariff review (3CRTP) concessionaires electricity
distributors. On this occasion, by the Technical Note 265/2010, it was proposed a thorough
review in the model that calculated the regulatory operating costs. She underwent appreciation of
utilities applying a benchmarking model titled Date Envelopment analysis - DEA, already widely
used by regulatory agencies of the electric sector countries like Austria, Belgium, Finland and the
Netherlands and that would replace the company model reference. Through DEA costs practiced
in getting the results achieved by each power utility are compared with the costs / results of other
concessionaires and an efficiency of border is drawn. The result of this is a model score that
indicates the efficiency how efficiently each company is transforming the inputs (costs) of
products (market billed number of users and network extension) when compared to companies
similares1.

Despite the proposal ANEEL follow the trend of using Data Envelopment Analysis DEA by the main European regulatory agencies, she was the target of criticism and suggestions
from the community of Brazilian power distribution utilities.
Seeking to correct the deficiencies presented in the first proposal, ANEEL reformulates
the model and reopens a discussion with the community through the Technical Note 101/2011,
setting a deadline of just over 30 days for new contributions from companies. In this new bid, two
models DEA the first stage were replaced by a single model made up of operating costs as input
and billed the market, network extension and number of consumer units as product. It was also
introduced COLS model of minimum square corrected ordinary and average the results (DEA and
COLS Cobb-Douglas) was taken and businesses efficient. The second stage was also redesigned
and the inclusion of variables: average salary, precipitation index, number of consumers by area
percentage Impaired assets 100% DEA were added to the score by a Tobias regression. This
approach is incorrect because the condition of separability and independence between the
variables of product and environmental variables, established by Banker and Natajaran (2008)
was clearly violated.
In another review of the benchmarking methodology governor opened the Public Hearing
no. 023/2014 proposing the DEA continuity and the application of the suspension of the
minimum methodology Fixed square (COLS). The correction of the DEA scores of
environmental variables that impact costs was replaced by bootstrapping, setting a confidence
interval, a number most variables and embedding weight restrictions. This proposal is still under
discussion, but clearly still encounters problems. Very low efficiency scores as firms Boa Vista,
EB and CEEE (22%, 30%, 41%, respectively) shows that there are still variables missing in the
model.
It is necessary, therefore, to build a theoretical model that recognizes and captures the
interactions between all variables.
The analysis of ANEEL showed wide variations in the efficiency scores in the different
models 5 proposed, indicating the probable absence of adequate modeling. Moreover, estimates
of efficiency scores below 50% for the distribution companies of Brazilian electric power, It is
highly questionable because it means that these companies could, and should, serve the same
market, with the same network extension with an operating cost 50% less than or more than the
current. However, it is unrealistic to state that half or more of operating costs, currently practiced,
they are simply inefficient.
In fact, what is happening is that the Brazilian regulator have used functions production
simplistic to perform benchmarking of the companies, ignoring that reality is the the power
distribution companies have different types of consumers and areas They serve, with different
costs. Examples of such complexities are abundant. Some companies Brazil must provide energy
in areas where consumers are dispersed over large geographic areas, difficult to reach. The
distances involved for maintenance and commercial services many consumers make these more
complex to serve. There is one great need for teams scattered through the service area to service,
providing services within the quality standards (DEC and FEC) acceptable. Services in regions
low density are frequent in conjunction with limited access to service areas and customers. These
areas are often in poor road conditions, irregular surface, and other adverse conditions which
require special tools and vehicles, and also particularly susceptible to bad weather conditions.
ANEEL's proposal does not present the true relationship of cost and production. It is
necessary to Inclusion of a greater number of variables in the first stage model. In fact, different

inputs that combine in different ways, depending on the operating conditions of each company
produce different products. To correct this distortion in the Brazilian regulatory model it is
necessary a detailed study of the models currently used by regulators European and implemented
parametric and non-parametric tools like DEA.
A thorough analysis of cases of success and failure in implementing models regulatory
elsewhere provides the basis for the development of a proposal for identification of regulatory
operational costs of the Brazilian power distribution companies, bringing important benefits for
all electricity distribution companies, as well as for the Brazilian electricity sector.
The proposed research is therefore appropriate when seeking to deepen the discussion on
the calculation of efficient operating cost of distribution of Brazilian electricity companies. The
sector Brazilian power as well as consumers will benefit from the results thereof.
Understand how it is measured the regulatory operating costs of European energy
distributors, It will allow for more efficient and effective benchmarking studies separating and
pointing the true managerial inefficiencies of Brazilian companies. This search ANEEL may help
in the development of a more appropriate model for the next cycle rate review. Assist also the
distribution of Brazilian electricity companies, perform more efficiently the services they propose
reducing costs 6 distribution, while reach the quality standards required by the regulatory agency
and by society.
The Brazilian electric sector and foreign will have at your disposal, with the results of
this work, basis for the improvement of their models of regulation.
2. Objectives
2.1 General Purpose
The proposed research has the general objective to build subsidies for the improvement
of efficient operating cost calculation model to be applied in the next tariff review of distribution
companies of Brazilian electric power, researching the successes and failure of European models
of regulation of companies in the energy sector.. 2.2. Specific objectives:
Identify, in the European countries studied, calculation models operating costs or total
or regulatory currently in force;
Study European models seeking to identify successes that can be played in Brazil and
errors that must be prevented, or search the successes and failures in implementation thereof;
Provide insight into how a new methodology can be developed to model Brazilian tariff
regulation bringing new knowledge to the area;
Build a partnership strong and lasting survey of the Graduate Program in Administration
- CEPEAD / UFMG, now 6 concept in CAPES, especially the Core Research on Efficiency,
Sustainability and Productivity, NESP / UFMG, currently under coordination of the applicant, and
the Aston Business School, UK. This partnership will bring significant returns to the country in
the form of the existing regulatory model improvement, as well as for UFMG increasing the
number of articles published in international journals, international recognition the NESP /
UFMG in the area of efficiency and possible agreements for doctorate degrees of mentees the
proponent.
3. Benchmarking Methodologies Used by Distribution Companies Regulators Electricity

The benchmarking techniques based on frontier, commonly used include Date

Envelopment analysis (DEA), corrected ordinary least squares (COLS) and frontier analysis
stochastic (SFA) (Haney and Pollitt 2009). DEA is an econometric method that non-parametric
imposes chances of increasing and concave production function (Banker, Charnes and Cooper
1984). It presents a very flexible function robust to poor specification errors. Both SFA and
COLS are parametric methods which require the specification of the functional style, as a
function Cobb-Douglas or translog. The primary difference between AFS and COLS COLS is
that assigns the deviation of 7 border to inefficiency while SFA attribute these deviations from the
border to technical inefficiency and noise random. Although SFA may have a theoretical
advantage over COLS, it is difficult to implement in SFA Small samples (CEPA, 2003). Recent
advances in the incorporation of AED allowed deviations relating to both inefficiency and
random noise, as in stochastic frontier (and BANKER NATAJARAN, 2008).
3.1 Data Envelopment Analysis DEA
First introduced by Charnes, Rhodes and Cooper (1978), DEA has been widely used to
estimate the technical efficiency of decision makers units (DMU). DEA is a methodology that
involves mathematical programming for measuring one measure of efficiency, calculated using
the multiple inputs and multiple products. It is a frontier technique that estimates the best practice
and assesses the relative efficiency of DMU's. For each one, DEA has an efficiency score,
typically ranging between zero and one [0-1], pointing out the inefficiencies and setting targets
for achieving efficiency.
The two DEA models that follow show the analysis of the DMU efficiency j requiring
different returns to scale. is the DMU o efficiency score, decision marking unit under analysis,
obtained by solving the models (1) and (2), y rj and xij are variables that reflect the amount of
product r (r = 1, , R) produced with the inputs i (i = 1, ..., I) by DMU j and j are the weights of
the observations used as a benchmark for the DMU under analysis.
The first model (1) is known as CCR (CHARNES, COOPER and RHODES, 1978),
which requires constant returns to scale (CRS) in production technology, while (2) requires
variable returns to scale (VRS or BCC) (BANKER, CHARNES and COOPER, 1984). Both are
here shown in the form of enveloping and oriented to minimizing inputs.

Previous studies have used DEA to evaluate the efficiency and productivity change of
energy distribution companies (eg Arocena 2008; Bagdadioglu, Price and Weyman-Jones
1996; Chen and Valeriy 2005; Hjalmarsson and Veiderpass 2002; Kumbhakar and Hjalmarsson
1998; and Guzman 2002 Pacudan). Estellita et al (ESTELLITA, M. et al, 2007) presented a case
study of Brazilian energy distribution companies in which were proposed two different DEA
models, one that reflected important criteria for regulatory agencies and other that reflected the
criteria of the companies. Agrel et al (Agrell, P., BOGETOFT, P, tind, J., 2005) presented a multiperiod and multi-product scheme for distribution companies, built with cost information of a
productivity analysis model and a theoretical model of the agency.
Zhou et al (ZHOU, P., ANG, BW, POH, KL, 2008) present the results of a survey on
studies involving DEA in the energy sector and the environment while Wang et al (Wang, JH et
al, 2007) proposed a DEA model for regulation in Hong Kong.
3.2. Benchmarking Using Stochastic Frontier SFA

Another benchmarking methodology in the literature is the specification of the

cost/production parametric functions, such as cost function of Cobb-Douglas (eg Neuberg 1977)
and cost function translog (Akkemik 2009; Huang, Chen and Yang 2010; Dal Bo and Rossi 2007;
Hattori 2002; Burns and Weyman-Jones 1996; Filippini 1996, 1998; Scully, 1998). The general
model of cost stochastic frontier can be formulated as in (3):

If C (.) Has the form of a translog, then equation (3) can be extended to 1

Where the matrix

is symmetric. The error term in (3) and (4) can be seen as
compound consisting of two economically different random components (Aigner, Lovell and
Schmidt 1977 Henceforth ALS):

The error component vi is symmetrical on both sides and can result from favorable
external factors and unfavorable outside the company's control; another error component
represents technical and economic inefficiencies factors arising under the control of Company 2. vi
and ui are independent from each other and they are also independent of y ik. k = 1, ... m. vi, i=1,
,N, are independent and identically distributed with N(0, 2v).
On the other hand, previous research assume that there are various distributions,
including the halfnormal (ALS 1977), the exponential (ALS 1977; Meeusen and Broeck 1977)
Gamma (Richmond 1974) and lognormal (Greene 1980).
The stochastic cost function (3) can be estimated in two ways, as recommended by Olson,
Schmidt and Waldman (1980). One way is using the corrected by the least squares estimator
(COLS), which corrects the intercept based on waste moments of a regression least squares
(OLS). The other is the maximum likelihood estimator, which is based on error distribution
i.
4. Research Methodology
The post-doctoral fellowship, now claimed by the applicant, will last for 12 months,
starting 1st. August 2015 and ending on July 31, 2016.
To achieve the objectives mentioned above, the researcher will make use of documentary
research, interviews and the use of statistical tools, econometric and the theory of data
envelopment analysis - DEA.
The researcher will carry out the regulatory visits located in different parts of Europe in
search of material for research. It is important to note that documents indicating which models
were used in calculating the operating costs of European energy companies are difficult to access.

Little has been published in journals and little is on the websites of regulators. Only through visits
to the chosen regulatory you can have on hand the models used.
At this time, will be seeking to conduct interviews with technicians who design models as well as
some energy companies affected by the models already implemented.
This research will be limited to regulators who use the benchmarking methodologies Data
Envelopment analysis - DEA, Stochastic Frontier and Regression Analysis in their countries.
More deepening will occur in those who currently use DEA and this decision is due to the fact
that this methodology is being applied by ANEEL to calculate efficient operating cost, both in the
distribution companies and power transmission. An in-depth study of the model used in England
is part of this research. Despite it does not use the methodology benchmarking DEA, preliminary
studies have shown the importance, complexity and success of the English model.
The methodology of this research is designed, therefore, to seek a better understanding of
existing regulatory models.
One should therefore investigate and critically evaluate the main models used by
Europeans regulators, especially those who currently use DEA.
Publications of the research results in important journals of the area are planned.
5. Motivations and Relevance
It is hoped that this research will generate significant impacts on the regulatory model
currently used in Brazil. These results and impacts should return to distribution companies in the
form of economic benefits generated by cost savings and obtain an regulatory operating cost,
recognized in the next tariff review cycle, suited to their operation characteristics.
The creation of a partnership between the researcher and the Lecturers of Aston Business
School, University chosen to carry out this internship, it is also one of the benefits of it. Aston
Business School, located in Birmingham, UK, is one of the best universities of the world and
important source of publications in Data Envelopment Analysis. Britain is the second largest
country in number of publications in DEA, and Aston brings together two of the leading
researchers on the subject, Dr. Emmannuel Thanassolis and Dr. Ali Emrouznejad. Dr. Emmannuel
and Dr. Ali are founding members of the International Data Envelopment Society, iDEAs., the
editors of Data Envelopment Analysis Journal and author of several books and articles in
renowned international journals.
6. Work Plan and Schedule
6.1 Work plan
The following activities will be undertaken:
Literature review: in a first phase the researcher will seek in the library of the foreign
University available material. It will also research material in the chosen European Regulators.
Bibliography about the models used will be raised and studied.
Interviews: in the second phase will be carried out interviews with the technicians
responsible for building and implementation of the operational cost calculation models, an

important component of the energy tariff definition, the different regulatory bodies, as well as
some companies preselected.
Depth study of European models: this phase will be a deepening of the studies about the
models used by the regulators;
Construction of modeling proposal for the Brazilian regulator.
Closure of the work: the work will be completed and the final report will be drafted, and
also preparation of articles for congresses, national and international journals.
6.2. Execution Schedule (from 08.01.2015 to 31.07.2016)
Activity
Literature
review
available about the
theme
Interviews
with
European regulators
Depth study of the
raised models

1 trimester

2 trimester

3 trimester

4 trimester

Construction
of
proposal for Brazilian
regulator
Project closure with
development of report
and scientific articles
7. Justification for inclusion in the area of engineering of Science Without Borders Program
It should be noted that although the applicant act in a Postgraduate Program in the
Business department, it is part of the Center for Research in Supply Chain and coordinates the
Nucleus Research on Efficiency, Sustainability and Productivity - NESP, both with operations
primarily quantitative and engineering. The applicant has a degree in Civil Engineering, master
and PhD in Industrial Engineering and works in the undergraduate and graduate as only
responsible for the operational research discipline (undergraduate) and Data Envelopment
Analysis in Regulation Companies (masters and doctorate). Her research is focused on measuring
efficiency companies, in particular energy through Data Envelopment Analysis - DEA, linear
programming tool, purely quantitative and whose core is in Production Engineering.
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