Data envelopment analysis
"When assumptions go unquestioned"
This page is for corrections, additions, comments, thoughts, and any other material relating to Reckon's November 2004 article on DEA (24 pages, PDF), which reviews the assumptions on which DEA rests.
Summary of Reckon's November 2004 article
Data Envelopment Analysis (DEA) is a technique used to estimate the production function on the basis of what is observed. DEA rests on a set of assumptions about the accuracy of the data used (are the data accurate reflection of the levels of inputs and outputs involved in the relevant production process) and on the technology to be estimated (given a set of observations what can be inferred about what input-output combinations are feasible).
The paper discusses the specific assumptions underlying the more familiar models of DEA and argues that, at the peril of drawing invalid inferences, the analyst must justify those assumptions before programmes are run and numbers cranked out.
Such good practice does not appear to be adhered to in DEA studies in the context of the UK water and electricity distribution. To the best of our knowledge, the bulk of DEA carried out in this context are based on one of the two "standard" models. The paper suggests that some of the assumptions on which these standard models are not likely to be satisfied in these sectors. At best, this suggests that the assumptions of the "standard" models should not be made, and that the analyst should look further afield into the sizeable DEA literature for models that do not rely on those assumptions found to be unjustifiable. At worst, it suggests that the application of DEA in these sectors is fundamentally misplaced and should not be pursued.
Links
- Reckoning article: http://www.reckon.co.uk/ReckonDEANov2004.pdf (1.4M)
- Reckon's relevant services
References in Reckoning article (those available online):
- Charnes, A., W. Cooper and E. Rhodes (1978) "Measuring the efficiency of decision making units", European Journal of Operations Research, vol. 2, no.6, pp. 429-444. (abstract only) http://www.sciencedirect.com/science?_o…b28753853c9758443ae9a44bc74f6f26
- Cherchye, L. and T. Post (2001) Methodological advances in DEA: A survey and an application for the Dutch electricity sector, Erasmus Research Institute of Management Report Series, ERS-2001-53-F&A.
https://ep.eur.nl/retrieve/112/erimrs20010921133001.pdf
- Jamasb, T. and M. Pollitt (2001) "Benchmarking and regulation: international electricity experience", Utilities Policy, vol. 9, pp. 107-130. (abstract only)
http://www.sciencedirect.com/science?_o…69292b08a9dde10da27a78b5ca3bc6dd
- Jamasb, T. and M. Pollitt (2003) "International benchmarking and regulation: an application to European electricity distribution utilities", Energy Policy, vol. 31, pp. 1609-1622. (abstract only)
http://www.sciencedirect.com/science?_o…c7728dadaf7df8bfbecd06041e0c4791
- Kuosmanen, T. (1999) Data envelopment analysis of non-convex technology: with empirical evidence from the batting technology of Finnish super-league pesis players, Helsinki School of Economics and Business Administration Working Paper W-224
http://www.sls.wau.nl/enr/staff/kuosmanen/papers/ncdear~1.pdf
- Ofgem (2004) Electricity Distribution Price Control Update Review – Update paper
http://www.ofgem.gov.uk/temp/ofgem/cach…ach/8738_22204_dpcrsepupdate.pdf
- Stone & Webster Consultants (2004) Investigation into evidence for economies of scale in the water and sewerage industry in England and Wales.
http://www.ofwat.gov.uk/aptrix/ofwat/pu…f/$FILE/stone_webster_150104.pdf
Data used in the article:
|
DNO
|
Network
length |
Customer
number |
Units
distributed |
Composite
variable |
Normalised
cost |
Adjusted
normalised cost |
|
CN_Midlands
|
60.3
|
2.33
|
27.3
|
21.9
|
67
|
63.9
|
|
CN_East_Midlands
|
68.9
|
2.43
|
28.9
|
24.0
|
63
|
60.7
|
|
United_Utilities
|
59
|
2.3
|
25.4
|
21.2
|
70.4
|
67.1
|
|
CE_NEDL
|
39.9
|
1.5
|
17
|
14.2
|
40.5
|
38.2
|
|
CE_YEDL
|
51.1
|
2.15
|
24.3
|
19.2
|
54.2
|
52.1
|
|
WPD_South_West
|
48.1
|
1.44
|
15.4
|
15.1
|
54.2
|
51.3
|
|
WPD_South_Wales
|
33.5
|
1.055
|
12.6
|
11.1
|
38
|
36.1
|
|
EDF_LPN
|
30.7
|
2.1
|
27
|
15.2
|
62.4
|
59.4
|
|
EDF_SPN
|
49.5
|
2.14
|
21.2
|
18.3
|
68.5
|
66.1
|
|
EDF_EPN
|
92.1
|
3.385
|
36.3
|
32.0
|
86.9
|
84.4
|
|
SP_Distribution
|
67.3
|
1.94
|
22.3
|
21.0
|
62.7
|
57.5
|
|
SP_Manweb
|
45.5
|
1.44
|
16.8
|
15.0
|
52.6
|
51.4
|
|
SSE_Hydro
|
48.3
|
0.69
|
8.5
|
10.8
|
36.4
|
32.9
|
|
SSE_Southern
|
75
|
2.7
|
32.8
|
26.6
|
62.6
|
58.5
|
|
Sources:
The formula for the composite variable is:
|
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Last changed by Franck at 2:48 AM on Sunday 10 February 2008.