The determinants of cost efficiency of hydroelectric generating plants: A random frontier approach

This paper analyses the technical efficiency in the hydroelectric generating plants of a main Portuguese electricity enterprise EDP (Electricity of Portugal) between 1994 and 2004, investigating the role played by increase in competition and regulation. A random cost frontier method is adopted. A translog frontier model is used and the maximum likelihood estimation technique is employed to estimate the empirical model. We estimate the efficiency scores and decompose the exogenous variables into homogeneous and heterogeneous. It is concluded that production and capacity are heterogeneous, signifying that the hydroelectric generating plants are very distinct and therefore any energy policy should take into account this heterogeneity. It is also concluded that competition, rather than regulation, plays the key role in increasing hydroelectric plant efficiency.