Applying an Efficiency Measure of Desirable and Undesirable Outputs in DEA to U.S. Electric Utilities

Abstract

The measure proposed in this paper is a new nonparametric data envelopment analysis (DEA) scheme, the hybrid measure, for determining efficiency in the presence of radial and nonradial inputs or outputs. Further extension of the scheme occurred to address nonseparable desirable and undesirable outputs. Applying the model to measure the overall efficiency of U.S. electric utilities in the presence of both desirable and undesirable outputs indicated that the utilities had improved their overall management and environmental efficiency between 1996 and 2000. In accordance with global environmental conservation awareness, undesirable outputs of production and social activities (e.g., air pollutants and hazardous waste) have harmful social and environmental dimensions. Thus, development of technologies with less undesirable outputs is important in every area of production. Data envelopment analysis (DEA) usually indicates that producing more outputs relative to fewer input resources is a criterion of efficiency. In the presence of undesirable outputs, however, one should recognize technologies with more good (desirable) outputs and fewer bad (undesirable) outputs relative to fewer input resources as efficient. Addressing the problem included integrating the radial and nonradial measures of efficiency in DEA into a unified framework called the hybrid measure. The extension of the model followed to address desirable (good) and undesirable (bad) outputs where separable and nonseparable goods and bads in input and output items were evident. Conducting the empirical study involved applying the model to 30 U.S. electric utilities over five years (1996-2000) using two inputs, total generation capacity (separable) and fuel consumption (nonseparable), and four outputs, nonfossil power generation (separable good), fossil power generation (nonseparable good), nitrogen oxide emissions (nonseparable bad), and sulfur dioxide emissions (nonseparable bad). Reducing bad outputs is an important objective of the electric utilities but not their only goal. Utilities have to supply electricity to their customers, manage efficient production, and make a profit. The purpose of this study was to measure overall efficiency, taking into account not only environmental but also management efficiency. The results indicate that the U.S. utilities under study improved their overall management and environmental