Does environmental heterogeneity affect the productive efficiency of grid utilities in China?

Abstract

China's electric power industry has experienced a reform whereby the generation sector is being opened up to competition but the transmission and distribution sectors are still under regulation. Efficiency and benchmarking analyses are widely used for improving the performance of regulated segments. The impact of observable environmental factors, together with unobservable characteristics, on efficiency has gained increasing attention in recent years. This study uses alternative stochastic frontier models combined with input distance functions to measure the productive efficiency of 29 grid firms of China over the period of 1993–2014 and investigates whether the observed environmental and unobserved heterogeneity factors affect the productive efficiency. The results indicate that adverse environmental conditions may bring negative influence to the production of grid utilities while the number of customers and the network length have positive impacts on the utilities' efficiency; Besides, the efficiency is sensitive to the model specification, which illustrates the presence of observed and unobserved heterogeneity; Moreover, there is no significant efficiency improvement in the grid utilities after the unbundling reform of 2002; Finally, the regional grids differ significantly in efficiency, and there is room for improvement, which could be achieved by incentive regulation taking due account of environmental heterogeneity.