Environmental assessment by DEA radial measurement: U.S. coal-fired power plants in ISO (Independent System Operator) and RTO (Regional Transmission Organization)

Abstract

The economic concept of weak and strong disposability on undesirable outputs dominated the previous discussions on DEA (Data Envelopment Analysis) radial measurement for environmental assessment. This study reexamines the economic concept from the perspective of corporate strategies on how to adapt a regulation change on undesirable outputs. The economic concept of disposability, conventionally accepted by production economists, is replaced by natural and managerial disposability in this study. The natural disposability implies an environmental strategy that a firm attempts to decrease an input vector to reduce a vector of undesirable outputs. Given the decreased input vector, the firm attempts to increase a vector of desirable outputs as much as possible. This type of strategy indicates negative adaptation. Meanwhile, the managerial disposability indicates an opposite strategy by increasing the input vector. This disposability expresses an environmental strategy by which a firm considers a regulation change on undesirable outputs as a new business opportunity. A firm attempts to improve its unified (operational and environmental) performance by utilizing new technology and/or new management. The strategy indicates positive adaptation. Considering the two types of disposability, this study discusses how to measure unified efficiency under natural and managerial disposability by DEA radial models. To document the practicality of the proposed DEA environmental assessment, this study applies it to compare the performance of U.S. coal-fired power plants under ISOs/RTOs (Independent System Operators/Regional Transmission Organizations) with that of the other power plants not belonging to any organization. This study identifies two empirical findings. One of the two findings is that the latter coal-fired power plants outperform the former power plants belonging to ISOs/RTOs in terms of three efficiency measures. This result indicates that ISOs and RTOs do not provide an effective coordination for coal-fired power plants at the level that can be found in the other power plants. The other finding is that there is technological improvement in the operation of coal-fired power plants.