Parametric and Nonparametric Approaches to Benchmarking the Regulated Firm

Abstract

Rewarding regulated firms based on their relative performance requires benchmarks that reflect how performance is affected by regulation. This paper demonstrates how parametric and nonparametric efficiency measures can be employed to produce benchmarks that account for the effects of regulation. We apply measurement techniques to an eleven-year panel of 20 U.S. interstate natural gas transmission companies and use our benchmarking measures to distinguish firms that perform well owing to a superior management of technology from firms that perform well owing to the effective management of the regulatory mechanism.