An analytical investigation of incentive regulation and efficiency improvement using data envelopment analysis

This study examines whether and how Brazil’s incentive regulation regime affects the productivity of electricity distribution system operators (DSOs). Cross-sectional inefficiency scores are estimated using Data Envelopment Analysis (DEA), and the influence of contextual factors is assessed through ordinary least squares regression. Using panel data for Brazilian DSOs from 2003 to 2016, the results show a statistically significant improvement in average efficiency following the introduction of DEA-based incentive regulation in 2011. Furthermore, efficiency trends and the Malmquist productivity index reveal distinct patterns between privately owned and state-owned firms. Private firms achieved moderate efficiency gains during 2003–2010 under the engineering-based reference company model, while the average efficiency of state-owned DSOs declined, reaching its lowest levels in 2009–2010. After the adoption of DEA-based benchmarking, however, efficiency improved from 2011 onward for both ownership groups. Private operators also enhanced service quality by significantly reducing the equivalent duration of interruptions while maintaining stable interruption frequency. Overall, the findings suggest that DEA benchmarking better identifies cost inefficiencies and provides stronger incentives for efficiency improvements than reference company models.