Weight restrictions in the DEA benchmarking modul for Norwegian electricity distribution companies : size and structural variables

Abstract

We have previously, in report 33/08, looked at possible weight restrictions for the so-called “geography” variables in the DEA model for the distribution networks. In this report we consider weight restrictions for the remaining output variables.

Because some cost drivers are represented by proxy variables, in some cases endogenous input variables, the resulting shadow prices are difficult to interpret. Weight restrictions that rely on detailed assumptions about individual prices, such as the proposal in NVE (2008), are therefore problematic. We suggest instead virtual weight restrictions with respect to groups of variables, thereby eliminating the need for detailed assumptions. The virtual restrictions were introduced in report 33/08, and we discuss here how to set the restriction limits. Since one of the main motivations for considering weight restrictions is to limit the effect of the geography variables, we compare the weight restricted model to a two-stage DEA approach where the geography variables are included in the second stage. We also make comparisons with the procedure used by NVE to limit super efficiency.