Decision Analytics Journal 3 (2022) 100051

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Decision Analytics Journal

journal homepage: www.elsevier.com/locate/dajour

Robust stochastic frontier analysis applied to the Brazilian electricity

distribution benchmarking method
Magno Silvério Campos a ,∗, Marcelo Azevedo Costa b ,∗, Tiago Silveira Gontijo b ,
Ana Lúcia Lopes-Ahn c
a
Department of Production Engineering, Federal University of Ouro Preto, School of Mines, University Campus, Ouro Preto, 35.400-000, Minas Gerais, Brazil
b
Department of Production Engineering, Federal University of Minas Gerais, School of Engineering, Campus Pampulha, Belo Horizonte, 31.270-901, Minas
Gerais, Brazil
c Department of Management Sciences, Federal University of Minas Gerais, Faculty of Economic Sciences, Campus Pampulha, Belo Horizonte, 31.270-901, Minas

Gerais, Brazil

ARTICLE INFO ABSTRACT

Keywords: A Data Envelopment Analysis (DEA) method has been applied by the Brazilian regulator to set regulatory
Data envelopment analysis operational costs for 61 electricity distribution utilities. Recent studies show evidence that the current method
Stochastic frontier analysis still requires improvements. This study evaluates the use of Stochastic Frontier Analysis (SFA) as an alternative
Bayesian statistic
method. Pros and cons are evaluated. Results show that the SFA is more flexible to deal with outliers. However,
the SFA has major convergence problems. Convergence issues can be overcome using Bayesian computations.
This study advocates the use of both DEA and SFA as the best alternatives, as indicated by European regulators.

1. Introduction Corrected Ordinary Least Squares (COLS) is an alternative bench-

Estimating efficient cost practices in electricity energy distribution
has been a great challenge for companies, regulators and researchers [1,
2]. Efficient costs must represent a proper balance between company
profits, quality of services and fair electricity tariffs. Thus, the so-called
frontier methods or benchmarking methods [3] have been applied to
estimate efficient costs, or cost efficiencies.
Benchmarking methods provide analysts, in particular those in the
electricity tariff regulation sector, with mathematical and statistical
tools to estimate minimum cost of production given an observed
amount of products, or outputs. Furthermore, for inefficient companies,
benchmarking methods may identify best practices, i.e., observed com-
panies identified as fully efficient. Agrell and Bogetoft [4] claims that
most prominent applications of benchmarking techniques are related
to tariff regulation in the electricity sector. Consequently, the use
of benchmarking methods in electricity energy regulation has grown
significantly.
Data Envelopment Analysis DEA is the most popular benchmarking
method used by electricity regulators [5]. DEA was first introduced
by Charnes et al. [6] and subsequently extended by Banker et al. [7]. An
interesting review of DEA are found in Pessanha and Melo [8], Altoé
et al. [9] and Emrouznejad and Yang [10]. Examples of diverse and
interesting DEA applications can be found at Afsharian and Bogetoft
[11], Afsharian et al. [12], Ahn et al. [13] and Afsharian et al. [14].
marking method which applies standard statistical linear regression
methods [15,16]. COLS requires an a priori parametric cost efficient
frontier. The Cobb–Douglas production function, first presented by Cobb
and Douglas [17] and extended by Douglas [18], is used by en-
ergy regulators in Denmark and Britain [19]. Agrell and Bogetoft [4]
and Mesquita [20] show that 17% and 12% of European and Latin
American regulators apply COLS, respectively.
The DEA method estimates an efficiency frontier. Inefficiencies are
estimated as deviations from the frontier. An alternative benchmarking
method known as Stochastic Frontier Analysis (SFA) [21,22] decom-
poses deviations from the frontier into two components, stochastic
noise and stochastic inefficiency. SFA assumes that deviations from the
frontier can be beyond purely technical inefficiency. Disturbances due
to non-manageable factors, such as contextual factors, among others,
are incorporated into the noise component. According to Kumbhakar
and Lovell [23], a random unilateral deviation from the frontier is
related to technical inefficiencies, whereas symmetric deviations, which
capture random variations in the operating environment, represent the
noise or error component.
Kuosmanen et al. [24] reports the use of SFA in electricity regu-
lation worldwide. Some studies have addressed the use of SFA in the
Brazilian electricity distribution regulation. Zanini [25] applied both
DEA and SFA using data from the 1st Brazilian periodic tariff review
cycle (PTRC) and reported major discrepancies between the efficiencies

∗ Corresponding authors.
E-mail addresses: magno@ufop.edu.br (M.S. Campos), macosta@ufmg.br (M.A. Costa).

https://doi.org/10.1016/j.dajour.2022.100051
Received 7 February 2022; Received in revised form 2 April 2022; Accepted 14 April 2022
Available online 26 April 2022
2772-6622/© 2022 The Author(s). Published by Elsevier Inc. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
M.S. Campos, M.A. Costa, T.S. Gontijo et al.
estimated by each method. Arcoverde et al. [26] and Tannuri-Pianto
et al. [27] applied the SFA methodology for 22 DSOs, from 1993 to
2001. Socio-economic information for each DSO was included in the
method. Souza et al. [28] applied both the DEA and the SFA using data
from 40 Brazilian DSOs, reported in 2001. Souza et al. [29] extended
previous studies to include 60 DSOs. These studies have concluded that
both SFA and DEA methods continued to require further investigation.
An alternative method, named StoNED (Stochastic Nonparametric
Envelopment of Data) (Kuosmanen and Kortelainen [30], Kuosmanen
et al. [31]) has also been proposed to measure the efficiency of elec-
tricity companies. StoNED combines a non-parametric frontier with a
compound error structure. Afsharian [32] suggests how StoNED can be
extended as an estimator in the metafrontier efficiency analysis. Ac-
cording to Chen et al. [33], although promising, StoNED has limitations
and further investigation about statistical and performance properties
is still required.
In spite of significant contributions, the use of SFA as a bench-
marking method in Brazilian electricity distribution regulation is not
properly explored [26]. SFA is a parametric benchmarking method,
which resembles the COLS Cobb–Douglas method proposed by the
Brazilian regulator (ANEEL) in 2011. Nevertheless, SFA is more flexible
than COLS Cobb–Douglas. However, SFA has major statistical estima-
tion problems, such as convergence problems for small samples, as
reported by Azzalini and Valle [34] and Sartori [35]. The convergence
problems can be overcome using a Bayesian approach [36].
In general, DEA, COLS, SFA and StoNED benchmarking methods
have limitations if a small sample size is available, or if outliers
are present in the database, or if DSOs do not operate under the
same technological, production or cost conditions. To overcome these
limitations, the Bayesian Stochastic Frontier Analysis [37], hereafter
named BSFA, has proved to be effective for the estimation of efficiency
frontiers. BSFA incorporates a priori information in the frontier esti-
mation, i.e., prior knowledge about the underlying structure of the
frontier parameters. Following the Bayes theorem, both prior and data
information are combined into the posterior distribution. Furthermore,
any sample size can be considered. In addition, the BSFA responds well
to situations involving heterogeneity, thus ensuring that efficiencies
are correctly estimated [33]. According to Souza et al. [38], the un-
certainties related to the inefficiency distribution, 𝑢𝑖 , as well as and
the uncertainties related to the shape of the cost function can be
modeled using a Bayesian framework. However, BSFA methods tend to
be complex, requiring the support of simulation methods such Markov
Chain Monte Carlo [37], Gibbs sampling [39], among others. Osiewal-
ski and Steel [40] provide a detailed description of the aforementioned
numerical simulation methods.
According with Dorfman and Koop [41], the Bayesian econometric
methods have been applied on a larger scale lately. Mostly, because
the Bayesian paradigm can easily handle high dimensional methods,
which may not converge to a suitable solution using the standard
maximum likelihood approach. Thus, convergence issues associated
with the SFA methods can be overcome using the Bayesian approach.
For instance, Mitropoulos et al. [42] incorporates the Bayesian anal-
ysis to estimate stochastic DEA parameters. Tsionas and Mallick [43]
presents a semiparametric Bayesian approach to estimate stochastic
frontiers. Kumbhakar and Tsionas [44] applies the Bayesian approach
to estimate technical and allocative efficiency using panel data and
stochastic production frontier. A similar approach is presented by Klein
et al. [45].
Although regulation incentives in the electricity energy sector are
disseminated worldwide, the use of good practices in benchmarking
methods still requires improvement [1,2]. Energy regulators have faced
difficulties in choosing the best benchmarking method for the produc-
tion and environmental context in which they are situated. In fact, there
is no conclusion about the best benchmarking method.
This paper proposes and evaluates SFA methods to estimate cost
efficiencies of Brazilian DSOs. The parameters of the methods are
2
Decision Analytics Journal 3 (2022) 100051
estimated using Bayesian computation. Currently, the Brazilian regu-
lator applies DEA. Although the DEA cost efficiencies estimated by the
Brazilian regulator varies from 28% to 100%, Decision Making Units
(DMUs) are required to reduce operating costs by a maximum value
of 5% per year. Thus, the maximum operating cost reduction within
a tariff review cycle (four years) is 20%. This is similar to estimating
a minimum cost efficiency of 80%. Using the proposed SFA method,
the minimum efficiencies are close to 80%. Furthermore, the average
DEA efficiency is 70.5%, whereas the average SFA efficiency is 88.5%,
which represents an operating cost difference of R$ 3.175 billion, or U$
971.1 million (considering an exchange rate of R$ 3.27 per U$ 1.00 in
2016), currently identified as inefficiency by the Brazilian regulator.
This paper is organized as follows. Section 2 presents the historical
motivation of the work and reviews cost efficient frontier estimation.
The proposed SFA methods are described in Section 3. Results and
discussion are presented in Section 4. Section 5 presents the conclusion.
2. Literature review
2.1. Benchmarking methods applied in electric energy regulation worldwide
An international survey conducted by Haney and Pollitt [2] between
June and October 2008 in 40 countries shows that among 43 energy
regulators, 51% were applying benchmarking methods. Haney and Pol-
litt [1] report that energy distribution has many technical (joule effect)
and non-technical (energy theft) losses, especially in Latin American
countries, indicating potential for improvements in electricity efficiency
using benchmarking methods. Kuosmanen et al. [24] report that many
European countries are currently using benchmarking techniques. Zaja
et al. [46] and Agrell and Bogetoft [4] describe the positive impacts
of electricity regulation in several countries. Mesquita [47] presents
a comparative study of benchmarking methods used in European and
Latin American countries.
According to Haney and Pollitt [2], 34.8% of the electricity distribu-
tion regulators applied Data Envelopment Analysis (DEA), 13% applied
adapted statistical regression methods, such as Corrected Ordinary
Least Squares (COLS), and 8.7% applied stochastic frontier methods,
such as Stochastic Frontier Analysis (SFA). In Brazil, DEA and COLS
were used by the regulator to estimate cost efficiencies in 2011 [19].
Recent studies of Agrell and Bogetoft [4] and Mesquita [20] show that,
among European and Latin American countries, 30% of the electric-
ity distribution regulators applied Data Envelopment Analysis (DEA),
15% applied adapted statistical regression methods, such as Corrected
Ordinary Least Squares (COLS) and 10% applied stochastic frontier
methods, such as Stochastic Frontier Analysis (SFA).
According to Lampe and Hilgers [48], 11% of all DEA global appli-
cations between 1978 and 2012 were in the electricity sector. Sueyoshi
et al. [49] present a global survey of DEA applications in energy
and environmental sectors. The Norwegian regulator was the first to
use DEA [50]. Hu and Wang [51] evaluate energy efficiencies of 19
administrative regions in China, from 1995 to 2002, using DEA. Vanin-
sky [52] applies the DEA method to estimate efficiencies of electric
power generation companies in the United States. Bogetoft and Otto
[53] describe a DEA-based method applied to the energy regulation in
Germany. Liu et al. [54] propose the evaluation of investment strate-
gies for distribution networks based also in DEA. Lopes [55], Paradi
[56], Ray [57], Lopes et al. [58] and Banker and Zhang [59] describe
the 2014 Brazilian DEA method. Afsharian et al. [60] investigates the
way the X-factor1 was estimated in 2015 by Brazilian regulator in
the transmission sector. Mesquita [20] reports a survey with European
and Latin American electricity regulators in which 50% and 30% are
using DEA, respectively. Recently, Pessanha and Melo [8] propose
improvements in the Brazilian DEA method to evaluate the regulatory
operational expenditure of transmission utilities.
1
X-factor reflects the productivity gain already obtained across all op-
erators involved in the industry and therefore should be passed on to
customers [60].
M.S. Campos, M.A. Costa, T.S. Gontijo et al.
2.2. Historical background
Since the first PTRC, the Brazilian energy regulator, hereafter named
ANEEL (Agência Nacional de Energia Elétrica) have used mathematical
and statistical methods to estimate efficient operating costs. In the
first and second PTRC, from 2003 to 2006, and from 2007 to 2011,
respectively, ANEEL applied the reference company benchmarking
method.
In the third PTRC, from 2011 to 2014, both DEA and COLS Cobb–
Douglas were initially applied. Cost efficiencies were estimated as the
average value between DEA and COLS. In sequence, a second stage
adjustment [61–63] using precipitation index, density of consumers
and mean wage was applied. Dey et al. [64], Matos et al. [65] and Costa
et al. [19] argue that Cobb–Douglas is a production function rather
than a cost function. Furthermore, it is argued that the COLS Cobb–
Douglas is sensitive to sample size, the larger the sample size the lower
the estimated efficiencies. In addition, only one DSO is estimated as
fully efficient using COLS. Based on major limitations of COLS, DEA
was chosen as the final benchmarking method.
In the fourth PTRC, from 2015 to 2018, only the DEA benchmarking
method was applied, without any second stage analysis. The current
benchmarking method is presented in Technical Note 66/2015 [66]
and reproduced below. The NDRS (non-decreasing returns to scale)
input-oriented efficiency of the reference DMU, hereafter named as
DSO (Distribution System Operator), is calculated using the linear
programming model shown in Eq. (1).
∑
𝑠 frontier whereas inefficient companies, which have higher costs, are
ℎ0 = max 𝜈𝑗 𝑦0𝑗 + 𝜑
𝑗=1
subject to:
∑
𝑚
𝑢𝑖 𝑥0𝑖 = 1. (1)
𝑖=1
∑𝑠 ∑
𝑚
𝜈𝑗 𝑦𝑘𝑗 − 𝑢𝑖 𝑥𝑘𝑖 + 𝜑 ≤ 0, 𝑘 = 1, … , 𝑛.
𝑗=1 𝑖=1
𝑢𝑖 , 𝜈𝑗 , 𝜑 ≥ 0.
where 𝑦𝑗 are the outputs (𝑗 = 1, … , 𝑠), 𝑥𝑖 are the inputs (𝑖 = 1, … , 𝑚), 𝜈𝑗
are the output weight parameters, 𝑢𝑖 are the input weight parameters,
𝜑 is the parameter associated with the non-increasing returns to scale
property and ℎ0 is the input efficiency estimated for the reference DSO.
The DEA method proposed by ANEEL uses operating costs (OPEX)
as the input; and, as output variables, number of consumers, weighted
power consumption, high level network extension, low level network
extension, underground network extension, non-technical losses and
duration of interruption of energy. Non-technical losses and duration
of interrupted energy are included as negative outputs, which is an al-
ternative representation for non-desired inputs in the DEA method [67].
Input and output variables are available as average values from 2011 to
2013 for 61 DSOs. In addition, weight restrictions are also included in
the linear programming model. Estimated efficiencies vary from 22.4%
to 100%, and have a mean of 71.3%. It is worth mentioning that the
Brazilian regulator proposed the use of clusters of DSOs in the fourth
PTRC. However, the DSOs sample size is small, limiting the use of
many outputs and environmental variables. In general, using DEA, the
smaller the sample size and the larger the number of input and output
variables, the more DSOs are estimated as fully efficient. Consequently,
the current Brazilian DEA method does not apply sub-sampling of DSOs.
Further details about the Brazilian DEA benchmarking method are
found in ANEEL [66] and Lopes et al. [58].
Using DEA, the operating cost of each DSO is compared to the
costs and outputs of the remaining DSOs by means of a linear equation
system. Therefore, an efficient frontier is estimated. The final outcomes
of DEA are the efficiency scores or, simply, efficiencies, which indicate
the capacity of each DSO to transform resources (cost) into outputs
(provided services). Most efficient DSOs are named as benchmarks.
3
Decision Analytics Journal 3 (2022) 100051
Although the method proposed by ANEEL in the fourth PTRC is
currently being used, the method still requires improvement. Accord-
ing to Mesquita [47],Bogetoft [68],Bogetoft and Lopes [69], input
and output variables proposed in the current method are consistent
with international regulation methods. On the contrary, Bogetoft [68],
Bogetoft and Lopes [69] indicate missing variables in the DEA method,
inconsistent variables, presence of outliers, the need for second stage
analysis using environmental variables and further studies on weight
restrictions. Ray [57] and Paradi [56] also report inconsistencies in
the current DEA method. Furthermore, Tsionas [70] advocates that it
is inappropriate to use an isolated benchmarking method, therefore
suggesting the use of multiple benchmarking methods for consistency
analysis. In addition, Veronese et al. [71] and Gil et al. [72] have shown
that Brazilian DSO efficiencies may change significantly if second stage
analysis is applied.
Despite major improvements in the Brazilian electricity distribu-
tion benchmarking method over the last PTRCs, the estimated cost
efficiencies have presented large variability from one revision cycle
to the next. An alternative approach, such as using SFA, may provide
complementary information.
2.3. Cost efficient frontier
Cost efficient frontier comprises the minimum cost required to
produce a set of outputs which includes the price of the inputs and
the employed production technology. Fig. 1 illustrates the definition
of cost efficient frontier. Efficient companies are located on the cost
located below the frontier.
Mathematically, the cost frontier can be written as:
𝐶(𝒘, 𝒚) = 𝒘𝒙 ⋅ 𝑒𝑢 , com 𝑢 ≥ 0. (2)
where 𝒘 is the input price vector, 𝒙 is the input vector, 𝒚 is the output
vector and 𝑢 is the producer inefficiency. If a producer is inefficient
(𝑢 > 0), then the observed cost required to produce 𝒚, given as 𝒘𝒙𝑒𝑢 , is
larger than the minimum cost, 𝒘𝒙. Relative efficiency is estimated as
the ratio between minimum cost and observed cost:
𝒘𝒙
𝜃𝑖 = ∀ 𝒙 ∈ ℜ𝑛+ . (3)
𝒘𝒙𝑒𝑢𝑖
where 0 < 𝜃𝑖 ≤ 1. Economic inefficiency is defined as 1 − 𝜃𝑖 .
2.4. The Cobb–Douglas and translog cost functions
Parametric cost functions are presented in the literature for 𝐶(𝒘, 𝒚).
The Cobb–Douglas cost function [17] with one input (𝑥𝑖 ) and multiple
outputs (𝒚 𝑖 ) is written as:
[𝑀 ]
∏ 𝛽𝑗
𝑥𝑖 = 𝛽0 𝑦𝑖𝑗 𝑒𝜖𝑖 (4)
𝑗=1
∑
𝑀
ln(𝑥𝑖 ) = 𝛽0∗ + 𝛽𝑗 ln(𝑦𝑖𝑗 ) + 𝜖𝑖
𝑗=1
where 𝜖𝑖 = 𝜈𝑖 + 𝑢𝑖 is a compound error which represents the sum
of random noise (𝜈𝑖 ) and economic inefficiency (𝑢𝑖 ), and 𝛽s are the
cost function parameters. The price vector is incorporated into the
parameters of the method, which must be estimated.
Zanini [25] states that the Cobb–Douglas function represents a
simple mathematical log-linear function. However, it does not allow
multiple outputs without violating the convexity properties of the cost
function. Therefore, it results in biased estimates for cost inefficiencies.
Alternatively, the Translog function [73] accommodates multiple
products without violating the convexity property. The Translog func-
tion is written as:
∑
𝑀 ∑
𝑀
ln 𝑥𝑖 = 𝛽0 + 𝛽𝑗 ln(𝑦𝑖𝑗 ) + 𝛼𝑗𝑘 ln(𝑦𝑖𝑗 ) ln(𝑦𝑖𝑘 ) + 𝜖𝑖 (5)
𝑗=1 𝑗=1,𝑘≤𝑗
where 𝛽s and 𝛼s are the cost function parameters.
M.S. Campos, M.A. Costa, T.S. Gontijo et al.
Fig. 1. Cost frontier illustration.
Fig. 2. Differences between Cobb–Douglas and Translog functions in Stochastic Frontier Analysis.
Cobb–Douglas and Translog parametric functions are the most com-
mon methods in Stochastic Frontier Analysis. However, cost concavity
is achieved with the Translog function. This is illustrated in Fig. 2 which
shows that a parametric SFA using the Translog function achieves
smoother concavity as compared to the Cobb–Douglas function and the
current DEA-NDRS method used by ANEEL.
2.5. Cost frontier estimation
COLS [74] estimates the cost frontier by first assuming that 𝜖𝑖
follows a Gaussian distribution. Consequently, ordinary least squares
are used. Next, only the intercept of the method, 𝛽0 , is adjusted so
that the average frontier becomes an upper bound frontier. Only one
DSO with the minimum residue becomes the fully efficient DSO, with a
relative efficiency of 100%. In this case, any deviation from the frontier
represents inefficiency.
From Eqs. (4) and (5), the general cost efficient method can be
written as:
𝑥𝑖 = 𝐶(𝐲𝑖 , 𝜷) ⋅ 𝑒𝑢𝑖 +𝜈𝑖 , 𝑢𝑖 ≥ 0, 𝜈𝑖 ∈ ℜ.
where 𝜷 is the vector of the regression parameters, 𝑥𝑖 is the observed
cost and 𝑦𝑖 is the vector of observed outputs. Eq. (6) is known as the
Decision Analytics Journal 3 (2022) 100051
cost stochastic frontier method. According to Kumbhakar et al. [75],
Eq. (7) can be rearranged as:
𝐶(𝐲𝑖 , 𝜷) ⋅ 𝑒𝜈𝑖
𝑒−𝑢𝑖 = (7)
𝑥𝑖
which represents the ratio between minimum cost, 𝐶(𝐲𝑖 , 𝜷) ⋅ 𝑒𝜈𝑖 and
observed cost, 𝑥𝑖 , also known as input-oriented efficiency. As originally
proposed by Debreu [76] and Farrell [77], the economic efficiency of
a producer can be represented by 𝑒−𝑢𝑖 . Alternatively, 𝑢𝑖 can be further
divided into technical and allocative inefficiencies [23,75].
Maximum likelihood methods can be used to estimate the param-
eters of the cost function method. Thus, probabilistic distributions for
𝜈𝑖 and 𝑢𝑖 are required. The 𝜈𝑖 term represents random noise and it is
assumed to be symmetric. Kumbhakar and Lovell [23] claims that fa-
vorable and non-favorable environmental conditions are equally likely
among producers. Therefore, a Gaussian distribution for 𝜈𝑖 is preferable.
The 𝑢𝑖 term represents deviations from the frontier and, therefore,
should be strictly positive. Suggested distributions for 𝑢𝑖 are half-
(6)
Normal [22], truncated-Normal [78], Gamma [79], Exponential [21],
among others. Consequently, the distribution of the compound error,
𝜖𝑖 , is asymmetric.
4
M.S. Campos, M.A. Costa, T.S. Gontijo et al. Decision Analytics Journal 3 (2022) 100051

Furthermore, it is assumed that 𝜈𝑖 and 𝑢𝑖 are independent. It is where 𝑎 is the shape parameter, i.e., the degrees of freedom parameter
assumed that 𝜈𝑖 represents non-manageable effects which affect the of the 𝑡 distribution and 𝛤 (⋅) is the Gamma function. As 𝑎 → ∞
production process, whereas inefficiency (𝑢𝑖 ) can be optimized in order the 𝑡 distribution approaches the Normal distribution. Eq. (10) has no
to reach the frontier. Bandyopadhyay and Das [80], Lai and Huang [81] closed form. Nonetheless, approximations using numerical methods or
and Amsler et al. [82] have investigated dependencies between 𝜈𝑖 and simulated likelihood [87] can be applied.
𝑢𝑖 using copula modeling. It is worth mentioning the ability of parametric methods, such as
The standard SFA method assumes a Normal distribution for 𝜈𝑖 , SFA, to incorporate elements previously neglected by non-parametric
𝜈𝑖 ∼ 𝑁(0, 𝜎𝜈2 ), and a half-Normal distribution for 𝑢𝑖 , 𝑢𝑖 ∼ 𝑁 + (0, 𝜎𝑢2 ). As- methods, such as the effects of random events on production. Conse-
suming 𝜈𝑖 and 𝑢𝑖 as independent random variables, the joint probability quently, studies of SFA benchmarking methods for estimating produc-
distribution can be written as 𝑓 (𝜈, 𝑢) = 𝑓𝜈 (𝜈) ⋅ 𝑓𝑢 (𝑢). tion and cost frontiers have increased.
The density distribution of the compound error (𝜖 = 𝜈 + 𝑢) is
calculated as: 2.6. Contextual variables in SFA
∞
𝑓𝜖 (𝜖) = 𝑓𝜈 (𝜖 − 𝑢) ⋅ 𝑓𝑢 (𝑢)𝑑𝑢 (8)
∫0 The parametric SFA method requires input and output variables. In
( ) ( ) addition, contextual or environmental information can be incorporated
2 𝜖 𝜖
= 𝜙 𝛷 𝜆
𝜎 𝜎 𝜎 into the method. Contextual or environmental variables are external
𝜎
where 𝜎 2 = 𝜎𝑢2 + 𝜎𝜈2 is the scale parameter, 𝜆 = 𝜎𝑢 (𝜆 > 0) is the shape to the production process, i.e., are non-manageable by the producer.
𝜈
parameter, 𝜙(⋅) is the standard Normal density distribution and 𝛷(⋅) is However, they may affect the technical and/or allocative efficiency of
the standard Normal cumulative distribution. From Eq. (8), maximum the producer. Examples of contextual variables are market competi-
likelihood estimates for 𝜎 2 , 𝜆 and 𝜷 are found. tiveness, management structure, supply chain and some environmental
variables.
Eq. (8) is a specific case of the Skew-Normal distribution [34].
Kumbhakar and Lovell [23] claims that the SFA method using Normal Gil et al. [72] investigated the following environmental variables
and half-Normal distribution is extremely convenient. 𝜆 represents the in the Brazilian energy distribution: density of consumers, network
ratio between inefficiency and noise. If 𝜆 → +∞ then 𝜎𝜈2 → ∞ and/or density, complexity index, precipitation index, lightning rate, low veg-
𝜎𝑢2 → 0, i.e., the noise dominates the compound error and estimated etation index, medium vegetation index, high vegetation index, mean
declivity index, proportion of paved roads, concession area (km2 ), aver-
efficiencies are 100%. If 𝜎𝜈2 → 0 then the inefficiency dominates the
age duration of interrupted energy (DIE) and frequency of interrupted
compound error and it is estimated as the ratio between the observed
energy (FIE). In addition, Gil et al. [72] proposed a new variable,
cost 𝑥 and the efficient cost, 𝐶(𝐲𝑖 , 𝜷).
named e.variable, which is a linear combination of the available en-
Inefficiency estimates are calculated using the conditional distribu-
vironmental variables. Briefly, the e.variable is an indicator estimated
tion 𝑓 (𝑢|𝜖) = 𝑓𝑓(𝑢,𝜖)
(𝜖)
, which can be written as:
using a linear regression method in which the frequency of interrupted
𝑓 (𝑢, 𝜖) 𝑓 (𝑢) ⋅ 𝑓𝜈 (𝜖 − 𝑢) energy (FIE) is the dependent variable and density of consumers,
𝑓 (𝑢|𝜖) = = 𝑢 (9)
𝑓𝜖 (𝜖) 𝑓𝜖 (𝜖) network density, complexity index, precipitation index, lightning rate,
low vegetation index, medium vegetation index, high vegetation index,
Using Eq. (9), Jondrow et al. [83] propose using the conditional
mean declivity index, proportion of paved roads and concession area
mean, 𝑒−𝐸[𝑢|𝜖] , as the inefficiency point estimate, where 𝐸[𝑢|𝜖] = ∫ 𝑢 ⋅
(km2 ) are the independent variables. The e.variable is the most linearly
𝑓 (𝑢|𝜖)𝑑𝑢. Kumbhakar and Lovell [23] and Bogetoft and Otto [53]
correlated variable to current Brazilian DSOs efficiencies, estimated by
suggest using the alternative conditional mean 𝐸[𝑒−𝑢 |𝜖] = ∫ 𝑒−𝑢 ⋅
the regulator.
𝑓 (𝑢|𝜖)𝑑𝑢. Veronese et al. [71] suggest using the conditional mode,
Brazil is a large country, with several climatic zones, major eco-
𝑒−𝑀[𝑢|𝜖] to allow full efficient DSOs.
logical diversity forming distinct biographic zones or biomes. Some
Sartori [35] and Azzalini and Valle [34] show that, despite the nice
regions in Brazil face critical problems in raining season. Gil et al. [72]
properties of the Skew-Normal distribution, the maximum likelihood
and Veronese et al. [71] show statistical correlations between environ-
estimate of the shape parameter (𝜆) is infinite with positive probability
mental variables and the current DSOs cost efficiencies, estimated by
for moderate sample sizes. Consequently, SFA estimates for moderate
the regulator using a DEA method. The authors investigated second
sample sizes are problematic. If 𝜆 → ∞ then the noise dominates the
stage methods for DEA. Results show that DSOs located in the north of
compound error and the estimated efficiencies are 100%, as shown
Brazil may have their cost efficiencies increased using environmental
previously. Veronese et al. [71] first identified this problem using the
information.
Brazilian distribution data set.
Briefly, cost efficiencies must be updated using environmental in-
Alternatives to the SFA method estimates for moderate samples are
formation. DSOs located in favorable environments should have their
presented in Bayes and Branco [36], Sartori [35] and Liseo and Loper-
efficiencies reduced, since the environment partially contributes to
fido [84]. Sartori [35] proposes an estimator to correct the shape bias
a higher efficiency. However, DSOs located in unfavorable environ-
named M-factor, whereas Liseo and Loperfido [84] proposes a Bayesian
ments should have their efficiencies increased, since the unfavorable
inference method. Bayes and Branco [36] proposes an approximation
environment prevents them from achieving a higher efficiency.
to the M-factor and an alternative Bayesian inference method.
The literature presents different SFA methods including contextual
Griffin and Steel [85] first applied a robust SFA method using a 𝑡-
variables. See, for instance, Deprins and Simar [88,89], Kumbhakar
Student distribution for the noise component. The SFA parameters were
et al. [90], Reifschneider and Stevenson [91], Huang and Liu [92]
estimated using a Bayesian approach. Recently, Stead et al. [86] applied
and Battese and Coelli [93]. More recent studies are found in Al-
a Student’s 𝑡 distribution for the noise term in the SFA method in order
varez et al. [94] and Llorca et al. [95]. The studies of Kumbhakar
to increase the robustness of the method to outliers. In this case, the
et al. [90] and Reifschneider and Stevenson [91] are the most widely
compound error density is written as: disseminated.
( ) Kumbhakar et al. [90] proposes the following SFA method with
𝛤 𝑎+1 [ ( )]− 𝑎+1 √ ( )
∞
2 1 𝜖−𝑢 2 2 𝑢 contextual variables, adapted to cost function:
𝑓𝜖 (𝜖) = ( )√ 1+ ⋅√ 𝜙 𝑑𝑢
∫0 𝑎 𝑎 𝜎 𝜈 𝜋 𝜎 𝜎 𝑢
𝛤 2 𝜋𝑎 𝜎𝜈 𝑢 ln 𝑥𝑖 = ln 𝐶(𝒚 𝒊 ; 𝜷) + 𝜈𝑖 + 𝑢𝑖 ,
(10) 𝑢𝑖 = 𝒛𝒊 𝜹 + 𝜉𝑖 , 𝑢𝑖 ≥ 0. (11)

5
M.S. Campos, M.A. Costa, T.S. Gontijo et al. Decision Analytics Journal 3 (2022) 100051

where 𝒛𝒊 is the vector of contextual variables and 𝜹 is the respective introduced by Azzalini [98], a random variable 𝑍 has a standard skew
vector of coefficients. The method proposed in Eq. (11) can be rewritten normal distribution with probability density function (pdf) given by
as:
𝑓𝑍 (𝑧) = 2𝜙 (𝑧) 𝛷 (𝜆𝑧) , 𝑧 ∈ R, 𝜆 ∈ R. (16)
ln 𝑥𝑖 = ln 𝐶(𝒚 𝑖 ; 𝜷) + 𝜈𝑖 + 𝑢𝑖 ,
where 𝜙 and 𝛷 are the pdf and the cumulative distribution func-
𝜈𝑖 ∼ 𝑁(0, 𝜎𝜈2 ) tion (cdf) of a standard normal distribution, and 𝜆 is the skewness
𝑖𝑖𝑑
parameter.
𝑢𝑖 ∼ 𝑁 + (𝒛𝑖 𝜹, 𝜎𝑢2 ) (12)
𝑖𝑖𝑑 A more flexible variable can be built by adding location and scale
Eq. (12) shows that the contextual variables affect the mean param- parameters: 𝑋 = 𝜉 + 𝜎𝑍. Then, 𝑋 has a pdf given by:
eter of the inefficiency distribution, 𝐸[𝑢] = 𝒛𝜹, in the proposed method. ( ) ( )
2 𝑥−𝜉 𝑥−𝜉
The parameters of the method, say 𝜷, 𝜹, 𝜎𝑢2 and 𝜎𝜈2 can be estimated 𝑓𝑋 (𝑥) = 𝜙 𝛷 𝜆 , 𝜉 ∈ R, 𝜎 > 0. (17)
𝜎 𝜎 𝜎
using maximum likelihood. If 𝜹 = 𝟎 then the proposed method is the
standard SFA method as proposed by Aigner et al. [22]. Eq. (17) is known as the three parameters method. The SFA cost
Reifschneider and Stevenson [91] proposes an alternative SFA method assumes that 𝜆 ∈ R+ and 𝜉(𝐲) is the parametric cost function,
method with contextual variables. The cost function SFA method can i.e., either a Cobb–Douglas or a Translog function. The SFA cost method
be written as: assumes that:

ln 𝑥𝑖 = ln 𝐶(𝒚 𝑖 ; 𝜷) + 𝜈𝑖 + 𝑢𝑖 , 𝑋𝑖 = 𝜉(𝐲𝑖 ) + 𝜈𝑖 + 𝑢𝑖 or 𝑋𝑖 = 𝜉(𝐲𝑖 ) + 𝜎 𝑧𝑖 (18)

𝑢𝑖 = 𝑔(𝒛𝑖 ; 𝜹) + 𝜉𝑖 . (13) where 𝜎𝑧𝑖 = 𝜈𝑖 + 𝑢𝑖 , 𝜈𝑖 ∼ 𝑁𝑜𝑟𝑚𝑎𝑙(0, 𝜎𝜈2 ), 𝑢𝑖 ∼ 𝑁𝑜𝑟𝑚𝑎𝑙+ (0, 𝜎𝑢2 ) and
𝜎 2 = 𝜎𝜈2 + 𝜎𝑢2 .
where 𝑢𝑖 ≥ 0, 𝑔(𝒛𝑖 ; 𝜹) ≥ 0 and 𝜉𝑖 ≥ 0. Eq. (12) assumes that: Henze [99] introduced a new stochastic representation for the
𝜈𝑖 ∼ 𝑁(0, 𝜎𝜈2 ), standard skew normal random variable:
𝑖𝑖𝑑 √( )
𝜉𝑖 ∼ 𝑁 + (0, 𝜎𝜉2 ). (14) 𝑍= 1 − 𝛿 2 𝑉 + 𝛿𝑈 (19)
𝑖𝑖𝑑

Eqs. (13) and (14) show that the inefficiency is decomposed into two
components: 𝑔(𝒛𝒊 ; 𝜹) is the component explained by the environment
and 𝜉𝑖 is the new inefficiency, i.e., the adjusted inefficiency.
Llorca et al. [95] proposes an alternative SFA with contextual
variables based on the work of Alvarez et al. [94] and Reifschneider
and Stevenson [91]. The following stochastic method is proposed for
the inefficiency component:
+ 2
𝑢𝑖 ∼ 𝑁 (𝜇𝑖 , 𝜎𝑢𝑖 ), (15)
( ) ( )
where 𝜇𝑖 = exp 𝛿0 + 𝒛𝒊 𝜹 and 𝜎𝑢𝑖 = exp 𝜏0 + 𝒛𝒊 𝝉 .
According to Cambridge Economic Policy Associates [96], the fol-
lowing criteria for benchmarking should be considered: practicality,
robustness of methodology, transparency and verifiability, capture of
sector-specific factors, minimal restriction of the frontier, consistency
with other approaches and consistency with economic theory. There-
fore, the use of exogenous variables in the estimation of efficiencies
aims at capturing specific factors of the electricity sector. Nieswand
and Seifert [97] warns that cost efficiency estimates are meaningless
if environmental conditions, which clearly affect production, are not
incorporated.
Despite many contributions to the Brazilian 2015 cost efficient
method, ANEEL did not promote any efficiency adjustment due to
the environment in the 4PTRC. Lopes et al. [58] present constructive
criticisms of the current methodology and suggest that the regulator
should rethink its methodology.
By identifying the effects of contextual variables on efficiency
scores, the producer can make decisions and adopt practices that
minimize the negative effects. Another possibility is to identify missing
variables in the method.
Lopes et al. [58] also argues that contextual and endogenous vari-
ables may present high dispersion, i.e., the variability of these variables
in each DSO concession area is significant. These differences affect
the basic premise of the application of the DEA, that DSOs must be
comparable with respect to their inputs, outputs, and environment.
3. Materials and methods
3.1. Proposed SFA methods
The proposed SFA methods are based on the alternative param-
eterization of the skew normal distribution, described next. As first
where 𝑉 has a standard normal distribution (𝑉 ∼ 𝑁𝑜𝑟𝑚𝑎𝑙(0, 12 ))
and 𝑈 has a positive half normal distribution (𝑈 ∼ 𝑁𝑜𝑟𝑚𝑎𝑙+ (0, 12 )).
Furthermore, if 𝜆 > 0 for the SFA cost method, then 𝛿 ∈ ]0, 1[. It also
can be shown that:
𝛿
𝜆= √ (20)
1 − 𝛿2
𝜆
or 𝛿 = √ . In addition, since 𝜈𝑖 + 𝑢𝑖 = 𝜎𝑧𝑖 , it can be written that
(√
1+𝜆 2
) √
𝜈𝑖 + 𝑢𝑖 = 𝜎 1 − 𝛿 2 𝑉𝑖 + 𝛿𝑈𝑖 or 𝜈𝑖 = 𝜎 1 − 𝛿 2 𝑉𝑖 and 𝑢𝑖 = 𝜎𝛿𝑈𝑖 .
Using the Bayesian framework, the stochastic representation for the
skew-normal distribution proposed by Henze [99], and consequently
the proposed SFA cost method, can be written as:
( )
𝑋𝑖 |𝑈𝑖 , 𝜉(𝐲𝑖 ), 𝜎, 𝛿(𝜆) ∼ 𝑁𝑜𝑟𝑚𝑎𝑙 𝜉(𝐲𝑖 ) + 𝜎𝛿𝑈𝑖 ; 𝜎 2 (1 − 𝛿 2 ) ,
( ) (21)
𝑈𝑖 ∼ 𝐻𝑎𝑙𝑓 𝑁𝑜𝑟𝑚𝑎𝑙+ 0, 12 , 𝑖 = 1, … , 𝑛.
The method described in Eq. (21) can be implemented using stan-
dard MCMC (Markov Chain Monte Carlo) software such as WinBugs
[100–102] or JAGS [103], as described in Bayes and Branco [36].
Following Gil et al. [72] and Bayes and Branco [36], non-informative
prior distributions were chosen for the SFA parameters as shown below.
1
∼ 𝐺𝑎𝑚𝑚𝑎(0.01, 0.01),
𝜎2
𝛿 ∼ 𝑈 𝑛𝑖𝑓 𝑜𝑟𝑚(0, 1),
𝛽𝑗 ∼ 𝑁𝑜𝑟𝑚𝑎𝑙(0, 104 ),
It is worth mentioning that decisions as to the method rest with
the regulator. Therefore, based on the current DEA-NDRS method,
this work proposes SFA benchmarking methods using the same in-
put and outputs. We mimic the use of negative outputs in SFA us-
ing negative half normal prior distributions for the quality variables.
Nonetheless, we propose the aggregation of the technical losses (quality
variable) into the weighted market. Technical losses are estimated
for the low-voltage market only, i.e., mostly residential consumers.
Therefore, technical losses can be deducted from the low-voltage mar-
ket before calculating the weighted market. Thus, only one quality
variable, which is the duration of interrupted energy, is evaluated.
Furthermore, Gil et al. [72] and Veronese et al. [71] investigated en-
vironmental variables using DEA second-stage analysis and concluded
that the environmental index (e.variable) is a reasonable proxy for
environmental information. Therefore, SFA methods using e.variable as
the environmental variable are proposed.

6
M.S. Campos, M.A. Costa, T.S. Gontijo et al. Decision Analytics Journal 3 (2022) 100051

Originally, a few cost efficiencies estimated by the Brazilian regula-

tor were extremely low. Thus, suggesting the presence of outliers in the
data set. Griffin and Steel (2007) suggests using a 𝑡-Student distribution
for the noise component to increase the robustness of the method to
outliers. Therefore, SFA methods using the 𝑡-Student distribution are
evaluated.
Juárez and Steel [104] claim that the degrees of freedom parameter
often is not clearly determined by the data. Thus, those authors con-
sidered using different priors. Following Juárez and Steel [104], two
different priors were investigated. First, the Gamma distribution with
shape parameter of 2 and scale parameter of 0.1, 𝑎 ∼ 𝐺𝑎𝑚𝑚𝑎(2, 0.1).
This prior leads to the following probability density function, 𝑓𝑎 (𝑎) =
1
100
exp {−𝑎∕10}, which has a mode at 10 and allows for all prior
moments to exist. Second, a relatively non-informative prior distribu-
tion with shape parameter of 0.01 and scale parameter of 0.01, 𝑎 ∼
𝐺𝑎𝑚𝑚𝑎(0.01, 0.01) was used. The following SFA methods are proposed:

Method 1: SFA method using Translog cost function, operational cost

as the input variable and number of consumers, weighted power
(original variable), overhead network, high voltage network and
underground network as output variables. This method does not
include quality or environmental variables.
Method 2: SFA method using Translog cost function and the same
variables as method 1. However, the weighted market is re-
calculated by deducting technical losses. In addition, consumer
hours of interrupted energy is used as the quality variable and
e.variable is used as the environmental variable. The following
cost function structure is used:
ln 𝑥𝑖 = ln 𝐶(𝒚 𝑖 ; 𝜷) + 𝑔(𝒛𝑖 ; 𝜹) + 𝜈𝑖 + 𝑢𝑖 (22)
where ln 𝐶(𝒚 𝑖 ; 𝜷) is the Translog cost function and 𝑔(𝒛𝑖 ; 𝜹) =
𝛿0 + 𝛿1 𝑧𝑖 is the contextual or environmental component.
Method 3: A hybrid SFA method using Translog structure for num-
ber of consumers and weighted market; and a Cobb–Douglas
structure for overhead network, high voltage network and un-
derground network is proposed. In addition, consumer hours of
interrupted energy is used as the quality variable and e.variable
is used as the environmental variable.
Method 4: A hybrid SFA method using Translog structure for number
of consumers, weighted market and overhead network; and a
Cobb–Douglas structure for high voltage network and under-
ground network is proposed. In addition, consumer hours of
interrupted energy is used as the quality variable and e.variable
is used as the environmental variable.
Method 5: SFA method, similar to method 2 and using a 𝑡-density
distribution for the noise component. As indicated by Juárez
and Steel [104], the following a priori Gamma distributions
for the 𝑡-Student degree of freedom parameter are used, 𝑎 ∼
𝐺𝑎𝑚𝑚𝑎(2, 0.1) and 𝑎 ∼ 𝐺𝑎𝑚𝑚𝑎(0.01, 0.01).
Method 6: Hybrid SFA method, similar to method 3, using a 𝑡-density
distribution for the noise component and the Gamma prior
distributions for the degree of freedom parameter proposed in
method 5, 𝑎 ∼ 𝐺𝑎𝑚𝑚𝑎(2, 0.1) and 𝑎 ∼ 𝐺𝑎𝑚𝑚𝑎(0.01, 0.01).
Method 7: Hybrid SFA method, similar to method 4 using a 𝑡-density
distribution for the noise component and the Gamma prior
distributions for the degree of freedom parameter proposed in
method 5, 𝑎 ∼ 𝐺𝑎𝑚𝑚𝑎(2, 0.1) and 𝑎 ∼ 𝐺𝑎𝑚𝑚𝑎(0.01, 0.01).
The estimates of the parameters for both normal and 𝑡-Student
distributions, including the degree of freedom parameter, are achieved
using Bayesian computation. Thus, using the Bayesian framework,
an unknown parameter, such as degrees of freedom of the 𝑡-Student
Fig. 3. Spearman correlation plot of input, output, quality and environmental variables.
distribution, is estimated by combining the prior distribution for the
parameter and the likelihood function. The proposed methods were
compared using Watanabe–Akaike Information Criterion (WAIC), De-
viance Information Criterion (DIC) and Log-Pseudo Marginal Likelihood
(LPML) statistics. methods with lower value of DIC and larger values of
WAIC and LPML achieve better fit to the data. See Gelman et al. [105]
and Gamerman and Lopes [106] for further information about these
criteria.
3.2. The Brazilian regulator data set
A summary of input and output variables available for the 61
Brazilian DSOs is presented in Fig. 3. The variables comprise average
values from 2014 to 2016. The input variable is the operational cost,
adjusted for inflation, and the output variables are the following cost
drivers: (a) number of consumers as a proxy for the quantity of services
provided; (b) the weighted power (distributed energy — MWh) as
a proxy of total production; (c) overhead network, (d) high voltage
network and (e) underground network as measures of the spread of
consumers within the concession area [107]. In addition, consumer-
hour of interrupted energy is the quality variable and e.variable is
the environmental variable. Positive correlations are represented by
ellipses with positive slopes. Negative correlations are represented by
ellipses with negative slopes. The larger the correlation the narrower
is the ellipse. Fig. 3 shows that number of consumers presents the
largest correlation to operating costs (adjusted PMSO), followed by
weighted market and overhead network. Furthermore, number of con-
sumers and weighted market are strongly correlated. Apparently, the
environmental variable is weakly correlated to operating costs.
4. Results and discussion
In addition to the proposed SFA methods, described in Section 3.1,
estimated coefficients using the OLS Cobb–Douglas method with pro-
duction, quality and environmental variables are presented in Table 1.
The OLS method provides basic statistical insights of how the produc-
tion, quality and environmental variables affect the average operating
costs. Table 1 show that among the predictor variables, only the num-
ber of consumers, weighted market and the environmental variables
are statistically significant. Most likely, this is due to the small sample
size of 61 DSOs. Results also support the findings of Veronese et al.
[71] and Gil et al. [72] who claimed that the environment affects the
cost efficiencies of Brazilian DSOs. Furthermore, all production and
environmental coefficients are positive, as expected. Interestingly, the
OLS method presents a negative coefficient for quality, even though

7
 M.S. Campos, M.A. Costa, T.S. Gontijo et al.
Table 1
Posterior mean estimates of the proposed SFA methods.
Variables Parameters Normal-Half Normal SFA 𝑡-Student - Half Normal SFA
OLS Cobb–Douglas* Method 1 Method 2 Method 3 Method 4 Method 5 Method 6 Method 7
Estimate SD Mean SD Mean SD Mean SD Mean SD Mean SD Mean SD Mean SD
Constant 𝛽0 −0.1472 0.5738 5.5200 7.4887 −4.8662 6.5478 −3.5543 2.6209 −3.0444 3.4081 −5.3726 7.4029 −2.7410 2.7074 −1.8267 3.2774
lnCons 𝛽1 0.5223 0.1439 4.3133 2.5213 0.6031 2.0994 −1.4997 0.8683 −1.2721 1.3672 −2.1378 1.8600 −1.2172 0.7318 −0.8151 1.2540
lnWmkt 𝛽2 0.3288 0.1464 −3.5861 2.3781 1.6581 1.9922 2.7101 1.0580 2.1682 1.5471 3.9641 2.4197 2.3239 0.9316 1.5418 1.3449
lnOver 𝛽3 0.0225 0.0540 −1.1629 1.1865 −1.2917 1.2105 0.0143 0.0596 0.3838 0.6003 −0.8886 1.1089 0.0198 0.0595 0.4234 0.5527
lnHigh 𝛽4 0.0303 0.0226 0.8602 0.7632 0.5449 0.7300 0.0242 0.0230 0.0187 0.0257 0.7057 0.6182 0.0225 0.0231 0.0152 0.0249
lnUnder 𝛽5 0.0240 0.0215 0.4135 0.4491 −0.1691 0.4568 0.0461 0.0256 0.0448 0.0253 −0.3026 0.4913 0.0445 0.0255 0.0427 0.0243
(lnCons * lnCons) 𝛽11 0.0770 0.6107 0.3634 0.3177 −0.0525 0.1215 0.4233 0.3496 0.4835 0.2363 0.0063 0.0777 0.4521 0.2482
(lnWmkt * lnWmkt) 𝛽22 0.1860 0.3151 −0.0270 0.1682 −0.2150 0.1320 0.0592 0.2695 −0.2591 0.2702 −0.1408 0.0795 0.1395 0.1325
(lnOver * lnOver) 𝛽33 0.0379 0.0593 0.0404 0.0507 0.0774 0.0462 0.0639 0.0499 0.0788 0.0434
(lnHigh * lnHigh) 𝛽44 −0.0124 0.0194 −0.0140 0.0164 −0.0133 0.0163
(lnUnder * lnUnder) 𝛽55 0.0301 0.0144 0.0152 0.0132 0.0091 0.0128
lnCons * lnWmkt 𝛽12 −0.2604 0.9049 −0.3793 0.4258 0.2597 0.2433 −0.4176 0.5654 −0.1986 0.4565 0.1300 0.1439 −0.5220 0.3065
lnCons * lnOver 𝛽13 −0.5217 0.2983 −0.5793 0.2778 −0.3248 0.2462 −0.8295 0.2331 −0.3014 0.2591
lnCons * lnHigh 𝛽14 0.4377 0.2428 0.2553 0.1694 0.2084 0.1070
lnCons * lnUnder 𝛽15 0.1347 0.1165 0.0552 0.0984 −0.0194 0.1000
lnWmkt * lnOver 𝛽23 0.5271 0.2762 0.5875 0.2936 0.1717 0.2132 0.7467 0.2401 0.1463 0.2173
8

lnWmkt * lnHigh 𝛽24 −0.4594 0.2538 −0.2672 0.1838 −0.2578 0.1204

lnWmkt * lnUnder 𝛽25 −0.1649 0.1113 −0.0294 0.0990 0.0509 0.1114
lnOver * lnHigh 𝛽34 −0.0007 0.0712 −0.0003 0.0606 0.0303 0.0583
lnOver * lnUnder 𝛽35 −0.0116 0.0492 −0.0213 0.0504 −0.0248 0.0455
lnHigh * lnUnder 𝛽45 0.0153 0.0394 0.0036 0.0372 0.0116 0.0330
lnCHI 𝛽6 −0.0103 0.0088 −0.0124 0.0074 −0.0120 0.0069 −0.0098 0.0066 −0.0108 0.0067 −0.0109 0.0070 −0.0089 0.0062
e.variable 𝑑1 0.0214 0.0049 0.0226 0.0053 0.0249 0.0050 0.0225 0.0052 0.0226 0.0053 0.0246 0.0050 0.0221 0.0049
a 18.9171 13.5916 21.7003 14.2939 19.7428 14.0988
𝜎 0.3224 0.0615 0.3226 0.0671 0.3113 0.0601 0.3277 0.0647 0.3058 0.0759 0.2928 0.0600 0.2953 0.0661
𝜆 0.9746 2.6313 1.8544 6.4711 1.0190 1.7999 1.4571 2.4012 1.9301 3.2776 0.9535 1.1257 1.2302 1.6212
WAIC −17.87839 −14.48895 −9.145846 −9.679834 −15.00923 −8.838742 −9.716204
DIC 44.75155 43.79012 22.22629 27.7508 44.69681 21.61173 25.06897
LPML −17.79408 −13.53134 −10.07233 −10.48291 −12.48827 −9.318436 −10.92601

Notes:
(1) Statistical significant parameters at 5% level are in bold.
(2) Cons: number of consumers.
Wmkt: weighted market.
Over: overhead network.
High: high voltage network.
Under: underground network.
CHI: consumerhour of interrupted energy.

Decision Analytics Journal 3 (2022) 100051

*Adjusted R-squared: 0.9795.
M.S. Campos, M.A. Costa, T.S. Gontijo et al.
Fig. 4. Boxplots and correlations matrix comparing original DEA efficiencies and proposed SFA efficiencies.
no restriction was imposed. This result indicates the effect of multi-
collinearity and provides evidence that a negative quality coefficient
improves the average cost estimation.
Table 1 also shows the estimated coefficients for methods 1 to 7. It
is worth mentioning that method 1 has 21 coefficients, methods 2 and 5
have 23 coefficients, methods 3 and 6 have 11 coefficients and methods
4 and 7 have 14 coefficients. It is worth seeing that although the
convexity property is achieved using Translog, it increases the number
of coefficients and compromises statistical analysis. In conclusion, there
is a trade-off between the convexity property and statistical significance
using SFA.
Methods 3, 4, 6 and 7 apply the hybrid Translog Cobb–Douglas
structure in order to reduce the number of parameters. WAIC, DIC
and LPML results indicate methods 3 and 6 as the best methods,
i.e., with the best data fit. Results shown in Table 1 for methods 6
and 7 use the prior Gamma distribution with shape parameter of 2 and
scale parameter of 0.1 for the degrees of freedom parameter, i.e., 𝑎 ∼
𝐺𝑎𝑚𝑚𝑎(2, 0.1), which achieved better WAIC, DIC and LPML statistics.
Results for methods 6 and 7, using the relatively non-informative prior
distribution, i.e., 𝑎 ∼ 𝐺𝑎𝑚𝑚𝑎(0.01, 0.01), are included in the Appendix
(Table A.1). Results also show that the production coefficients using
a Cobb–Douglas structure present positive estimates, as expected. Fur-
thermore, estimated coefficients in methods 3 and 6 are very similar,
and similar results for the 𝜆 parameter are found. 𝜆 represents the
proportion between inefficiency and noise components. Estimated val-
ues for 𝜆 using methods 3 and 6 are close to one. Method 6 achieves
slightly better WAIC, DIC and LPML results as compared to method
3. This is expected, since method 6 uses a 𝑡-Student distribution for
the error component. According to Stead et al. [86], the 𝑡-distribution
accounts for outliers in the data base. Table 1 shows that the posterior
distribution for the degrees of freedom parameter for Method 6 has a
mean of 21.7 and a standard deviation of 14.29.
Fig. 4(a) compares the DEA and the proposed SFA estimated effi-
ciencies. Results show that estimated SFA efficiencies are much larger
than DEA efficiencies. DEA efficiencies have a mean of 70.87% and a
minimum value of 27.90%, whereas the SFA efficiencies have a mean
of 86.87% and a minimum value of 66.34%. As previously described,
lower DEA efficiencies have been strongly criticized. Furthermore, in
the last PTRC, the regulator adopted a maximum cost reduction of
5% per year, which indicates a minimum cost efficiency of 80% in
each PTRC. Therefore, estimated SFA results do support the Brazilian
regulator decision in the last PTRC.
Fig. 4(b) shows the linear correlation of the estimated efficiencies.
The SFA method 1, hereafter named SFA 1, presents the largest correla-
tion to the original DEA efficiencies (𝜌 = 0.6531). It is worth mentioning
that SFA 1 does not include quality or environmental variables. It is
9
Decision Analytics Journal 3 (2022) 100051
also expected that the SFA methods would achieve different efficien-
cies since they rely on different parametric frontiers, the efficiency
estimation is based on maximum likelihood, as well as other technical
differences. Nonetheless, the SFA efficiencies are positively correlated
to the DEA efficiencies, as expected. Furthermore, Fig. 4(b) shows that
the efficiencies estimated using methods 4 and 7 are highly correlated
(𝜌 = 0.9974), as well as methods 3 and 6 (𝜌 = 0.9957). The estimated
efficiencies for each method are presented in Table A.2.
Figs. 5(a) and 5(b) show the distribution of the DEA and SFA
(method 6) efficiencies across the Brazilian territory. Color schemes
were adjusted to the range of DEA and SFA efficiencies to minimize
scaling differences. Results show similar patterns between DEA and SFA
efficiencies in the south and southeast regions. Furthermore, the SFA
efficiencies are larger in the north, as opposed to DEA efficiencies which
are much lower in the north. This is because the SFA method includes
environmental adjustments. Veronese et al. [71] and Gil et al. [72] also
conclude that the north region of Brazil faces adverse environmental
conditions which require cost efficiency updates. Significant differences
between DEA and SFA are found in the states of Mato Grosso and
Tocantins (midwest/north). As opposed to DEA, the SFA efficiencies
for DSOs located in these states were lower as compared to the SFA
efficiencies across the Brazilian territory. In general, despite the scaling
differences shown in Fig. 4(a) both DEA and the proposed SFA pre-
sented similar patterns of larger and lower efficiencies in most Brazilian
DSOs. Specific changes are mainly due to environmental adjustments.
Fig. 6 also illustrates similarities and dissimilarities between DEA
and SFA efficiencies after scaling adjustments. DSOs were sorted in
increasing order of dissimilarity. Two different 𝑦-axis are shown. SFA
efficiency values are located in left 𝑦-axis whereas DEA efficiency values
are located in the right 𝑦-axis. It can be concluded that, after scaling,
both DEA and SFA efficiencies are similar to a large group of DSOs. As
previously mentioned, major dissimilarities are associated with DSOs
located in the north.
Table A.3 shows the DEA and SFA efficiencies for all DSOs and
their respective efficient costs. Results are sorted in decreasing order
of SFA efficiencies. Since SFA efficiencies are, on average, larger than
DEA efficiencies, most SFA efficient costs are larger than DEA efficient
costs. However, the largest SFA efficiencies are below 100%. This is
because SFA efficiencies are estimated using the posterior mean. As
a consequence, DSOs which achieved 100% using DEA will present
lower efficiencies using SFA. This is shown in the bottom of Table A.3.
An alternative for overcoming this limitation is to use the maximum
value of DEA and SFA efficiencies as the final efficiency, as suggested
in Agrell and Bogetoft [4].
As mentioned by Jondrow et al. [83], using the conditional mode
to estimate the efficiency, some DSOs may achieve full efficiency,
M.S. Campos, M.A. Costa, T.S. Gontijo et al. Decision Analytics Journal 3 (2022) 100051

Fig. 5. Estimates DEA and SFA efficiencies across the Brazilian territory.

Fig. 6. Similarities and dissimilarities between DEA and SFA after scaling adjustments.

i.e., 100%. On the contrary, Bogetoft and Otto [53] advocate the use
of the conditional mean, 𝐸 [𝑒−𝑢𝑖 |𝜖], as the optimal estimator, since
it minimizes the mean squared error. Consequently, DSOs estimated
efficiencies are less than 1. By applying the maximum value from
DEA and SFA [4], DSOs may achieve full efficiency and extremely low
efficiencies are avoided.
Table A.4 presents the elasticity results of the input (OPEX) with
respect to the outputs and the respective estimated returns to scale
statistic.2 It is worth mentioning that the proposed SFA method com-
prises a cost frontier rather than a production frontier. Fig. A.1 shows
the boxplots of the elasticity results for outputs 𝑦1 and 𝑦2 . Results
show that most DSOs present non-increasing returns of scale, i.e., the
proportional increase in the input 𝑥 (OPEX) is less than the proportional
increase in the outputs 𝑦𝑗 .
In summary, different SFA methods were evaluated combining dif-
ferent variables, probability distributions and parametric cost func-
tions, thus evaluating different assumptions for the SFA structure. Based
on the WAIC, DIC and LPML statistics, the best SFA proposed method
is SFA 6, which includes an environmental component. It is worth
mentioning that WAIC, DIC and LPML statistics evaluate the fitness of
the data to the proposed methods. In general, the larger the WAIC, DIC
2
Following Kumbhakar and Lovell [23], the elasticity estimate of the input
𝜕𝑥 𝑦𝑗
𝑥 with respect to the output 𝑦𝑗 is calculated as 𝜉𝑗 = 𝜕𝑦 . The returns to scale
𝑗 𝑥
∑
statistic, known as the total elasticity, is calculated as 𝑅𝑇 𝑆 = 𝑗 𝜉𝑗 .
and LPML statistics the better the SFA method. Thus, these statistics in-
dicated the need for the inclusion of an environmental variable, which
is missing in the current DEA method of the Brazilian regulator. Fig. 6
shows that the current DEA and the final SFA method (SFA 6) have
major similarities. Differences are mostly related to the environmental
component. Following Agrell and Bogetoft [4], we advocate the use
of the maximum value from the DEA and SFA efficiencies as the final
efficiency.
Future studies aim at combining spatial clustering techniques, as
suggested by Costa et al. [108], and the proposed Bayesian SFA method.
5. Conclusion
Fitting a Stochastic Frontier method to a limited data set is not a
trivial task, as demonstrated in this work. Using a traditional maximum
likelihood approach, the skewness parameter may converge to infinity
with positive probability, thus compromising the cost efficiency esti-
mation. As an alternative, the Bayesian approach provides a proper
mechanism for estimating the skewness parameter and may impose
restrictions on the method coefficients.
Nevertheless, the proposed Bayesian approach has limitations and
further investigations are still required. The applied Bayesian estima-
tion process was the MCMC (Markov Chain Monte Carlo). In order to
evaluate convergence, multiple runs are required and, therefore, final
results may present slight differences. We rely on the WAIC, DIC and
LPML statistics to evaluate method fitting.

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M.S. Campos, M.A. Costa, T.S. Gontijo et al. Decision Analytics Journal 3 (2022) 100051

Table A.1
Posterior mean estimates for methods 6 and 7 using non-informative prior distribution for the t-Student degrees of freedom parameter,
𝑎 ∼ 𝐺𝑎𝑚𝑚𝑎(0.01, 0.01).
Variables Parameters t-Student - Half Normal SFA
Method 6 Method 7
Mean SD Mean SD
Constant 𝛽0 −1.827140 2.917568 −1.702350 3.764391
lnCons 𝛽1 −0.738690 1.025780 −0.566312 1.507136
lnWmkt 𝛽2 1.741330 1.250076 1.368575 1.780244
lnOver 𝛽3 0.026320 0.061249 0.310685 0.647789
lnHigh 𝛽4 0.021570 0.023755 0.014584 0.025283
lnUnder 𝛽5 0.041880 0.025009 0.044124 0.024749
(lnCons * lnCons) 𝛽11 0,069180 0.134868 0.832030 0.349193
(lnWmkt * lnWmkt) 𝛽22 −0,048820 0,168923 0.334022 0.211925
(lnOver * lnOver) 𝛽33 0.100293 0.049521
(lnHigh * lnHigh) 𝛽44
(lnUnder * lnUnder) 𝛽55
lnCons * lnWmkt 𝛽12 −0.022200 0.293393 −1.079050 0.457202
lnCons * lnOver 𝛽13 −0.541807 0.335719
lnCons * lnHigh 𝛽14
lnCons * lnUnder 𝛽15
lnWmkt * lnOver 𝛽23 0.348616 0.291539
lnWmkt * lnHigh 𝛽24
lnWmkt * lnUnder 𝛽25
lnOver * lnHigh 𝛽34
lnOver * lnUnder 𝛽35
lnHigh * lnUnder 𝛽45
lnCHI 𝛽6 −0.010200 0.006810 −0.007692 0.005902
e.variable 𝑑1 0.023940 0.005127 0.021525 0.005140
a 34.385140 45.727396 27.784753 48.317811
𝜎 0.292430 0.060984 0.292584 0.074152
𝜆 1.033320 1.388548 1.381128 2.954317
WAIC −9.161200 −11.764420
DIC 22.503690 29.784240
LPML −10.83381 −31.17997
Notes:
(1) Statistical significant parameters at 5% level are in bold.
(2) Cons: number of consumers.
Wmkt: weighted market.
Over: overhead network.
High: high voltage network.
Under: underground network.
CHI: consumerhour of interrupted energy.

Fig. A.1. Boxplots of the estimated elasticities of the input 𝑥 (OPEX) with respect to the outputs 𝑦1 (Cons) and 𝑦2 (Wmkt) for method 6 (SFA 6).

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M.S. Campos, M.A. Costa, T.S. Gontijo et al. Decision Analytics Journal 3 (2022) 100051

Table A.2
Estimated efficiency scores using the proposed SFA methods.
DSO SFA 1 SFA 2 SFA 3 SFA 4 SFA 5 SFA 6 SFA 7
DMED 0.7657 0.6789 0.7474 0.6634 0.6971 0.7737 0.7241
BOA VISTA 0.7643 0.7213 0.7800 0.7019 0.7193 0.7943 0.7498
JOAO CESA 0.8344 0.7142 0.7886 0.7005 0.7113 0.8156 0.7578
CERON 0.8521 0.8015 0.8186 0.7801 0.8029 0.8285 0.8097
ETO 0.8505 0.8141 0.8219 0.8198 0.8300 0.8289 0.8432
CEPISA 0.8511 0.7824 0.8207 0.7900 0.7865 0.8364 0.8203
LIGHT 0.8843 0.8586 0.8262 0.7915 0.8616 0.8419 0.8192
AMPLA 0.8718 0.7668 0.8303 0.8018 0.7957 0.8428 0.8235
EMT 0.8918 0.8439 0.8306 0.8379 0.8425 0.8430 0.8605
ENF 0.8563 0.8092 0.8363 0.7960 0.8246 0.8439 0.8187
CEB 0.8390 0.8089 0.8363 0.7922 0.7995 0.8492 0.8187
CEEE 0.8207 0.8123 0.8478 0.7906 0.8073 0.8500 0.8169
CEAL 0.8519 0.8275 0.8391 0.8227 0.8416 0.8508 0.8465
COPEL 0.8521 0.8085 0.8465 0.8061 0.8097 0.8539 0.8350
CHESP 0.8694 0.7981 0.8435 0.8163 0.8210 0.8553 0.8427
FORCEL 0.8873 0.8690 0.8455 0.8725 0.8805 0.8555 0.8872
IGUA«U 0.8700 0.8256 0.8468 0.8079 0.8243 0.8564 0.8392
URUSSANGA 0.8722 0.8758 0.8422 0.8173 0.8916 0.8584 0.8455
COCEL 0.8145 0.7706 0.8538 0.8011 0.7682 0.8585 0.8289
BRAGANTINA 0.9046 0.8449 0.8527 0.8173 0.8463 0.8608 0.8368
CEMIG 0.8821 0.8460 0.8547 0.8119 0.8471 0.8663 0.8343
ELETROPAULO 0.8923 0.8720 0.8559 0.8429 0.8869 0.8694 0.8656
CELG 0.8630 0.8489 0.8603 0.8305 0.8469 0.8723 0.8542
CELESC 0.8658 0.8378 0.8692 0.8349 0.8436 0.8761 0.8587
CELPE 0.8475 0.8118 0.8695 0.8429 0.8266 0.8804 0.8602
EMS 0.9097 0.8749 0.8816 0.8779 0.8905 0.8834 0.8869
EMG 0.8949 0.8786 0.8807 0.8525 0.8777 0.8835 0.8698
DEMEI 0.8551 0.8140 0.8806 0.8377 0.8276 0.8872 0.8608
SULGIPE 0.8911 0.8967 0.8755 0.8756 0.8797 0.8907 0.8988
AMAZONAS 0.8542 0.8271 0.8853 0.8629 0.8374 0.8910 0.8817
COOPERALIAN«A 0.8726 0.8518 0.8872 0.8415 0.8514 0.8936 0.8689
RGE SUL 0.9016 0.8484 0.8858 0.8694 0.8495 0.8937 0.8860
ELETROACRE 0.8371 0.8806 0.8886 0.8589 0.8876 0.8954 0.8789
ELETROCAR 0.8771 0.8697 0.8855 0.8554 0.8913 0.8955 0.8718
CAIUÃ 0.9181 0.8887 0.8927 0.8661 0.8886 0.8962 0.8819
ESCELSA 0.8982 0.8400 0.8887 0.8653 0.8446 0.8976 0.8822
CPEE 0.9322 0.9101 0.8938 0.8806 0.9141 0.9011 0.8980
VALE PARANAPANEMA 0.9254 0.9150 0.9029 0.8842 0.9187 0.9048 0.8968
COELBA 0.9011 0.8978 0.8980 0.8772 0.8956 0.9063 0.8900
ESE 0.8880 0.8754 0.8992 0.8819 0.8813 0.9071 0.8933
SANTA MARIA 0.8935 0.8871 0.9121 0.9029 0.9020 0.9099 0.9104
BANDEIRANTE 0.8894 0.8464 0.9059 0.8945 0.8548 0.9128 0.9034
NACIONAL 0.9172 0.8995 0.9084 0.8814 0.8986 0.9132 0.8939
EPB 0.8885 0.8740 0.9021 0.8951 0.8814 0.9142 0.9069
SANTA CRUZ 0.9242 0.9164 0.9127 0.8971 0.9185 0.9168 0.9088
CSPE 0.9270 0.9112 0.9107 0.8979 0.9161 0.9172 0.9084
HIDROPAN 0.8922 0.9069 0.9143 0.8697 0.9081 0.9196 0.8901
EBO 0.8877 0.9135 0.9105 0.9069 0.9202 0.9207 0.9195
JAGUARI 0.8967 0.8574 0.9156 0.9062 0.8388 0.9215 0.9194
COSERN 0.9089 0.8950 0.9141 0.9049 0.9050 0.9218 0.9140
ELEKTRO 0.8889 0.8560 0.9166 0.9049 0.8679 0.9230 0.9175
CPFL PAULISTA 0.9101 0.8895 0.9198 0.9027 0.8976 0.9242 0.9162
MOCOCA 0.9069 0.8867 0.9224 0.9104 0.8871 0.9247 0.9176
COELCE 0.9279 0.9073 0.9225 0.9121 0.9087 0.9281 0.9229
NOVA PALMA 0.8545 0.8650 0.9223 0.9212 0.8716 0.9289 0.9271
CELPA 0.8672 0.9153 0.9293 0.9151 0.9186 0.9324 0.9221
CFLO 0.8566 0.8892 0.9294 0.9112 0.8925 0.9325 0.9195
RGE 0.9179 0.9291 0.9314 0.9304 0.9337 0.9337 0.9330
CEMAR 0.8991 0.9231 0.9296 0.9263 0.9269 0.9354 0.9306
PIRATININGA 0.9164 0.9136 0.9306 0.9250 0.9181 0.9357 0.9293
MUXFELDT 0.9382 0.9322 0.9457 0.9363 0.9312 0.9439 0.9382
Notes: the efficiency scores were classified in ascending order using the efficiencies from method 6.

The goal of this study was twofold. First, to replicate as close including the environmental component. A maximum linear correlation
as possible the Brazilian DSOs estimated efficiencies using an SFA of 𝜌 = 0.6531 was obtained using an SFA method with a Translog cost
approach, i.e., using the same input and outputs. Second, to pro- function. However, the original DEA method includes additional weight
pose an alternative SFA approach using the full available information, restrictions which still requires further studies in order to develop a

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M.S. Campos, M.A. Costa, T.S. Gontijo et al. Decision Analytics Journal 3 (2022) 100051

Table A.3
Estimated efficiencies and efficient costs using DEA and SFA (method 6), and differences between efficient costs using DEA and the proposed SFA.
DSO DEA SFA 6 Efficient OPEX Efficient OPEX SFA
DEA (R$) SFA 6 (R$) change (R$)
BOA VISTA 0.2788 0.7943 25 556 579.36 72 799 267.22 47 242 687.86 ▴
DMED 0.2925 0.7737 13 701 384.11 36 245 575.96 22 544 191.84 ▴
AMAZONAS 0.3385 0.8910 158 480 620.50 417 078 259.35 258 597 638.85 ▴
CEEE 0.4402 0.8500 283 298 377.35 546 996 095.14 263 697 717.78 ▴
URUSSANGA 0.4706 0.8584 2 919 625.37 5 325 596.45 2 405 971.08 ▴
CERON 0.4723 0.8285 150 896 328.24 264 709 589.97 113 813 261.73 ▴
ENF 0.4773 0.8439 17 060 734.43 30 163 298.44 13 102 564.01 ▴
ELETROACRE 0.4822 0.8954 55 397 088.80 102 870 328.87 47 473 240.07 ▴
CEAL 0.5111 0.8508 165 651 311.27 275 729 011.15 110 077 699.87 ▴
COCEL 0.5194 0.8585 10 667 825.64 17 631 314.62 6 963 488.97 ▴
IGUA«U 0.5282 0.8564 9 299 509.27 15 078 296.51 5 778 787.23 ▴
DEMEI 0.5294 0.8872 6 029 224.84 10 104 630.19 4 075 405.36 ▴
FORCEL 0.5374 0.8555 2 302 945.15 3 666 038.41 1 363 093.26 ▴
HIDROPAN 0.5405 0.9196 4 091 106.17 6 960 079.05 2 868 972.88 ▴
ELETROCAR 0.5475 0.8955 8 875 619.78 14 517 352.05 5 641 732.27 ▴
CEB 0.5490 0.8492 209 422 109.05 323 972 674.46 114 550 565.41 ▴
COOPERALIAN«A 0.5615 0.8936 7 401 912.74 11 779 949.76 4 378 037.02 ▴
SULGIPE 0.5638 0.8907 24 258 769.21 38 326 417.50 14 067 648.28 ▴
AMPLA 0.5918 0.8428 389 547 727.90 554 762 283.73 165 214 555.83 ▴
CELPA 0.5963 0.9324 404 356 427.10 632 251 584.55 227 895 157.46 ▴
BRAGANTINA 0.6334 0.8608 30 400 514.76 41 312 652.39 10 912 137.63 ▴
ESE 0.6413 0.9071 119 207 414.10 168 621 656.90 49 414 242.80 ▴
CELPE 0.6593 0.8804 567 757 907.55 758 101 234.45 190 343 326.90 ▴
CEPISA 0.6686 0.8364 262 940 893.06 328 930 688.56 65 989 795.50 ▴
CELG 0.6716 0.8723 636 942 966.74 827 262 789.91 190 319 823.18 ▴
CHESP 0.6842 0.8553 10 684 709.04 13 357 742.40 2 673 033.36 ▴
CEMIG 0.6898 0.8663 1 559 382 615.03 1 958 305 749.20 398 923 134.17 ▴
COPEL 0.6944 0.8539 921 299 620.68 1 132 916 200.47 211 616 579.79 ▴
CAIUÃ 0.6996 0.8962 46 718 956.27 59 847 115.45 13 128 159.19 ▴
CFLO 0.6998 0.9325 11 053 894.68 14 730 208.08 3 676 313.40 ▴
NACIONAL 0.7024 0.9132 22 979 857.74 29 877 638.54 6 897 780.80 ▴
EMG 0.7071 0.8835 89 328 273.51 111 606 719.88 22 278 446.37 ▴
COELBA 0.7086 0.9063 950 382 640.99 1 215 600 160.69 265 217 519.70 ▴
CELESC 0.7283 0.8761 610 036 189.83 733 803 079.84 123 766 890.01 ▴
LIGHT 0.7289 0.8419 672 705 722.42 776 933 929.47 104 228 207.04 ▴
EBO 0.7380 0.9207 33 049 261.01 41 228 536.01 8 179 275.00 ▴
COSERN 0.7546 0.9218 222 182 274.39 271 427 489.22 49 245 214.84 ▴
VALE PARANAPANEMA 0.7683 0.9048 36 862 519.27 43 413 501.52 6 550 982.25 ▴
SANTA CRUZ 0.7697 0.9168 40 051 305.05 47 706 033.02 7 654 727.97 ▴
EPB 0.7762 0.9142 236 460 129.38 278 509 035.37 42 048 905.99 ▴
ESCELSA 0.7986 0.8976 268 519 911.39 301 804 022.53 33 284 111.15 ▴
SANTA MARIA 0.8002 0.9098 27 837 424.60 31 653 267.84 3 815 843.24 ▴
CEMAR 0.8102 0.9354 402 967 994.29 465 223 348.83 62 255 354.54 ▴
ELETROPAULO 0.8269 0.8694 1 205 490 658.03 1 267 417 389.74 61 926 731.71 ▴
CSPE 0.8300 0.9172 17 652 782.24 19 509 075.30 1 856 293.06 ▴
CPEE 0.8332 0.9011 14 468 400.13 15 646 143.08 1 177 742.95 ▴
RGE SUL 0.8373 0.8937 272 950 518.08 291 329 041.91 18 378 523.83 ▴
MOCOCA 0.8406 0.9247 10 061 842.95 11 068 833.69 1 006 990.73 ▴
EMS 0.8494 0.8834 293 097 953.73 304 825 180.45 11 727 226.72 ▴
BANDEIRANTE 0.8852 0.9128 311 776 392.00 321 493 834.80 9 717 442.80 ▴
EMT 0.9145 0.8430 486 714 829.63 448 667 715.08 −38 047 114.55 ▾
JOAO CESA 0.9302 0.8156 2 134 654.07 1 871 801.38 −262 852.69 ▾
CPFL PAULISTA 0.9786 0.9242 776 723 186.65 733 518 498.73 −43 204 687.92 ▾
ETO 0.9833 0.8289 246 388 940.33 207 698 637.64 −38 690 302.69 ▾
ELEKTRO 0.9844 0.9230 514 851 312.42 482 743 777.86 −32 107 534.56 ▾
JAGUARI 1.0000 0.9215 12 324 819.00 11 356 950.96 −967 868.04 ▾
COELCE 1.0000 0.9281 571 992 828.00 530 849 383.88 −41 143 444.12 ▾
PIRATININGA 1.0000 0.9357 300 814 765.00 281 468 525.18 −19 346 239.82 ▾
MUXFELDT 1.0000 0.9439 2 304 748.00 2 175 443.57 −129 304.43 ▾
RGE 1.0000 0.9337 304 029 938.00 283 885 491.97 −20 144 446.03 ▾
NOVA PALMA 1.0000 0.9289 5 762 588.00 5 353 135.95 −409 452.05 ▾

similar SFA proposal. Nevertheless, this work successfully estimated an
SFA benchmarking method for estimating efficient costs of Brazilian
electricity energy distribution companies. Results show a large scaling
difference between DEA and SFA efficiencies. The average DEA effi-
ciency is 70.5%, whereas the average SFA efficiency is 88.5%. This
difference represents a total revenue of R$ 3.098 billion or U$ 947.6
million (considering an average exchange rate of R$ 3.27 per U$ 1.00 in
year 2016) which is currently considered as inefficiency. As previously
mentioned, this is because SFA decomposes the distance to the cost
frontier into two components, noise and economic inefficiency, whereas

13
M.S. Campos, M.A. Costa, T.S. Gontijo et al. Decision Analytics Journal 3 (2022) 100051

Table A.4
Estimated economic effects using the proposed SFA method (SFA 6).
DSO Elasticity of the OPEX with respect to the outputs Returns to
Cons (𝑦1 ) Wmkt (𝑦2 ) Over (𝑦3 ) High (𝑦4 ) Under (𝑦5 ) CHI (𝑦6 ) Scale
SULGIPE 0.4994 0.4691 0.0198 0.0225 0.0445 −0.0109 1.0444
AMAZONAS 0.7721 0.1723 0.0198 0.0225 0.0445 −0.0109 1.0203
CEAL 0.8012 0.1345 0.0198 0.0225 0.0445 −0.0109 1.0115
CEPISA 0.8300 0.0893 0.0198 0.0225 0.0445 −0.0109 0.9952
EBO 0.5998 0.3110 0.0198 0.0225 0.0445 −0.0109 0.9867
EPB 0.8660 0.0322 0.0198 0.0225 0.0445 −0.0109 0.9741
COELBA 1.0641 −0.1699 0.0198 0.0225 0.0445 −0.0109 0.9701
CEMAR 0.9448 −0.0565 0.0198 0.0225 0.0445 −0.0109 0.9642
ESE 0.7925 0.0947 0.0198 0.0225 0.0445 −0.0109 0.9631
CHESP 0.3829 0.5038 0.0198 0.0225 0.0445 −0.0109 0.9625
EMG 0.7237 0.1615 0.0198 0.0225 0.0445 −0.0109 0.9611
CELPE 1.0102 −0.1295 0.0198 0.0225 0.0445 −0.0109 0.9566
AMPLA 0.9693 −0.0886 0.0198 0.0225 0.0445 −0.0109 0.9565
ENF 0.5337 0.3465 0.0198 0.0225 0.0445 −0.0109 0.9561
COELCE 1.0050 −0.1251 0.0198 0.0225 0.0445 −0.0109 0.9558
COSERN 0.8851 −0.0097 0.0198 0.0225 0.0445 −0.0109 0.9512
JOAO CESA 0.0872 0.7867 0.0198 0.0225 0.0445 −0.0109 0.9497
ELETROACRE 0.6578 0.2142 0.0198 0.0225 0.0445 −0.0109 0.9478
ETO 0.7718 0.0980 0.0198 0.0225 0.0445 −0.0109 0.9456
CELPA 0.9659 −0.0993 0.0198 0.0225 0.0445 −0.0109 0.9424
CERON 0.7825 0.0838 0.0198 0.0225 0.0445 −0.0109 0.9421
COOPERALIAN«A 0.4036 0.4626 0.0198 0.0225 0.0445 −0.0109 0.9420
MUXFELDT 0.2432 0.6224 0.0198 0.0225 0.0445 −0.0109 0.9415
CFLO 0.4708 0.3898 0.0198 0.0225 0.0445 −0.0109 0.9365
CEMIG 1.1407 −0.2807 0.0198 0.0225 0.0445 −0.0109 0.9358
CSPE 0.5257 0.3294 0.0198 0.0225 0.0445 −0.0109 0.9309
SANTA CRUZ 0.6487 0.2059 0.0198 0.0225 0.0445 −0.0109 0.9304
CEEE 0.9294 −0.0755 0.0198 0.0225 0.0445 −0.0109 0.9298
NOVA PALMA 0.3005 0.5529 0.0198 0.0225 0.0445 −0.0109 0.9292
ELETROCAR 0.4167 0.4357 0.0198 0.0225 0.0445 −0.0109 0.9283
CELG 1.0043 −0.1533 0.0198 0.0225 0.0445 −0.0109 0.9269
HIDROPAN 0.3237 0.5252 0.0198 0.0225 0.0445 −0.0109 0.9248
DEMEI 0.4035 0.4442 0.0198 0.0225 0.0445 −0.0109 0.9235
MOCOCA 0.4525 0.3950 0.0198 0.0225 0.0445 −0.0109 0.9233
COCEL 0.4620 0.3835 0.0198 0.0225 0.0445 −0.0109 0.9214
ESCELSA 0.9229 −0.0774 0.0198 0.0225 0.0445 −0.0109 0.9214
BRAGANTINA 0.6175 0.2272 0.0198 0.0225 0.0445 −0.0109 0.9206
DMED 0.5180 0.3259 0.0198 0.0225 0.0445 −0.0109 0.9198
VALE PARANAPANEMA 0.6443 0.1939 0.0198 0.0225 0.0445 −0.0109 0.9141
EMS 0.8745 −0.0385 0.0198 0.0225 0.0445 −0.0109 0.9118
FORCEL 0.2179 0.6148 0.0198 0.0225 0.0445 −0.0109 0.9085
CAIUÃ 0.6896 0.1420 0.0198 0.0225 0.0445 −0.0109 0.9075
NACIONAL 0.5935 0.2340 0.0198 0.0225 0.0445 −0.0109 0.9033
BANDEIRANTE 0.9651 −0.1398 0.0198 0.0225 0.0445 −0.0109 0.9012
CPEE 0.5014 0.3227 0.0198 0.0225 0.0445 −0.0109 0.8999
ELEKTRO 1.0132 −0.1897 0.0198 0.0225 0.0445 −0.0109 0.8994
IGUA«U 0.4334 0.3884 0.0198 0.0225 0.0445 −0.0109 0.8976
RGE SUL 0.9285 −0.1080 0.0198 0.0225 0.0445 −0.0109 0.8964
RGE 0.9450 −0.1294 0.0198 0.0225 0.0445 −0.0109 0.8915
SANTA MARIA 0.5946 0.2195 0.0198 0.0225 0.0445 −0.0109 0.8901
EMT 0.9340 −0.1211 0.0198 0.0225 0.0445 −0.0109 0.8887
LIGHT 1.0825 −0.2733 0.0198 0.0225 0.0445 −0.0109 0.8851
COPEL 1.1021 −0.2929 0.0198 0.0225 0.0445 −0.0109 0.8851
CPFL PAULISTA 1.0954 −0.2875 0.0198 0.0225 0.0445 −0.0109 0.8837
PIRATININGA 0.9746 −0.1736 0.0198 0.0225 0.0445 −0.0109 0.8768
CELESC 1.0541 −0.2625 0.0198 0.0225 0.0445 −0.0109 0.8675
ELETROPAULO 1.1780 −0.3890 0.0198 0.0225 0.0445 −0.0109 0.8648
BOA VISTA 0.6190 0.1688 0.0198 0.0225 0.0445 −0.0109 0.8637
CEB 0.9268 −0.1450 0.0198 0.0225 0.0445 −0.0109 0.8576
URUSSANGA 0.2888 0.4435 0.0198 0.0225 0.0445 −0.0109 0.8082
JAGUARI 0.5357 0.1908 0.0198 0.0225 0.0445 −0.0109 0.8024
Notes: economic effects were classified in descending order of the returns to scale statistic.

DEA assumes only economic inefficiency. Despite the scaling difference, It is worth mentioning that, although the original DEA scores range
both DEA and SFA present major similarities. A few dissimilarities are from 28% to 100%, the regulator has applied ad-hoc additional restric-
found in DSOs located in the north of Brazil. tions to force the efficiencies into the range 80% to 100%, thus creating

14
M.S. Campos, M.A. Costa, T.S. Gontijo et al.
a balance between economic sustainability of companies and consumer
tariffs. ANEEL has applied a simple standardization procedure. Conse-
quently, the final regulatory costs estimated using either SFA or DEA
with the ad-hoc changes are similar. Major changes are related to the
environmental adjustments using the proposed SFA model. By using
SFA or the maximum of SFA and DEA as the new efficiency estimate,
efficiencies will fall approximately within the range 80% to 100%, as
expected by the regulator.
Furthermore, the use of hybrid methods using the mean or maxi-
mum aggregation functions, aims at minimizing inconsistencies related
to specific methods. For example, DEA may overestimate the number
of fully efficient DSOs or may generate extremely low values, whereas
SFA may not generate fully efficient DSOs but may include more
variables, such as environmental variables. Therefore, hybrid methods
can incorporate important characteristics related to different meth-
ods, thus estimating reliable cost efficiencies. The Brazilian regulator
considered a hybrid method during the third periodic tariff review
cycle, in 2011 [19]. The final cost efficiency was estimated using the
average value from a COLS Cobb–Douglas method and a DEA method.
However, efficiencies estimated using the COLS were much lower than
the efficiencies using DEA, thus final efficiencies were unrealistic.
Finally, as demonstrated in this work, the SFA approach com-
prises a flexible benchmarking method. Nevertheless, SFA also requires
advanced statistical expertise as compared to DEA. To the best of
our knowledge, this is the first work which successfully presents an
SFA method of Brazilian DSOs applying the same input, outputs and
including environmental information.
Acknowledgments
The authors thank CNPq, Brazil, CAPES, Brazil and UFMG, Brazil for
financial support, project numbers PQ-308361/2014-8, CNPq-402070/
2016-0 and CAPES/DAAD/PROBAL 88881.144034/2017-01.
Appendix
See Tables A.1–A.4 and Fig. A.1.
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