On the regulatory choice of returns to scale in DEA MODELS: An Application to the argentine electricity distribution sector

“High-power” regulatory regimes were adopted in most of the reformed electricity distribution sectors. In particular, in a price cap regime with a RPI-X rule, it is commonly used a benchmarking exercise based on efficiency frontier estimations to determine X factors. DEA is a widely used tool to accomplish this objective. Given that DEA efficiency scores are affected by the assumption made upon returns to scale, it is relevant for regulators to test that assumption. In this sense, the aim of this study is to determine if there is any evidence that the scale of production is constant in the electricity distribution activity. To achieve this objective, we construct efficiency frontiers using data from Argentine distribution firms in order to use them to statistically evaluate hypotheses about characteristics of production and factors affecting productivity. We find evidence of the presence of constant returns to scale in the Argentina electricity distribution. The regulatory implication is straightforward: it gives a justification to be a “tough” regulator at the time to choose the envelopment surface.