Dynamic Probabilistic Indices - Probabilistic Composition of Preferences, Theory and Applications - page 66

Finally, a compound probabilistic Malmquist index can be obtained by calcu-
lating the square root of the quotient between the conservative index (calculated by
comparing ef

ciencies measured in terms of probabilities of not being the worst)
and the progressive index (calculated by comparing probabilities of not being the
best).

7.3 Malmquist Analysis of a Production Model

The present analysis considers the search for ef cient operational costs for elec-

tricity distributors. The electric industry is characterized as a network industry. The
joint and simultaneous action on three segments, generation, transmission and
distribution of electricity, determines the

final product available to the consumer.
In network industries, segments of transport and distribution are natural
monopolies (Ramos-Real et al. 2009 ). To make the bene ts of cost reduction due to

economies of scale in the natural monopoly components of the network ow to

price reduction for the consumer the interference of public power is employed.
To reduce appropriation by the monopolistic

firms of extraordinary pro ts

appears the figure of the regulator. Regulation must however balance the goal of

reducing prices with encouraging economic ef

ciency and ensuring universality
and quality of service. This can be achieved by simulating market conditions.
In Brazil the activity of electricity distribution is authorized by the Union con-
ditioned upon signature of service contracts. Thus the electricity distributors serve
its captive consumers in a Regulated Contracting Environment. The National
Electric Energy Agency (ANEEL) regulates that market.
Among the regulatory powers of ANEEL is the Periodic Tariff Review, which is
one of the mechanisms for setting the value of energy paid by electricity consumers.
A review is held on average every 4 years. The Periodic Tariff Review repositions
the value of the portion of the price that covers the cost of the distribution activity
manageable by the distribution company. This mechanism should grant ef cient

levels of operational costs and adequate remuneration of the investments of the
distributors. If formulated in a comparative basis, it may be able to replicate the
advantages of a market environment.
According to ANEEL ( 2010 ), the variation of prices in a competitive market has
three well-de ned sources: technological change, economies of scale and scope and

inputs prices. The first two of these factors impact prices by altering productivity.

Thus, under the assumption of constant input prices, productivity increases must
generate lower tariffs to be passed on to consumers. The crucial matter for the
regulator is then establishing new standards of productivity.
Along the tariff cycles ANEEL has been re

ning the methodology used to

determine the ef first tariff review cycle, cost was

determined based on a reference company, a concept applied again in the second
cycle, but with the introduction of an analysis of global consistency. The reference
company is built as a mathematical representation of the distribution activity by

cient operational costs. In the