Energy Policy 39 (2011) 826833

Contents lists available at ScienceDirect

Energy Policy
journal homepage: www.elsevier.com/locate/enpol

Firm size and productivity. Evidence from the electricity distribution

industry in Brazil
Beatriz Tovar a, Francisco Javier Ramos-Real b,n, Edmar Fagundes de Almeida c
a

lisis Econo
mico Aplicado y EIT, Universidad de Las Palmas de Gran Canaria, Spain
Departmento de Ana
lisis Econo
mico, Facultad de Ciencias Econo
micas y Empresariales, Campus de Guajara, Universidad de La Laguna, La Laguna, S/C de Tenerife, Espan
a, Spain
Departamento de Ana
c
IE-UFRJ (Instituto de Economia-Universidade Federal do Rio de Janeiro), Brazil
b

a r t i c l e i n f o

a b s t r a c t

Article history:
Received 12 November 2009
Accepted 1 November 2010
Available online 9 December 2010

In this paper we apply Stochastic Frontier Analysis through a distance function to investigate the impact of
rm size on productivity development in electricity distribution. We use a sample of seventeen Brazilian
rms from 1998 to 2005 and decompose productivity into technical efciency, scale efciency and
technical change. Moreover, a further step is to decompose the technical change measurement into
several components. The results indicate that rm size is important for industrys productivity, and
therefore a key aspect to consider when making decisions that affect the market structure in the
electricity distribution industry.
& 2010 Elsevier Ltd. All rights reserved.

Keywords:
Brazil electricity distribution
Firm size
Productivity decomposition. L94

1. Introduction
Over the last three decades, many countries have introduced
reforms to transform the organization and regulation of electricity
markets. One of the most important features of these reforms has
been the unbundling of different industry segments. The main
purpose of these reforms is to introduce competition into electricity generation and retail markets, and improve the efciency of
natural monopoly transmission and distribution stages. Whenever
possible, the reforms also broke up the national distribution
companies horizontally into several regional monopolies. The
regulatory reforms for monopoly activities have tended to move
away from the traditional rate of return regulation towards
incentive-based regulation models. In most cases, these changes
were associated with the creation of new regulatory agencies that
were responsible for monitoring the performance of public and
private monopolies.
Together with structural reforms in the industry, there has also
been a shift toward the privatization of public enterprises in many
countries. The privatization processes have also led to mergers
between companies trying to improve industrys performance.1
Some papers focus on the impact of rm size on the performance of
electricity distribution. As Bagdadioglu et al. (2007) note, this issue
can be treated from two points of view. The rst tries to analyse

Corresponding author. Tel.: +922 317110; fax: + 922 317204.

E-mail address: frramos@ull.es (F. Javier Ramos-Real).
1
The idea is that if rm size is not adequate, a merger could be an appropriate
way to restructure the sector in order to improve efciency and productivity.
0301-4215/$ - see front matter & 2010 Elsevier Ltd. All rights reserved.
doi:10.1016/j.enpol.2010.11.001

how operational scale affects cost savings and the second tests the
potential production efciency gains from mergers.
In the rst alternative, a common nding of many studies
performed in different countries is the evidence of considerable
economies of density2 but insignicant or weak economies of scale
in the electricity distribution industry. There is evidence of
signicant scale effects with respect to output and number of
customers at quite small levels, though unit costs do not change
across a wide range. Moreover, for large rms, an increase in the
service area does not generate any signicant decrease in average
cost.3
As concerns the study of efciency resulting from mergers,
empirical studies are not conclusive. For example, Hattori et al.
(2005) on electricity distribution in the UK and Japan and Domah
and Pollitt (2001) in the UK have found efciency gains due to
mergers and privatization processes. The results by Kwoka and
Pollitt (2007) for the USA from 1994 to 2003 indicate that
electricity mergers are not consistent with improved cost performance. Bagdadioglu et al. (2007) compares the actual efciency
levels of distribution companies with the proposed combined
companies in Turkey for the period 19992003. The results indicate
potential for considerable efciency gains from the proposed
mergers.
In the 1990s, pro-market reforms were implemented in the
Brazilian Electricity Industry (BEI), the objective being to promote

2
This concept explains the evolution of average costs when production is
increased while some of the features of the product are maintained constant, such as
the size of the service area or the number of customers.
3
For a complete survey see Ramos-Real (2005) and Kwoka (2005).

B. Tovar et al. / Energy Policy 39 (2011) 826833

growth in sectors investment rate by attracting private capital and

improving sectors productivity. With the exception of some smaller
state-owned companies, the restructuring of the distribution segment
was accomplished by privatization for most rms. For this reason, the
BEI has been used as an example to study the effects of regulatory
reforms in the sector. Three initiatives should be highlighted, see
Resende (2002), Mota (2004) and Ramos-Real et al. (2009). The results
prove that, in general, the incentives generated by the reform process
do not seem to have led rms toward more efcient behaviour.
The objective of this paper is to analyse how rm size affects the
performance of the electricity distribution industry by calculating
productivity development in the Brazilian Electricity Industry
(BEI). This paper estimates productivity growth by applying
Stochastic Frontier Analysis (SFA). A distance function was used
on a sample of 17 rms from 1998 to 2005 to decompose
productivity into technical efciency, scale efciency and technical
change or technical progress. Moreover, a further step was to
decompose the technical change measurement, also known as
technical progress or technological change, into several components. As we shall see, rm size determines productivity development through the effect of scale and the scale augmenting
component of technical change.
This paper is organised as follows. Section 2 presents the
methodology used in this paper and its suitability to achieving
the goal of this work. Section 3 provides a short presentation of the
structure and regulatory framework of the BEI and describes the
data and variables used to estimate the model. Section 4 shows the
empirical results and analyses them in depth. Finally, Section 5
presents the main ndings of this study.

2. Methodology
In economics, productivity is generally dened as the ratio of
what is produced versus what is required to produce it. In the real
world, where rms usually use multiple inputs to obtain multiple
outputs, the measurement of productivity must take this into
account using a Total Factor Productivity (TFP) measurement. TFP
growth refers to the change in productivity over time.
There are several approaches for measuring productivity. The
traditional approach does not take into account company inefciency,4 meaning it is inadequate for considering the contribution
of efciency changes on productivity changes. Hence our use of the
frontier approach, which lets us estimate a best practice frontier
against which each rm is to be compared.
The best practice frontier may be estimated using either nonparametric5 or parametric6 techniques, but in both cases some
assumptions about the technology must be made. Both approaches
have their merits and drawbacks.7 In order to measure and decompose
the productivity development of Brazilian distribution rms, we have
decided to estimate the best frontier by estimating a distance function.
2.1. Measuring and decomposing TFP using the Malmquist TFP index

827

and its decomposition. These productivity indexes were named

after Malmquist, who in 1953 proposed the construction of input
quantity indexes as ratios of distance functions.
The distance function, introduced by Shephard (1953 and 1970),
allows us to estimate the relative efciency of rms in relation to
the technological frontier described by the distance function. A
distance function describes multi-input, multi-output production
technology without making behavioural assumptions, such as cost
minimization or prot maximization; this is especially suitable for
regulated industries. Another important advantage of distance
functions is that the input and output prices are not required.
The distance function can take either an input or an output
orientation. An input distance function characterizes production
technology by looking at the minimal proportional contraction of
the input vector for a given output vector. Conversely, an output
distance function considers the maximal proportional expansion of
the output vector for a given input vector; in this paper, we follow
an input-oriented approach; see Jamasb and Pollitt (2000). This is
because the demand for electric distribution services is a derived
demand that is beyond the control of utilities, and has to be met.
In order to estimate the best practice frontier we have to choose
a technique. Although there are more studies that deal with DEA,
there are those that have used a parametric (SFA) technique to
measure and decompose the TFP.8 SFA was introduced by Aigner
et al. (1977) and Meeusen and Van den Broeck (1977), and it is
driven by the idea that deviations from the production frontier
might not be entirely under the control of the agent being studied.
Kumbhakar and Lovell (2000, 2003) provide a useful revision of
this eld.
The decomposition we have looked for in this paper especially
takes into account rm size to explain the development of
productivity. For this task, we nd the SFA approach to be the
proper one because, in contrast to DEA, SFA does not need to
assume Constant Returns to Scale (CRS) for the production technology. Instead the Malmquist productivity index is obtained from
the parameters produced by a distance function tted with variable
returns to scale.
An input distance function can be thought of as a multiple
output version of a production frontier. The empirical application of
a parametric distance function calls for the denition of an
appropriate functional form.

2.2. Malmquist index via SFA

It is desirable that the functional form presents the following
advantages: it must be exible,9 it must be easy to calculate and,
lastly, it must allow the imposition of the condition of homogeneity10 The translogarithmic functional form meets these conditions, and this is the reason why we have chosen it. Therefore, we
have estimated the following stochastic translogarithmic input
distance function11:
M
X

N
1
X

ai ln xit

M X
M
1X
b ln yit ln yjt
2 i j ij

The Malmquist TFP indexes, which were introduced by Caves

et al. (1982), have been chosen to analyse the productivity change

lnxnit a0

4
Within this group there are two different techniques for obtaining TFP: nonparametric (index number) or parametric (average function).
5
For example, using DEA or Free Disposable Hull (FDH).
6
This could be either through linear programming or econometric techniques.
The econometric group may also be subdivided into two: deterministic and
stochastic frontiers.
7
Although several studies compare both methods, the literature is not clear on
which approach is superior. A detailed analysis of the relative merits of all of these
techniques is beyond the scope of this article, but a good summary can be found in
et al. (1997).
Fare

8
See Kumbhakar and Heshmati (1996), Fuentes et al. (2001), Kim and Han
(2001), Orea (2002) and Tovar and Rendeiro (2009b).
9
This is in order to weaken as much as possible the implications of assuming a
particular functional form for the underlying input distance function.
10
This condition has been imposed by normalizing the distance function with
one of the inputs, which is in accordance with Lovell et al. (1994). This methodology
has been applied in some empirical papers; see Coelli and Perelman (1999 and
2000), Morrison et al. (2000), Orea (2002) and Tovar and Rendeiro (2009a) among
others.
11
We do it through Frontier, version 4.1, developed by Coelli (1996).

bi ln yit

828

B. Tovar et al. / Energy Policy 39 (2011) 826833

1 N
1
M N
1
X
X
X
1 NX
aij ln xit ln xjt
gij ln yit ln xjt
2 i j
i
j

l1 T l11 T 2

n1
X

d1i T ln xit

with

xit

M
X

f1i T ln yit vit uit ;

xit =xnit

where y is a vector of M outputs, x is a vector of N factors, T is a time

trend, i relates to the ith rm, a, b, c, g, r, y are parameters to be
estimated. vit is a symmetric error terms, iid with a zero mean
(which represents the random variables that cannot be controlled
by the operator) and ui is a one-sided negative error term (which
measures the technical inefciency of each operator) and is
distributed independently of vit.
Finally, we follow Battese and Coelli (1992) specications for
modelling the temporary pattern of technical inefciency, so that
uit ui expZtTi

where Ti is the last time period in the ith panel, Z is the decay
parameter to be estimated, uit is the non-negative random variables
which are assumed to account for technical inefciency in production
and are taken to be iid as truncations at zero of the N(m,s2u ) distribution.
The parameters obtained by the estimation allow us to calculate
and to decompose the TFP change relative to the input distance
function, which is estimated in the following way12:


 
h
 
i
TEi1
@ln Di0
i1
ln TFP
@ln@tDi1
TFPi0 ln TEi0 0:5
@t
0:5

M
X

SFi0 emi0 SFi1 emi1 ln yji1 ln yji0 

formula represent the Pure Technical Change (PTC), which equally

affects all companies. The second component is the Non-Neutral
Technical Change (NNTC), which depends on the input mix. The last
component represents the Scale Augmenting Technical Change
(SATC), which depends on the scale and the production mix.
This decomposition specially takes into account rms size to
explain the productivity development [through SECH in Eq. (3) and
SATC in (4)]. Finally, in order to calculate the SECH, production
elasticity and scale factors are required. We can calculate the
production elasticity, for each output and each observation,
through the following expression:

emit

@ ln Dit
@ ln ymit

bm

M
X

bmi ln ymit

m1

N
X

gni ln xnit fm t

n1

with i 1,2,:::,N; t 1,2,:::,T

In order to obtain the scale factor we use

M
X
SFit eiteit 1 where eit
emit
m1

with i 1,2,:::,N; t 1,2,:::,T

3. Brazilian electricity industrydata and variables

This section briey describes the structure and the reform
process that has taken place within the industry and the data and
variables that dene the model to be estimated.

m1

with

i 1,2,:::,N; t 1,2,:::,T

where13

3.1. A brief history of Brazilian electricity industry

This methodology results in the decomposition of technical

change into three components. The rst two elements of this

In the early 1990s, the regulatory framework of the Brazilian

electricity industry (BEI) was characterized by state control of all
industry segments, particularly in terms of decisions regarding
plans for expansion and pricing policy. The Federal government has
concentrated its operations in generation companies, while almost
all states have created their own electricity distribution companies.
This industrial organization and regulation framework was very
effective in supporting the expansion of the BEI15 (Almeida and
Pinto, 2000).
But the deteriorating nancial performance of Brazilian electricity utilities in the 1980s spurred the reform process. The system
of cross-subsidies between low cost and high cost utilities reduced
the incentives for efciency gains (Pinto and de Oliveira, 1995). The
reforms in BEI started in 1993 with Law 8631. This Law changed the
tariff policy and the subsidy policy was eliminated. In addition, a
price cap regime for distribution utilities was adopted that
allocated to business benets from gains in efciency.16 Between
1995 and 1998 the virtual unbundling of the generation, transmission and distribution function of current utilities was implemented. An institution (MAEMercado de Energia Atacadista) was
created to oversee the future market for wholesale electricity. Long
term contracts for electricity supply were canceled and replaced by
initial contracts which would gradually expire after 2002. In
1997, congress approved Law 9427 creating a new regulator
(ANEEL), better adapted to the new industry pattern of development. Finally, in 1998 an independent system operator (ISO) was

12
We follow the general approach outlined in Orea (2002), but instead of using
it for an output distance function we have chosen an input distance function; see
Coelli et al. (2003).
13
The multiplication of Pure Technical Efciency by Scale Efciency is called
Technical Efciency Change (tech).
14
The multiplication of Pure Technical Efciency by Scale Efciency is called
Technical Efciency Change (TECH).

15
Electricity production expanded at an annual rate of 9.7% between 1975 and
1980. Over 150 000 Km of transmission lines were built to interconnect many town
grids.
16
The electricity tariff is readjusted only every 5 years. During this period, if the
utility increases its efciency, only part of these gains is transferred to the endconsumers (factor X) and the company is allowed to increase prots. Therefore, Law
8631 has introduced incentives for utilities to increase their economic efciency.



TEi1
Pure Technical Efficiency Change PECH ln
;
TE

  i0

@ln Di0
@ln Di1

;
Technical Change TECHCH 0:5
@t
@t
Scale Efficiency Change SECH
M
X
0:5
SFi0 emi0 SFi1 emi1 ln yji1 ln yji0 
m1

We have applied a standard interpretation of these components.

TEni is the inverse of the input distance measure, and varies
between 0 and 1. PECH represents the so called catching up effect
or specic inefciency of each rm mainly derived by managerial
skills. SECH is the inefciency derived by not being on the efcient
scale.14 The technical change (TECHCH) is measured as the mean of
the technical change obtained in two consecutive periods, and is
equal to


@ln Dit
@t

l1 2l11 t

N
X

dn ln xnit

n1

with i 1,2,:::,N; t 1,2,:::,T

M
X

fm ln ymit

m1

B. Tovar et al. / Energy Policy 39 (2011) 826833

created, which was in charge of operating the integrated

transmission grid.
Even before the completion of regulatory reforms, the government launched a major privatization process. When it began in
1995, investors and the government were very optimistic about the
pace of reform. Because of the huge macroeconomic implications,
the Government has not waited for the end of the implementation
of the new regulatory framework to begin to privatize. Nineteen
companies were privatized by 1999 for about $ 19 billion (Almeida
and Pinto, 2000).17
The currency devaluation in January 1999, and economic
volatility observed in the national and international contexts have
reduced Governments interest to continue the reform process. In
addition, the government has hesitated to let electricity prices to be
formed in the market. The price of electricity in the spot market
(MAE) was determined according to a very complex mathematical
formula and it had remained relatively unstable in the short term
(Pinto, 2003). Consequently, investments fell sharply to historically
very low levels. An unusual dry season in 2001 and the recovery of
the Brazilian economy that year, resulted in the electricity shortage
crisis and rationing in 2001.
The victory of the Workers Party in the 2002 elections marked a
turning point in energy policy for the gas and power industry. The
negative effects of the electricity shortage on the economy
impelled the new government to revise the institutional organization and regulatory framework of the electricity sector. The most
important objective of this revision was to provide the Federal
Government with new instruments to guarantee security of supply.
In order to reach this objective a new model of the electricity sector
was proposed based on a more centralized institutional design, the
reduction of the importance of operational competition (with
priority given to competition for new investments) and freezing
of the privatization process.
3.2. Data and variables
The data used in this paper consists of a balanced sample of 17
private Brazilian electricity distribution rms over an 8-year
period, from 1998 to 2005. This data set has been used in previous
research and its characteristics are fully described elsewhere
(Ramos-Real et al. 2009). The data set we constructed was based
on the Abradee (Brazilian Association of Electricity Distribution
Companies) reports. They were complemented by information
provided by companies annual reports. The 17 companies included
in the study, distributed about 54.6% of Brazils electricity consumption in 2005. Table 1 presents the statistics concerning the
size of the companies in 2005, specically, the number of customers and amount of electricity delivered.
Cemig, CPFL and Light are the largest companies in terms of
quantity of energy distributed. These companies are located in the
South eastern region of Brazil. This region accounts for 54.9% of the
GDP. If the number of customers is also considered as a criterion,
then this group expands to include Coelba in Bahia State in the
north eastern region of the country. Using both criteria, the
smallest companies are Ceb, Cosern, Energipe and Enersul.
Our specic choice of variables is in accordance with the general
consensus found in the current literature. Standard variables for
the outputs are used: the amount of electricity distributed (in
GWh) and number of customers. The inclusion of the number of
customers reects the spread of demand among the connection
points, which is generally regarded as a major cost driver (see
Jamasb and Pollitt (2003)). These variables also capture the
17
With the exception of some smaller state-owned companies, the restructuring process of the distribution segment took the form of privatization for most rms.

829

Table 1
Sample companies in 2005.
Firm

Sales
(GWh)

Number of
customers

Size

Region of
country
covered

AESSUL
BANDEIRANTE
CEB
CELG
CELPA
CELPE
CEMAT
CEMIG
COELBA
COELCE
COSERN
CPFL
ELEKTRO
ENERGIPE
ENERSUL
ESCELSA
LIGHT

6293.00
7257.00
2911.10
6033.20
3875.30
6581.30
3474.70
35756.30
8535.80
5668.00
2668.00
16413.00
8299.50
1318.90
2308.10
4615.40
16078.20

1038
1275
722
1900
1298
2416
782
5952
3787
2297
861
3225
1885
461
651
1022
3765

Medium
Medium
Small
Medium
Small
Medium
Small
Large
Medium
Medium
Small
Large
Medium
Small
Small
Small
Large

South
South east
Mid west
Mid west
North
North east
Mid west
South east
North east
North east
North east
South east
South east
North east
Mid west
South east
South east

important differences in the average levels of consumption, as

well as the differences among the regional distribution utilities
(rural and urban areas).
The input variables are expressed as physical units. In principle,
it is assumed that the electricity distribution rms use two inputs,
labor and capital, to deliver electricity to the end users. In addition,
the network energy losses are also considered to be an input.18
Labor input is estimated as number of employees. Network length
(in km) is used as a proxy of capital which is a common practice in
many other papers (see Jamasb and Pollitt (2003)).19 Losses, in
GWh, are the difference between purchased power to generators
and the electricity sold to the end users by distribution utilities.
Bagdadioglu et al (2007) point out that losses will rise as service
area expands, consequently, electrical losses can be used as another
form of input to proxy the direct capital requirements of improving
the quality of the network. A summary of the statistics for the
balanced sample during the whole 19982005 period is presented
in Table 2; in total 136 observations were available for estimation.

4. Results
4.1. Global efciency results
Table 3 shows the parameters from the input distance function
estimated by maximum likelihood. It can be seen that all the rst
order parameters are statistically signicant, and have the correct
sign. This implies that the estimated distance function complies
with all the expected theoretical properties. The conditions of
regularity are satised at the sample mean; i.e. inputs are nondecreasing and quasi-concave, and outputs are decreasing. The
variables have been divided by the geometric mean, therefore the
rst order coefcients can be interpreted as elasticity. Moreover,
18
Network losses can be categorized as technical and non-technical losses; i.e.
measurement errors and un-metered supplies. From the technical point of view, to
increase productivity a reduction is required in both types of losses. Thus, any
regulation to control unmetered supplies or to perform the maintenance of the
network results in the productivity development.
19
This choice might lead certain bias since capital input per network-km is
different in rural and urban areas, but is partially corrected by an adequate denition
of the outputs to capture the differences in the average levels of consumption (as we
made). Another possibility could be to consider the network length as an output
(Estache et al., 2004); but, in that case, we would not have other alternative measure
for capital.

830

B. Tovar et al. / Energy Policy 39 (2011) 826833

Table 2
Sample summary statistics.
Variables
Outputs

Mean
Standard Deviation
Minimum
Maximum

Inputs

Sales (GWh)

Number of
customers

Length of electricity
grid (km)

Number of
employees

Losses (GWh)

8307.23
8082.68
1318.90
35756.30

1719.00
1296.05
334.43
5951.90

68899.10
75610.23
11,306.00
379400.00

2501.80
2471.40
597.00
11748.00

2779.64
2666.55
669.00
14324.00

Table 3
Input distance function parameter estimates.
Variable

Cte
Delivered energy (MWh)
Customers (no)
network length (km)
Labor (no)
Losses (Mwh)
T
Delivered energy sq
Delivered energy Vs customers
Network length Vs delivered
energy
Labor x delivered energy
Losses x delivered energy
Delivered energy Vs trend
Customers sq
Network length Vs customers
Labor Vs customers
Losses Vs customers
Customers Vs trend
Network length sq
Network length Vs labor
Network length Vs losses
Network length Vs trend
Labor sq
Labor Vs losses
Labor Vs trend
Losses sq
Losses Vs trend
Trend sq
Sigma-squared
Gamma
Mu
Eta

coefcient

0.440
 0.237
 0.545
0.275
0.468
0.256
0.049
 0.191
0.344
 0.034

LIGHT

standarderror
0.044
0.074
0.143
0.032
0.041
0.038
0.008
0.193
0.209
0.071

0.273
0.121
 0.239
0.140
 0.005
0.015
 0.941
0.338
 0.075
0.082
 0.118
0.149
0.193
0.173
0.073
0.016
0.032
0.044
 0.088
0.062
0.056
0.068
0.006
0.009
0.161
0.160
 0.073
0.113
0.038
0.019
0.017
0.077
 0.044
0.017
 0.009
0.004
0.290
0.169
0.956
0.009
Is restricted to be zero
 0.126
0.024

t-ratio

10.098
 3.206
 3.818
8.520
11.337
6.688
5.834
 0.993
1.647
 0.487
2.259
 1.700
 0.320
 2.788
 0.917
 0.794
1.113
4.503
0.729
 1.414
0.831
0.640
1.008
 0.650
1.965
0.219
 2.526
 2.089
1.983
111.200
 5.275

the variance parameters, s2 and g,20 are statistical signicant at a

5% level, and the estimated value of parameter g is 0.956; this
shows that technical efciency has an important role to play in
explaining the efciency and the change in the TFP. Finally, as the
estimate for the parameter Z is negative, then the technical
efciency decreases over time; this is in accordance with the
exponential model dened in Eq. (2).
The technical efciency of each rm for each period was
assessed by means of the estimated distance function parameters.
The average technical efciency score21 during the period for
Brazilian distribution rms is plotted in Fig. 1. The most efcient
20
The model was estimated using maximum likelihood methods, and relied on
the parameterizations method proposed by Battese and Corra (1977) who estimated
s2 s2v + s2u and g s2u/(s2v + s2u).
21
This value represents the inverse of the distance measurement input, and
varies between 0 and 1. For the sake of brevity, we only report average results;
however, the annual results are available from the authors upon request.

AESSUL
1

BANDEIRANTE

0.8

ESCELSA

CEB

0.6
ENERSUL

CELG

0.4
0.2

CELPA

ENERGIPE
0

ELEKTRO

CELPE

CPFL

CEMAT

COSERN

CEMIG
COELCE

COELBA

Fig. 1. Brazilian distribution rms average technical efciency.

rms were AESSUL and Bandeirante, which are medium-size

companies, and Energipe, which is the smallest company of the
sample. Conversely, the least efcient rms were Cemig, Celg,
Cemat, Celpa and Elektro, all of which exhibited technical efciencies of 0.6 or less. This set of rms is heterogeneous in terms of size.
Taking into account these facts, and jointly analyzing Table 1 and
Fig. 1, we can conclude that technical efciency is not directly
related to company size, despite the fact that the smallest company
is the most efcient in the sample and the largest is the most
inefcient.
4.2. Global evolution of TFP and decomposition
While technical efciency represents the relative position of
rms with regard to the efcient frontier at a given moment, TFP
change (TFPCH) dened in Eq. (3) shows whether rms are moving
with respect to the efcient frontier from one period to another, as
well as the frontier shift.22
Table 4 summarizes industrys annual TFP change (TFPCH)
decomposition. The last row shows the computed average, which
takes the indices for the whole period into account. The results
show that, for the average rm, the TFP exhibited a positive annual
growth of only 0.9% during the 19982005 period.23 Within the TFP
22
In this case, the values in Table 4 represent growth rates, while those in Fig. 1
indicate relative positions. Thus, we must bear in mind that it is entirely possible for
a highly inefcient company to exhibit a very favourable TFP trend.
23
The interpretation of these values is as follows. Unity means zero growth; a
value greater than one means positive growth. For example, the rst value of TFPCH

B. Tovar et al. / Energy Policy 39 (2011) 826833

Table 4
Malmquist Index. Summary of years means.

831

Table 5
Malmquist Index. Summary of rms means.

TECHCH

TECH

Pure TECH

SE CH

TFPCH

1998  1999
1999  2000
2000  2001
2001  2002
2002  2003
2003  2004
2004  2005

1.074
1.064
1.057
1.050
1.040
1.032
1.024

0.981
0.981
0.945
0.973
0.965
0.934
0.942

0.975
0.972
0.968
0.964
0.959
0.953
0.947

1.006
1.009
0.976
1.009
1.006
0.979
0.994

1.056
1.046
1.002
1.024
1.006
0.965
0.967

Mean

1.049

0.960

0.963

0.997

1.009

components, one important result is the negative change (  4%) for

the technical efciency (TECH). The decomposition of this efciency indicates that the pure technical efciency change (PECH)
represents  3.7%,24 while the change in scale efciency (SECH) is
nearly neutral for the entire period. The above notwithstanding, the
technical change (TECHCH) shows a yearly average positive growth
rate of 4.9% during the period.
These results generally conrm those of Ramos-Real et al. (2009),
where the productivity evolution of the sample companies during the
whole period depended on the frontier shift; i.e. technical change that
was mainly due to technological innovations. On the other hand, the
pure technical efciency change, which is the catching up effect,
shows that the rms as a whole are moving away from the efciency
frontier and have not improved their behaviour.
Because of all these factors, the TFP change is positive but
declined during the period 19982003, up from 5.6% in 1999 to
0.6% in 2003. This is mainly because the contribution of technical
change has been positive. However, the TFP change becomes
negative for the two last years, see Table 4. The reason is that
the rate of technical change is declining, although it has always
been positive, but the pure technical efciency change is negative
and getting worse.
4.3. Analysis of TFP by rm and scale economies
In this section it is important to see the non-neutral contribution
of rm size to TFPs change (TFPCH). Table 5 shows the decomposition of the TFP for each rm.25
From this information we can highlight several important facts
1. Several facts can be analysed with regard to the scale effect
(SECH) on productivity change. Some rms can be found in the
area of economies of scale, and others in the area of diseconomies of scale. In Table 6, we can see economies of scale rm by
rm during the period.26 Obviously, the smallest rms are in the
former category, and the biggest rms are in the latter. Only one
rm, CELG, is located at the efcient minimum scale. The scale
effect contribution on the TFP for small rms is positive (see
Table 5); these rms are Ceb, Celpa, Cemat, Cosern and, Enersul,
and the sole exception is Energipe. This means that these
companies are moving towards the minimum efcient scale.
(footnote continued)
indicates an annual positive growth of 5.6%, whereas the latter value indicates a
decrease in 3.3%.
24
This means that rms, as a whole, move away from the efcient frontier from
one year to another, regardless of whether the frontier shifts over time.
25
To understand Table 5, we will comment on the case of CELPE. The rms TFP
average annual growth was 3.6% in the period motivated by: (a) Positive contribution of TECHCH of 7.3% (b) Negative contribution of TECH (  3.7%) because a small
negative SECH (  0.3%) and a negative PECH ( 3.4%).
26
A value larger than one indicates economies of scale and less than one shows
diseconomies.

TECHCH

TECH

Pure TECH

SE CH

TFPCH

AESSUL
BANDEIRANTE
CEB
CELG
CELPA
CELPE
CEMAT
CEMIG
COELBA
COELCE
COSERN
CPFL
ELEKTRO
ENERGIPE
ENERSUL
ESCELSA
LIGHT

1.013
1.035
0.994
1.084
1.047
1.073
1.011
1.158
1.115
1.080
1.001
1.097
1.068
0.964
0.998
1.020
1.087

0.998
0.958
0.994
0.918
0.960
0.963
0.973
0.902
0.953
0.971
0.998
0.973
0.936
0.935
0.967
0.957
0.967

0.997
0.997
0.982
0.919
0.937
0.966
0.940
0.913
0.969
0.978
0.984
0.975
0.935
0.993
0.958
0.959
0.967

1.001
0.960
1.012
0.999
1.024
0.997
1.035
0.988
0.983
0.993
1.015
0.998
1.001
0.941
1.009
0.998
1.000

1.011
0.992
0.988
1.002
1.008
1.036
0.985
1.059
1.067
1.051
0.999
1.069
1.004
0.897
0.965
0.977
1.054

Mean

1.049

0.9597

0.963

0.997

1.009

Table 6
Average economies of scale by rms.
Firms

Scale Economies

AESSUL
BANDEIRANTE
CEB
CELG
CELPA
CELPE
CEMAT
CEMIG
COELBA
COELCE
COSERN
CPFL
ELEKTRO
ENERGIPE
ENERSUL
ESCELSA
LIGHT

1.483899
1.539360
3.076883
1.004043
1.633932
0.937203
2.639134
0.750845
0.771375
0.909045
1.624996
0.946164
1.109348
4.849903
2.352069
1.756548
0.980463

Conversely, the biggest rms are moving away from this point,27
although here the impact of the scale effect on productivity is
not relevant. This last result suggests the existence of constant
returns once the minimum efcient scale has been reached, that
is a common nding in the literature.
2. Technical change (TECHCH) has proved to be a positive component within the TFP, and is stronger for the biggest rms in the
sample. Cemig, Light, CPFL have values of about 10% average
annual growth. For the smallest rms, technical change is less
important and sometimes negative; this can be seen in the case
of Energipe, Enersul, and Ceb. In order to analyse this result, as
previously stated, we decompose the technical change measurement [as dened by Eq. (4)] into a pure technical change
(PTC), non-neutral technical change (NNTC) and scale augmenting technical change (SATC); see Table 7. It can be noted that
scale augmenting explains this fact; this is because it is positive
and stronger as the products grows, while pure technical change
does not depend on rm size and the non-neutral effect is not
quantitative relevant. It can be concluded that the frontier shift

27
The value of the economies of scale for CELG is 1, and consequently the scale
does not affect the TFP.

832

B. Tovar et al. / Energy Policy 39 (2011) 826833

Table 7
Technological change decomposition by rms.
TECHCH

Pure
TECHCH

NonNeutral
TECHCH

Scale
Augmenting
TCCHCH

AESSUL
BANDEIRANTE
CEB
CELG
CELPA
CELPE
CEMAT
CEMIG
COELBA
COELCE
COSERN
CPFL
ELEKTRO
ENERGIPE
ENERSUL
ESCELSA
LIGHT

1.0134
1.0349
0.9938
1.0840
1.0472
1.0734
1.0112
1.1577
1.1151
1.0802
1.0007
1.0967
1.0683
0.9644
0.9976
1.0200
1.0874

1.0487
1.0487
1.0487
1.0487
1.0487
1.0487
1.0487
1.0487
1.0487
1.0487
1.0487
1.0487
1.0487
1.0487
1.0487
1.0487
1.0487

0.9897
0.9820
0.9989
1.0192
1.0114
0.9906
1.0133
1.0146
1.0069
1.0037
0.9920
0.9965
1.0030
0.9956
1.0061
0.9987
0.9778

0.9750
1.0044
0.9462
1.0160
0.9870
1.0341
0.9492
1.0941
1.0594
1.0276
0.9600
1.0514
1.0166
0.9199
0.9427
0.9726
1.0610

Mean

1.0486

1.0487

0.9999

0.9999

effect, or technical change, are more important for productivity

as rm size grows.28
3. The pure technical efciency change (PECH) is negative for all
rms (see Table 5), except for Energipe, Bandeirante and
AESSUL, which are practically on the efcient frontier. As noted
previously, the sample companies are further away from the
efcient frontier at the end of the period, moreover, the less
efcient rms had a worse performance. There is, however, no
direct relationship between a companys efciency and its size,
as a result of which we may conclude that PECH is independent
of company size.

contribution to TFP for small rms is positive, which means that

these companies are moving towards the minimum efcient scale.
The results suggest the existence of constant returns once the
minimum efcient scale is reached. Thirdly, the technical change is
positive and stronger for the largest rms in the sample, which is
explained by the increasing scale effect. Thus, the frontier shift
effects become more important for productivity as rm size grows.
The technical change is the component with the greatest weight,
quantitatively speaking, on the change in TFP. These three facts
imply that the size of the company contributes positively to the
change in TFP, regardless of the fact that PECH would have or not a
direct bearing on companys size.
Thus, these results suggest that mergers could be justied by
their potential to provide future productivity gains. These conclusions are not taking into account the potential efciency gains if the
merged rms could operate with greater technical efciency than
do existing rms. This last issue as well as the spatial effects of
mergers between distribution companies in adjacent areas, are two
questions to be addressed in future research.
The results are relevant to government policy, because the
regulator can analyse whether mergers among certain small
electricity distribution rms in Brazil should be permitted. From
our point of view, the results indicate that rm size is important for
industrys productivity, and therefore a key aspect to consider
when making decisions that affect the market structure in the
electricity distribution industry.

Acknowledgements
This research was funded with Grant from Programa Hispano
o de Cooperacion Interuniversitaria (HPB-20070022-PC).
Brasilen
Ramos-Real and Tovar would like to thank the hospitality at the
UFRJ while working on this research
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28
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