Inefficiency persistence and heterogeneity in Colombian electricity utilities

- We evaluate efficiency of Colombian electricity distributors after the reform.
- We use a stochastic frontier model with dynamic effects and heterogeneity.
- We find high inefficiency persistence but important differences among firms.
- High persistent and low efficient firms should draw the attention of the regulator.
- Recent regulation in quality has increased not only efficiency but also tariffs.

The electricity reform in Colombia has exhibited gains in terms of reliability but its effects on firm efficiency and service quality have not been clear. Previous studies evaluating the performance of distribution companies after the reform have not found evidence of improvements, although large differences in efficiency have been found among firms. This suggests high inefficiency persistence and heterogeneity in the Colombian distribution sector. In this paper, we propose an extension of dynamic stochastic frontier models that accounts for unobserved heterogeneity in the inefficiency persistence and in the technology. The model incorporates total expenses, service quality and energy losses in an efficiency analysis of Colombian distributors over fifteen years after the reform. We identify the presence of high inefficiency persistence in the sector, and important differences between firms. In particular, rural companies and firms with small customers present low persistence and evidence the largest gains in efficiency during the period. However, increases in efficiency are only manifested during thelast five years when the main improvements in service quality and energy losses are presented. Overall, inefficiency persistence, customer density and consumption density are found to be important criteria to be considered for regulatory purposes.