An analysis of cost efficiency in Swiss multi-utilities

This study presents an empirical analysis of the cost efficiency of a sample of Swiss multi-utilities operating in the distribution of electricity, natural gas and water. The multi-utilities that operate in different sectors are characterized by a strong unobserved heterogeneity. Therefore the measurement of their performance poses an important challenge for the regulators. The purpose of this paper is to study the potential advantages of recently developed panel data stochastic frontier models in the measurement of the level of efficiency for multi-utility companies. These models are estimated for a sample of 34 multi-output utilities operating from 1997 to 2005. The alternative models are compared regarding the cost function slopes and inefficiency estimates. For the inefficiency estimates, the correlation between different models and the effect of econometric specification have been analyzed. The results suggest that the inefficiency estimates are substantially lower when the unobserved firm-specific effects are taken into account.