Statistical evaluation of Data Envelopment Analysis versus COLS Cobb–Douglas benchmarking models for the 2011 Brazilian tariff revision

•We evaluate the benchmarking model used by the Brazilian regulator in 2011.•Major differences are reported between DEA and Cobb–Douglas COLS efficiency scores.•We provide a detailed statistical analysis of the problem.•We point out major statistical issues of the COLS Cobb–Douglas.•We present statistical tests to compare DEA and COLS.

In 2011, the Brazilian Electricity Regulator (ANEEL) implemented a benchmarking model to evaluate the operational efficiency of power distribution utilities. The model is based on two benchmarking methods: Data Envelopment Analysis (DEA) and Corrected Ordinary Least Squares (COLS) with a Cobb Douglas production function. Although the estimated scores are highly correlated, differences between the scores are as high as 41%. For some companies differences between the efficiency scores result in substantial reduction in regulatory operational costs. We provide a detailed statistical comparison which indicates that the COLS Cobb Douglas model has major deficiencies in terms of estimating efficiency scores.