Efficiency of Independent Efficiency of Independent
Power Producers: A Power Producers: A Fuzzy DEA ApproachFuzzy DEA Approach
Presentor /co-author: Rene D. OlamitPresentor /co-author: Rene D. Olamitaa , Emilyn C. , Emilyn C. CabandaCabandabb
aa Graduate School, University of Santo Tomas, Philippines. Graduate School, University of Santo Tomas, Philippines. bbSchool of Global Leadership & Entrepreneurship, Regent School of Global Leadership & Entrepreneurship, Regent
University,University,Virginia Beach, VA 23464 USA. Virginia Beach, VA 23464 USA.
Alter Hall, Fox School of Business And Management
Temple University, Philadelphia, USA
July 11, 2009
1. 1. IntroductionIntroduction
Purpose / AimPurpose / Aim•Compare and evaluate the technical Compare and evaluate the technical
efficiency performance (industry-level efficiency performance (industry-level analysis) of selected IPP firms in Luzon analysis) of selected IPP firms in Luzon during the period (2000-2006) using the during the period (2000-2006) using the DEA and FDEA Models. DEA and FDEA Models.
•Examine whether the selected controllable Examine whether the selected controllable variables incur slacks that could affect the variables incur slacks that could affect the technical efficiency of these IPP industries technical efficiency of these IPP industries employing Input/ Output Orientation DEA employing Input/ Output Orientation DEA VRS-TE (Slacked Based) Multi Stage VRS-TE (Slacked Based) Multi Stage Model. Model.
•Compare the technical efficiency Compare the technical efficiency performance of IPPs for both Non-Fuzzy performance of IPPs for both Non-Fuzzy DEA evaluation. DEA evaluation.
•Establish the efficiency ranking of IPPs Establish the efficiency ranking of IPPs based on DEA and FDEA.based on DEA and FDEA.
Electricity supports society, synergizing globalization
Electric Power SectorElectric Power Sector
Efficiency performance Efficiency performance
factors
Conventional DEA Literature
Unconventional DEA Literature
Conventional DEA LiteratureConventional DEA Literature
• Hattori, et al., 2002;Hattori, et al., 2002;• Managi et al., 2005; Managi et al., 2005; • Delmas and Tokat, Delmas and Tokat,
2005; 2005; • Cherchye and Post, Cherchye and Post,
2003; Hirschhausen et 2003; Hirschhausen et al., 2006; al., 2006;
• Korhonen and Korhonen and Syrjanen, 2003;Syrjanen, 2003;
• Nemoto and Goto, Nemoto and Goto, 2003; 2003;
• Hattori, et al., 2002; Hattori, et al., 2002; • Bagdadioglu, et al., Bagdadioglu, et al.,
2007; 2007; • Hollas, et al., 2002Hollas, et al., 2002..
Unconventional DEA LiteratureUnconventional DEA Literature
• Yang and Pollitt, 2009;
• Madlener et al., 2009
Inadequate source of Inadequate source of Efficiency Performance… Efficiency Performance…
except studies..except studies..
• Lavado and Hua,2004; Posadas and Lavado and Hua,2004; Posadas and Cabanda, 2007; World Bank Groups like Cabanda, 2007; World Bank Groups like Bacon and Besant-Jones, 2001; Ishiguro and Bacon and Besant-Jones, 2001; Ishiguro and Akiyama, 1995; and Jamash et al., 2005.Akiyama, 1995; and Jamash et al., 2005.
CONVENTIONAL DEA
GAP
FUZZY DEA
Efficiency Performance
• Yang and Pollitt, 2009; Madlener et al., 2009
World Bank Study World Bank Study ResultResult
• IPPs were inefficient, having incurred IPPs were inefficient, having incurred substantial losses to a minimum of 18- 22 substantial losses to a minimum of 18- 22 percent in 1989, percent in 1989,
• possibly increasing, even doubling at the range possibly increasing, even doubling at the range of 44 - 50 percent, by the end of the century.of 44 - 50 percent, by the end of the century.
• pointed out an astounding approximation of a pointed out an astounding approximation of a minimum of $30 billion to as high as $60-70 minimum of $30 billion to as high as $60-70 billion over a decade, billion over a decade,
• IPPs’ efficiency performance was below IPPs’ efficiency performance was below standard,standard,
• Generating service reliability seemed to be low.Generating service reliability seemed to be low.
Negative Findings
Reference : World Bank,1993; Ishiguro and Akiyama, 1995.World Bank,1993; Ishiguro and Akiyama, 1995.
2. The Philippines’ 2. The Philippines’ Electric Power Electric Power
SectorSector
Power Sector StructurePower Sector Structure
NPC
Generation
Transmission
IPPs TransCo
Distribution
RECs
Transmission grid & sub-transmission
networks
Switchyard
Note: EPIRA 9136-
Implementing laws for restructuring and privatization effort for electric power sector in the Philippines.
3. Methodology3. Methodology
Up-to- date Up-to- date Multidimensional Multidimensional
Approaches:Approaches:• Conventional non-Fuzzy DEAConventional non-Fuzzy DEA
DEA-Stage 1 (CVRSTE)DEA-Stage 1 (CVRSTE)
• Unconventional Fuzzy DEAUnconventional Fuzzy DEA
FDEA-Stage 2 (UCVRSTE_ I ), FDEA-Stage 2 (UCVRSTE_ I ),
FDEA -Stage 3 (UCVRSTE_ O)FDEA -Stage 3 (UCVRSTE_ O)
Period of AnalysisPeriod of Analysis
• Seven ( 7 ) years period (Yrs. Seven ( 7 ) years period (Yrs. 2000 – 2006 )2000 – 2006 )
Note: Considering Nine ( 9 ) Selected Independent Power Producers (IPPs).
Input variables
Total Number of Employees
Depreciation
ISO Certification
Output variablesTotal Operating Revenue
Total MWH/SalesAge of Technology
Data :Data :
Selected Independent Power Producers (IPPs) in Luzon Area
Decision Making Units (DMUs)
ACRONYM IPP Firms
1 SDPP Subic Diesel Power Plant
2KPSPP-I
Kalayaan Pumping Storage Power Plant-I
3KPSPP-II
Kalayaan Pumping Storage Power Plant-I
4 CHEPP Caliraya Hydro Electric Power Plant
5 BHEPP Botocan Hydro Electric Power Plant
6 ICCPP Ilijan Combined Cycle Power Plant
7MOTPP 1 & 2
Malaya Oil Thermal Power Plant 1 & 2
8 SCPP Sual Coal Power Plant
9 PCPP Pagbilao Coal Power Plant
Total = 9
Table 1
4. Empirical Results4. Empirical Results
0
20
40
60
80
100
120
1998 2000 2002 2004 2006 2008
Years
Tec
hn
ical
Eff
icie
ncy
SDPP
KPSPP-I
KPSPP-II
CHEPP
BHEPP
ICCPP
MOTPP 1& 2
SCPP
PCPP
Figure 1DEA-Stage 1 Technical Efficiency Analysis per IPP Industry (2000-
2006)
Figure 2DEA-Stage 1 Mean Technical
Efficiency per IPP Industry (2000- 2006)
0
20
40
60
80
100
Tech
nica
l
Eff
icie
ncy
Mean 18.19 47.42 40.28 96.42 61.28 93.8 84.63 74.46 67.27
SDPPKPSPP-
I
KPSPP-
IICHEPP BHEPP ICCPP
MOTPP
1& 2SCPP PCPP
Figure 3FDEA - Stage 2 Technical Efficiency
Analysis per IPP Industry (2000-2006)
0
20
40
60
80
100
120
1998 2000 2002 2004 2006 2008
Years
Tech
nic
al
Eff
icie
ncy
SDPP
KPSPP-I
KPSPP-II
CHEPP
BHEPP
ICCPP
MOTPP 1& 2
SCPP
PCPP
Figure 4FDEA-Stage 2 Mean Technical
Efficiency Analysis per IPP Industry (2000-2006)
0
20
40
60
80
100
Tech
nica
l Effi
cien
cy
MEAN 18.19 47.42 40.28 96.42 61.28 93.8 84.63 74.46 67.27
SDPP KPSPP-I KPSPP-II CHEPP BHEPP ICCPPMOTPP 1& 2
SCPP PCPP
Figure 5FDEA-Stage 3 Technical Efficiency Analysis per IPP Industry (2000-
2006)
-
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
1998 2000 2002 2004 2006 2008
Years
Te
ch
nic
al E
ffic
ien
cy
SDPP
KPSPP-I
KPSPP-II
CHEPP
BHEPP
ICCPP
MOTPP 1& 2
SCPP
PCPP
Figure 6FDEA-Stage 3 Mean Technical
Efficiency Analysis per IPP Industry (2000-2006)
0
10
20
30
40
Te
ch
nic
al E
ffic
ien
cy
MEAN 28 3 14 2 34 1 1 1 1
SDPPKPSPP-
IKPSPP-
IICHEPP BHEPP ICCPP
MOTPP 1& 2
SCPP PCPP
Table 2DEA-Stage 1 Model
Industry/IPP Firms
INPUT AND OUTPUT SLACKS (%) Average Summary (2000-2006)
INPUT OUTPUT
Total Number
DepreciationTotal
OperatingTotal MWH
of Employees Capital/ Eqp. Revenue Sales
SDPP - 3 89 12
KPSPP-I - - 35 -
KPSPP-II - - 81 14
CHEPP - 4 - 8
BHEPP - - - 500
ICCPP - - 2 -
MOTPP 1& 2 - - 3 -
SCPP - - - 4
PCPP 0.3 - 206 9
Mean 0.1 0.4 46 61
Note: - none or zero slack
Table 3FDEA-Stage 2 Model
Industry/IPP Firms
INPUT AND OUTPUT SLACKS (%) Average Summary (2000-2006)
INPUT OUTPUT
Total Number
Depreciation ISO Total Operating Total MWH
of Employees
Capital/ Eqp. Certification Revenue Sales
SDPP - - - 11 10
KPSPP-I - - 4 25 3
KPSPP-II - - 2 25 189
CHEPP - - - 2 18
BHEPP - 1 - - 1526
ICCPP 2 2 - 0.3 -
MOTPP 1& 2 10 12 4 3 -
SCPP 12 5 - - 4
PCPP 14 6 0.14 149 11
Mean 4.22 3 1.13 24 196 Note: - none or zero slack
FDEA-Stage 3 Model
Industry/IPP Firms
INPUT AND OUTPUT SLACKS (%) Average Summary (2000-2006)
INPUT OUTPUT
Total Number
DepreciationTotal
OperatingTotal MWH Age of
of Employees
Capital/ Eqp. Revenue Sales Technology
SDPP 22 15 737 7246 -
KPSPP-I 2 10 71 730 -
KPSPP-II 2 35 264 10375 -
CHEPP 4 25 4 295 -
BHEPP 4 38 114 49681 -
ICCPP 2 1 4 3 -
MOTPP 1& 2 4 14 19 0.4 7
SCPP 14 28 1 2 -
PCPP 15 28 380 10 4
Mean 8 22 177 7594 1.22
Note: - none or zero slack
Table 4
Table 5Comparative Technical Efficiency Performance Analysis of IPPs (%)
(DEA-Stage 1, FDEA-Stage 2 & FDEA-Stage 3) (2000-2006)
DMU Industry/IPP Firms
DEA-Stage 1 FDEA-Stage 2 FDEA-Stage 3
CVRS-TE(Stage 1)
UCVRS-TE (Stage 2)
UCVRS-TE (Stage 3)
1 SDPP 18.19 18.19 28
2 KPSPP-I 47.42 47.42 3
3 KPSPP-II 40.28 40.28 14
4 CHEPP 96.42 96.42 2
5 BHEPP 61.28 61.28 34
6 ICCPP 93.8 93.8 1
7 MOTPP 1& 2 84.63 84.63 1
8 SCPP 74.46 74.46 1
9 PCPP 67.27 67.27 1
Mean 64.86 64.87 10
Table 6Spearman Rank Correlation
Coefficient betweenDEA-Stage 1 versus FDEA-Stage 2 and DEA- Stage 1 versus FDEA – Stage 3
Method Correlation Coefficient Significance
CVRS(Stage 1) and UCVRS_I (Stage 2) 1.000** 0.000
CVRS(Stage 1) and UCVRS_O (Stage 3) -0.805** 0.000
Note: **. Correlation is significant at the 0.01 level (2-tailed).
Table 7Stages 1, 2 and 3 Technical Efficiency (%) Performance Ranking Summary of
IPPDMU
Industry/ IPP Firms
DEA
Rank
FDEA
Rank
FDEA
RankCVRS-TE (Stage
1)
UCVRS-TE (Stage 2)
UCVRS-TE (Stage 3)
1 SDPP 18.19 9 18.19 9 28 8
2 KPSPP-I 47.42 7 47.42 7 3 6
3 KPSPP-II 40.28 8 40.28 8 14 7
4 CHEPP 96.42 1 96.42 1 2 5
5 BHEPP 61.28 6 61.28 6 34 9
6 ICCPP 93.8 2 93.8 2 1 1
7 MOTPP 1& 2 84.63 3 84.63 3 1 1
8 SCPP 74.46 4 74.46 4 1 1
9 PCPP 67.27 5 67.27 5 1 1
Mean 64.86 64.87 10
5. Conclusion5. Conclusion
Findings SuggestFindings Suggest• (1) ISO Certification & Age of Technology entry (1) ISO Certification & Age of Technology entry
into the IPP firm study characterizes enhanced into the IPP firm study characterizes enhanced discriminating power in spite of dropping discriminating power in spite of dropping efficiency score values - connotes the efficiency score values - connotes the possible possible loss of precision;loss of precision;
• (2) Input and output orientation via UCVRSTE (2) Input and output orientation via UCVRSTE (Stages 2 &3) manifested inefficient results (Stages 2 &3) manifested inefficient results signifies signifies inappropriate use of scale inappropriate use of scale transformationtransformation;;
• (3) Misallocation of input/output resources as (3) Misallocation of input/output resources as evidence of slacks occurrence presented in evidence of slacks occurrence presented in three stages implies three stages implies mismanagement of mismanagement of variable alternativesvariable alternatives; ;
• ((4) An annual average of 1.13 percent 4) An annual average of 1.13 percent yearly for ISO Certification compliance yearly for ISO Certification compliance is required for the IPP firms relative is required for the IPP firms relative technical efficiency and continuous technical efficiency and continuous deterrence yields deterrence yields non-compliance of non-compliance of quality standards; quality standards;
• (5) An annual average reduction of (5) An annual average reduction of 1.22 percent also for old machineries/ 1.22 percent also for old machineries/ facilities refurbishment + updated facilities refurbishment + updated technologies utilization, pre-requisite for technologies utilization, pre-requisite for IPP efficiency score- Thus, non IPP efficiency score- Thus, non adherence means adherence means disregard ofdisregard of technology rehabilitation/ upgrading.technology rehabilitation/ upgrading.
Findings UncoveredFindings Uncovered(1)(1) Clumsy technical efficiency Clumsy technical efficiency
performance of IPP firms needs anperformance of IPP firms needs an
• immediate institutional/ immediate institutional/ restructuring reform, deregulation restructuring reform, deregulation • full implementation of EPIRA 9136 full implementation of EPIRA 9136 and other applicable power laws. and other applicable power laws. • create further energy enhancement create further energy enhancement and sustainable development. and sustainable development. • empowers on continuous research empowers on continuous research program for electricity technology program for electricity technology based on new innovations.based on new innovations.
(3) Ensure compliance of ISO Certification and full (3) Ensure compliance of ISO Certification and full rehabilitation of deteriorating technologies of IPP industry, rehabilitation of deteriorating technologies of IPP industry,
• apparently, alleviates its huge apparently, alleviates its huge substantial losses (not proportionate substantial losses (not proportionate energy production & escalating capital energy production & escalating capital expenditure) and fragile condition. expenditure) and fragile condition.
• proper utilization of input/ output mixes put stoppage on mentioned deficiencies.proper utilization of input/ output mixes put stoppage on mentioned deficiencies.
(2)(2) Imprecision caused by inefficient Imprecision caused by inefficient managerial capabilities invigorates managerial capabilities invigorates enormous slacks,enormous slacks,
FinalēFinalē
• shall be weighted carefully if they will be shall be weighted carefully if they will be used for any managerial decision-making. used for any managerial decision-making.
• shows how the models (Stages 1, 2 & 3) shows how the models (Stages 1, 2 & 3) are helpful in the evaluation of IPP sector are helpful in the evaluation of IPP sector technical efficiency performance. technical efficiency performance.
• models have their own limitations that models have their own limitations that can be strengthened and enhanced by can be strengthened and enhanced by using other non-parametric or parametric using other non-parametric or parametric models. models.
• due to the acknowledged limitation of the due to the acknowledged limitation of the present research, this area can be present research, this area can be addressed by future investigation. addressed by future investigation.
FDEA models and findings here shall FDEA models and findings here shall serve as guidelines for the IPP firm’s serve as guidelines for the IPP firm’s managementmanagement