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