Comparison of productive and cost efficiencies among Japanese and US electric utilities

Using Data Envelopment Analysis (DEA), this article measures both overall cost efficiency and technical efficiency to compare bilaterally between Japanese and US electric utilities in the annual periods from 1984 to 1993. Nine Japanese and 14 US vertically integrated investor-owned electric utilities are examined in this study. An intertemporal efficiency index, measuring the intertemporal shift of an efficiency frontier, is measured for the examination of productivity improvement over a time period. Country average overall cost efficiency indices are also proposed and broken down into technical, scale and allocative efficiencies in terms of cross-sectional and time-series performance analyses. The main empirical results include: (1) the overall cost efficiency of Japanese electric utilities was consistently higher than that of US electric utilities from 1984 to 1993; (2) Japanese utilities were more efficient than US utilities in terms of technical, allocative and scale efficiencies; (3) allocative inefficiency was a main source of overall cost inefficiency for the Japanese utilities. Our empirical results indicate that high electricity tariffs are mainly due to an excessive amount of capital investment, a source of allocative inefficiency, found in Japanese utilities. This finding may imply that electricity prices of Japanese utilities can be reduced by creating a free market where the utilities can increase inexpensive power purchase from independent power producers through competitive bidding, and/or they procure inexpensive equipment.