DEA with Bootstrap, Weight Restrictions and Negative Outputs: Shortcomings of the Proposal for the Brazilian Distribution System Operators Regulation

In 2015, the Brazilian regulatory agency proposed the current methodology for determining the efficient operating costs of the Brazilian energy distribution system operators (DSOs). This methodology applies an input-oriented non-decreasing returns to scale Data Envelopment Analysis (DEA) model with weight restrictions. In 2022, the regulator proposed a revised model that is currently under discussion. Besides five positive outputs, the model incorporates two negative outputs to account for the quality of provided services. To determine the weight restrictions’ upper and lower bounds, a bootstrap technique is applied. The final efficiency scores are resulting from the average from 21 DEA models, each using different percentiles of upper and lower bounds for the weight restrictions. Our analysis of the respective methodology shows that the use of data-driven weight restrictions leads to several issues. One significant problem is that the direct identification of peers is no longer possible. Moreover, the methodology sets unreachable targets for the DSOs. Regarding the use of negative outputs, our analysis also reveals that the proposed methodology produces results contrary to what is intended by the regulator.