Application of DEA in the Electricity Sector: The Case of Meralco Distribution Sectors

Manila Electric Company (MERALCO) is a utility company operating in Manila, Philippines supplying 90 % of the power requirement in the Metro Manila, Philippines. This chapter measures the relative efficiency performance of Meralco Distribution Sectors for the period 2006–2009. The study seeks to (1) evaluate and compare the technical efficiency performance of Meralco Distribution Sectors using selected PBR indicators and other inputs; (2) determine which Meralco Distribution Sector achieved the highest technical efficiency performance, and (3) identify areas for improvement of each Meralco Distribution Sector. The study employed input-oriented Data Envelopment Analysis (DEA), using Banker, Charnes and Cooper (BCC) Variable Returns to Scale (VRS) model to evaluate the panel data sets. A linear monotone transformation was adapted to make use of undesirable output in the DEA BCC model. Empirical results of the study revealed that the mean efficiency score of all DMUs was 89.90 %, which means that on the average, Meralco is below best practices by 10.10 %. This is a clear indication that there are Meralco Distribution Sectors, which drive down the overall performance of the company. These findings imply that the management of Meralco or the distribution sectors need to formulate strategies and policies that would further improve their performances.