Pitfalls in estimating the X-factor : The case of energy transmission regulation in Brazil

In Brazil, which has one of the biggest energy systems in the world, the National Electricity Regulatory Agency (Agência Nacional de Energia Elétrica – ANEEL) regulates the generation, transmission, distribution and commercialization of electricity. As a key step in running the incentive regulation regime, the regulator applies a DEA-based Malmquist index for estimating the X-factor, which reflects productivity gains that can be expected across all companies involved in the industry. This paper investigates the way the X-factor was estimated in 2015 by ANEEL in the transmission sector concerning the review period 2009–2014. The regulator applies a modified version of the Malmquist index developed by Ray and Desli [1] and also adapts the bootstrapping method of Simar and Wilson [2] to generate confidence intervals for an estimate of the X-factor. Analyzing ANEEL’s approach, we have discovered a number of serious analytical and computational shortcomings, which we demonstrate in the paper. On this basis, we address the effect of the estimated X-factor on social welfare, having the final customers to pay a higher price for electricity than they were supposed to.