Benchmarking and regulation

Benchmarking methods, and in particular Data Envelopment Analysis (DEA), have become well-established and informative tools for economic regulation. DEA is now routinely used by European regulators to set reasonable revenue caps for energy transmission and distribution system operators. The application of benchmarking in regulation, however, requires specific steps in terms of data validation, model specification and outlier detection that are not systematically documented in open publications, leading to discussions about regulatory stability and economic feasibility of these techniques. In this paper, we review the modern foundations for frontier-based regulation and we discuss its actual use in several jurisdictions.