Productivity in Electricity, Gas and Water : Measurement and Interpretation

This staff working paper (by Vernon Topp and Tony Kulys) examines productivity trends in the Australian utilities industry and highlights some significant issues relating to the measurement and interpretation of changes in measured productivity over time. Multifactor productivity (MFP) growth in Australia's market sector has been considerably below average since 2003-04. Utilities (Electricity, Gas, Water and Waste services), have played a significant role in this, with MFP growth being strongly negative between 1997-98 and 2009-10 (MFP falling, on average, by 3.2 per cent per year). To better understand why, this study examined MFP at the subdivision level, with a particular focus on the two largest subdivisions - Electricity supply (ES), and Water supply, sewerage and drainage services (WSSD). MFP growth between 1997-98 and 2009-10 was negative for both ES (on average, -2.7 per cent per year) and WSSD (-4.3 per cent per year). This study highlights some of the challenges involved in measuring and interpreting estimates of MFP growth in utilities. A particular concern is the influence of changes in capacity utilisation arising from either cyclical investment patterns, or changes in the structure of electricity demand. Also, government policies, regulatory settings and external shocks (especially the weather) can impact on the quantity or quality of measured output, and on the choice of production technology, thereby influencing estimates of MFP