Energy Policy 39 (2011) 3281–3295

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Energy Policy
journal homepage: www.elsevier.com/locate/enpol

Dynamics of productivity change in the Australian electricity industry:

Assessing the impacts of electricity reform
Reza Fathollahzadeh Aghdam n
Department of Finance and Economics, College of Industrial Management, King Fahd University of Petroleum and Minerals, PO Box 257, Dhahran 31261, Saudi Arabia

a r t i c l e i n f o abstract

Article history: The Australian electricity industry has undergone a significant reform, since the mid-1990s. Key
Received 12 June 2010 changes comprised functional unbundling, market restructuring, regulatory reform, public corporatisa-
Accepted 3 March 2011 tion and privatisation. Technological development has been another indisputable constituent of these
Available online 2 April 2011
changes, in the wake of ICT revolution. The principle rationale behind these changes has been that they
Keywords: would improve productivity of the industry and social well-being of people. This paper examines the
Australian electricity reform dynamics of productivity changes in the Australian electricity industry and conducts several hypoth-
Malmquist TFP index eses-testings to identify whether industry’s efficiency measures are truly improved as a result of the
ANOVA hypothesis-testing reform-driven changes. Malmquist Total Factor Productivity Index approach and ANOVA are used for
this purpose. The results reveal that the productivity gains in the industry have been largely driven by
technological improvements and, to a lesser extent, by reform-induced comparative efficiency gains. On
average at national level and for the entire industry, there are efficiency gains that, to large extents, can
be attributed to functional unbundling and public corporatisation and, to a lesser extent, to market
restructuring and privatisation. The results, however, reveal that the reform-driven changes have made
insignificant contribution to comparative efficiency, at the level of thermal generation.
& 2011 Elsevier Ltd. All rights reserved.

1. Introduction State governments in response to emerging concerns about the

The Australian electricity industry has experienced several
reforms in its history. The industry – like most developed countries
– emerged in the 1880s (see, Casazza and Delea, 2003, p. 1; EANSW,
1986, p. 1) and has evolved ever since. In its evolution, there have
been certain periods, when a pace of change has become significant
and distinctive. Such periods are often associated with a reform – a
substantial change in industry’s institutional facet. In Australia, five
such periods are generally identifiable (Fathollahzadeh, 2006,
pp. 59–62): (i) early years (1888–1913), there was free and fierce
competition among numerous private-sector players and the infant
industry lacked transmission lines and standards; (ii) wars and
depression years (1914–1944), in spite of progressive inventions
during this period, the industry developed slowly due to compli-
cated socio-political turmoils caused by the two world wars and the
Great Depression; (iii) industry consolidation (1945–1985), there was
significant expansion of electricity industries in each State, inde-
pendent from one another, as the governments realized significant
development potentials behind electricity; (iv) internal reforms
(1986–1993), a set of State-wide reforms that was launched by
n
Tel.: þ966 3 860 7525; fax: þ966 3 860 2585.
E-mail addresses: reza_f_a@yahoo.com, rezafa@kfupm.edu.sa
inefficiencies in the industry, essentially originated from the energy
crises of the 1970s (see for example, Beardow 2002, p. 8); and (v)
nation-wide market reform (1994-present), the industry started to
undergo a radical and nation-wide reform till present time. This
reform is often called the market reform attributable to its under-
lying free market philosophy, emphasising on promotion of compe-
tition through a bid-based market structure (see also, Quiggin, 2001;
Sharma, 2003; Sharma & Bartels, 1997).
The market reform has changed almost every institutional facet
of the industry, including its organisational setting, market struc-
ture, regulatory framework, and ownership arrangement. The tradi-
tionally vertically integrated organisation of the industry has been
functionally unbundled, essentially into four segments of genera-
tion, transmission, distribution and retail. The market structure of
the industry for electricity trade and pricing has been drastically
moved away from its traditional order-of-merit mechanism to a
mandatory bid-based system. A nation-wide regulatory framework
has been formed for overseeing and harmonising activities of State-
based regulatory bodies. Further, considerable parts of the industry
have been either corporatised (yet remaining under public owner-
ship) or privatised. While much of these changes took place by the
year 2002, some changes have accomplished in recent years. The
process of institutional change in the industry continues evolving as
challenges keep emerging.

0301-4215/$ - see front matter & 2011 Elsevier Ltd. All rights reserved.
doi:10.1016/j.enpol.2011.03.019
3282 R.F. Aghdam / Energy Policy 39 (2011) 3281–3295
Although the market reform became the first comprehensive
national approach towards electricity in Australia, each State tai-
lored the reform programme to its own political interest. Hence, a
divergence became observable in States’ approaches to electricity
reform during this period. One aspect of such divergence was
observed in the type of ownership arrangement adopted by various
States. For example, Victoria decided to privatise its industry, almost
entirely. Other States found the privatisation politically more
challenging and, in some instances, totally unpopular. South Aus-
tralia, for instance, privatised its industry in a different way, by
leasing out key parts of its industry to private sector for a long
period of time. New South Wales (NSW) chose to rather corporatise
its industry, but kept the ownership under public control. Qeens-
land, Western Australia, Tasmania, and Northern Territory did not
do much for changing their industries’ ownership arrangement.
Another critical divergence was seen in industry’s regulatory
framework that was sighted to being a multiplicity of institu-
tional involvement and jurisdictional contrasts that contributed
to unaccountability, overlap, ambiguity, and inconsistency in the
system (Sharma, 2003). By 2002, this issue became a major
challenge, needing to be urgently addressed. A major impetus
to this issue was provided by the findings of the Council of
Australian Governments Review (COAG, 2002), recommending –
alongside other things – a national regulatory framework that
could oversee and harmonise federal, State, and territory regula-
tory frameworks. The Ministerial Council of Energy (MCE, 2003),
in recognition of COAG Review’s recommendations, agreed on
establishment of a new national regulatory framework. The
Australian Energy Market Commission (AEMC) and the Australian
Energy Regulator (AER), each with well-defined tasks and respon-
sibilities, were formed as key institutional components of the new
regulatory framework.
Due to the changes that started in 2002 and almost completed
by 2006, some analysts may wish to break down the market
reform period into two separate periods: between 1994–2002 and
2003–present. Nonetheless, one should note that the essence of
reform philosophy (i.e., promotion of competition through a
newly introduced bid-based market structure) and main organi-
sational setting of the industry have remained unchanged since
the mid-1990s. Therefore, recent changes in the industry can best
be considered as an error-elimination stage for the entire process
of the market reform, rather than a new reform. Such stages will
continue happening in the years to come because this is how
human organisations evolve institutionally.
The principle rational behind the market reform has been that
this reform, through competition, would improve the productivity
of the industry and ultimately will enhance social well-being of
people. Several studies have been conducted to substantiate this
rationale. Analyses of these studies, this paper argues, have not
adequately accomplished this task. These studies, each using
either a scenario approach (applying ex-ante or ex-post counter-
factuals) or a trend analysis, mostly assumed how the impacts of
electricity reform on productivity of the industry would look like.
Perhaps, the use of scenario approach was inevitable in the early
stages of implementation of the reform. However, nearly two
decades to the reform, no alternative approach has been employed
in the context of Australia. A typical alternative approach could be
‘hypothesis-testing’ that allows for examining the significance of the
impacts of reform-driven changes on productivity measures of the
industry. This would be possible by developing an appropriate panel
dataset, across the Australian States over a suitable time span.
Against this background, the objective of this paper is to
examine the dynamics of productivity changes in the Australian
electricity industry on the basis of a panel dataset for the period
1969–2007 across Australian States and territories. The paper
estimates various productivity measures, using Malmquist Total
Factor Productivity (TFP) index and Distance Function approach.
Several models are configured at two levels of aggregation,
namely: the entire electricity industry; and thermal generation.
The paper also conducts several hypotheses-testings to examine
whether or not the industry’s comparative efficiency measures
are truly improved as a result of the aforementioned reform-
driven institutional changes (i.e., changes in organisational set-
ting, market structure, regulatory framework, and ownership
arrangement).
Organisation of the rest of the paper is as follows. Section 2 is
devoted to literature review, with a view to identify a research
gap and justify this paper’s methodology. Section 3 specifies the
structure of the models. Section 4 describes the dataset that is
developed for this paper. Section 5 discusses the empirical results
and Section 6 provides conclusions.
2. Literature review
As mentioned in the previous section, in order to substantiate
the soundness of the rationale behind electricity reform, several
studies have been undertaken by various research groups. These
studies have covered a broad range of specific objectives. How-
ever, they all – whether explicitly or implicitly; fully, or partially –
aimed to assess the impacts of electricity reform on the produc-
tivity of the electricity industry and the wider economy.
Prior to the inception of the market reform, a series of studies
were carried out by a group of individuals, think tanks and
governmental bodies, in the early 1990s. Among the studies that
were conducted by individuals, one should refer to the works of
Lawrence et al. (1990, 1991) (Swan Consultants, 1991, 1992;
Zeitsch and Lawrence, 1993; Zeitsch et al., 1992). The most
important studies that were conducted by think tanks and
governmental bodies included: Industry Commission (IC, 1991);
London Economics (1993, Part 1); Bureau of Industry Economics
(BIE, 1992, 1994); and Electricity Supply Association of Australia
(ESAA, 1992; 1994 (also known as: London Economics, Part 2)).
These studies – whether using a simple or sophisticated
approach; measuring partial or total factor productivity indices
– mostly remarked that introduction of competition and privati-
sation would improve the productivity of electricity industry.
Intertwined with the results of the studies of the early 1990s, a
series of anecdotal debates were going on at that time about how
to reform the electricity industry. Such debates became more
intense by the release of the report that was conducted by
independent committee of enquiry into competition policy in
Australia (NCPRC, 1993). This report essentially argued that
competition should be promoted, not only for electricity industry,
but also for most infrastructure industries and Government
Business Enterprises (GBEs) such as gas, water, telecom, post,
aviation, transport, and port authorities. In this way, the electri-
city reform was considered as an integral element of a wider
economic reform programme of Australian governments under
the title of National Competition Policy (NPC). NCP called for a set
of institutional changes (more or less) like those that as noted
above, eventually, imposed on electricity industry.
Accordingly, National Electricity Market (NEM) was designed
on the basis of a UK-style model of mandatory bid-base system1 .
1
The United Kingdom became one of the most leading pioneers of the global
wave of electricity reforms of the 1990s (Sioshansi & Pfaffenberger, 2006).
Australia embraced this model regardless of existing oppositions. According to
Booth (2003), this was done while the UK was having so much trouble with its
reform model in the 1990s. Booth argued that Australia could have adopted
Scandinavian model instead (p. 53). Booth, however. comments that this choice
can be explained by Australia’s ‘old cultural cringe’ and ‘strong ties to Britain’ (pp.
v-2).
 R.F. Aghdam / Energy Policy 39 (2011) 3281–3295
The main steps towards operationlisation of the NEM were:
operation of Victoria Pool, which was known as Victorian Power
Exchange, in January 1995; formation of National Electricity Code
Administration (NECA) as regulatory administrator and National
Electricity Market Management Company (NEMMCO) as market
operator, in March 1996; operation of the New South Wales
separate State electricity market, in May 1996; harmonisation of
these two State pools (known as NEM1), in May 1997; Queens-
land’s intention to join the NEM, in December 1998 (Booth, 2003,
p. 209); completion of Queensland and South Australia connec-
tions to the NEM by 2002; and completion of the undersea High
Voltage Direct Current (HVDC) transmission line and, hence,
Tasmania’s operational connection to NEM, in May 2006. Western
Australia and Northern Territory, due to geographical distance,
have remained unconnected. However, their individual State
electricity reforms have been very much coordinated with general
policy directions of NCP in the NEM area (i.e., New South Wales,
Victoria, Queensland, and South Australia).
As NCP started to be implemented and NEM was forming,
debates for or against the soundness of rationales behind elec-
tricity reform not only did not end, but also became more intense.
A key turning point in such debates was the release of Industry
Commission report (IC, 1995). This study was undertaken by IC at
the behest of the COAG. Its objective was to comprehensively
assess the economy-wide benefits (reform-induced growth and
revenue) of implementing a set of reforms in Australia under NCP.
These were a set of sectoral reforms for GBEs, including electricity
industry. IC (1995) estimated that GBEs would achieve significant
productivity gains as a result of implementation of NCP and its
related reforms and that Australian economy on average would
gain an extra 1.39% annual growth in real GDP in comparison to
an alternative (reference) scenario where no reform is implemen-
ted at all (SAIIR, 2002, p. 29). Quiggin critically argued that IC’s
‘estimated productivity gains are overoptimistic’ (Quiggin, 1997).
As a result of Quiggin’s criticism, more empirical studies were
engaged in this debate. Key studies included: Whiteman (1999);
Coelli et al. (1998, pp. 221–242); Productivity Commission (PC,
1999); Short et al. (2001); and Abbot (2006).
In the rest of this section, previous studies (mostly those of
which focused on Australia context) are analysed in terms of their
methodology for addressing such concerns and with a view to
identify a research gap. Their results are not discussed as they
have been mixed. Two methodological frameworks are distin-
guished in previous studies: (i) a framework for measuring
economic performances (either at micro- or macro-level); and
(ii) a framework for assessing to what extent change in perfor-
mance is due to the market reform and to what extent, to other
factors. These frameworks, in the context of this paper, are called
measurement- and assessment-frameworks, respectively. This dis-
tinction has not been made explicit in the reviewed studies,
perhaps because these frameworks are often tightly intertwined
with each other. This paper, however, contends that this distinc-
tion is useful because it allows a more comprehensive approach
for assessing industry’s performance, and for ascertaining the
institutional impacts of electricity reform on industry perfor-
mance. The following sub-sections help to further substantiate
this matter.
2.1. Measurement-frameworks
Analysis of previous studies can be divided into two groups:
(a) analyses of the impacts of electricity reform on economic
performance of the electricity industry that is essentially
expressed in terms of productivity gains; (b) analyses – relying
largely on the results of the first set of studies (either exogenously
given or carried out independently) – of the impacts of electricity
3283
reform on economic performance of the wider economy that is
essentially expressed in terms of GDP growth. In the context of
this paper, the first group of analyses is called micro-impact studies
(e.g., Lawrence, Swan & Zeitsch et al., 1991; London Economics,
1993; Whiteman, 1999), while the second group is called macro-
impact studies (including IC, 1995; PC, 1999; Quiggin, 1997; Short
et al., 2001; Whiteman, 1999). In turn, the impacts measured on the
basis of the former are called micro-impacts, while the impacts
measured on the basis of the latter are called macro-impacts. It
should also be noted that macro-impact studies generally had their
own micro-impact analysis as well (e.g., Whiteman, 1999) or,
occasionally, results of micro-impact analysis was taken from
another study as exogenously given (e.g., PC, 1999).
This paper, obviously, remains focused only on micro-impacts.
Table 1 provides more detailed classification for the approaches
that are used in the micro-impact studies. Each study involves
with some kind of productivity analyses. Such analyses typically
employ either an Index Approach (IA) or a Frontier Approach (FA)
which measure productivity in terms of various partial or overall
productivity indices. As can be seen in Table 1, there are some
variations, across various studies, in the selection of a specific
approach. For example, Lawrence et al. (1991) apply IA for measur-
ing various Partial Factor Productivities (PFPs) and Total Factor
Productivity (TFPs) (a sophisticated multilateral TFP); Whiteman
(1999) uses FA with advanced Data Envelopment Analysis (DEA)
and Stochastic Frontier Approach (SFA); Short et al. (2001) – simple
PFPs; and Coelli et al. (1998, pp. 221–242) – Malmquist TFP index,
using Distance Function. In preparation of Table 1, while utmost care
is made to keep it as self-explanatory as possible, it is assumed that
readers are familiar with these approaches. It is beyond the scope of
this paper to elaborate these approaches but, for interested readers,
Coelli et al. (1998) would be a suitable introductory text.
2.2. Assessment-frameworks
Review of previous studies reveals that scenario analysis is the
most dominant and explicitly mentioned assessment-framework,
especially after the release of Industry Commission report (IC,
1995). SAIIR (2002) (p. 32) also points this out and mentions that
‘the most common approach to estimate benefits of reform has
been to estimate a best practise outcome for the electricity sector,
and then assume that reform will achieve that outcome’. This
implies that impacts of electricity reform have been assessed by
the gap between two scenarios, namely no-reform and reform.
The no-reform scenario consists of the continuation of the pre-
reform trends of productivities, whereas the reform scenario
assumes that these productivities will be improved to the best-
practise benchmark.
The appropriateness of scenario analysis as a methodological
framework has however been subject of critical debate, since 1995,
when the IC report was released. It is argued by critics that scenario
analysis suffers from a methodological weakness in assessing the
impacts of electricity reform. Such a weakness, according to the
critics, relates mainly to the fact that this framework is not able to
specify ‘what changes in practices need to take place, that reform
will induce the Australian y electricity industry y to emulate the
performance of the benchmark enterprise’ (Quiggin, 1997, p. 258,
italics added). While the assessment-framework should be able to
address this issue, the scenario analysis assumes these gains as
somewhat granted as a result of reform. This assumption, critics
argue, ‘involves a substantial leap of faith’ (SAIIR, 2002, p. 32) that
has inflated the estimated benefits of electricity reform (see also
Johnson and Rix, 1991, pp. 130–134).
Although the methodological weaknesses of scenario analysis
are revealed by some of the critics, the recommendations pro-
vided by these critics have not given any significant guidance.
3284
Table 1
Classification of existing studies in terms of their measurement- and assessment-frameworksa.
Source: adopted from Fathollahzadeh (2006).
Benchmarking Scope
Index Approach (IA)
Partial Index Number
PFP Sophisticated PFP
Partial Index
Lawrence et al. (1990)
Domestic
Lawrence et al. (1991)
ESAA (1992) ESAA (1992)
Swan Constultant (1991)
International
BIE (1992) BIE (1992)
London Economics (1993) London Economics (1993) London Economics (1993)
Part 1 Part 1
Domestic
Short et al. (2001)
International
IC (1995)
a
All studies, except this paper, adopted either ‘scenario analysis’ or ‘trend analysis’ as their assessment-framework.
Essentially, this is because the recommendations have focused on
highlighting the weaknesses in the measurement-frameworks of
the previous studies and the sensitivity of the measured produc-
tivity gains to the assumptions behind counterfactuals (reform/
no-reform scenarios) which are often subjective. For example,
with regard to IC (1995), Quiggin (1997, p. 256) argues that the
‘estimated productivity gains are overoptimistic, representing
upper bounds to possible achievement rather than likely out-
comes’. Consequently, for instance, Quiggin (1997, p. 258) urges
‘the choice of an appropriate benchmark’ and SAIIR (2002, p. 32)
similarly recommends the adoption of ‘more reliable estimates of
a best practise benchmark’.
These recommendations, while useful, do not adequately
reflect the methodological weaknesses of scenario analysis as a
distinct assessment-framework. As a result, responses to the
criticisms have all focused on the adoption of an alternative
measurement-framework, but almost all of the studies continued
using scenario analysis as their assessment-framework. For
instance, Whiteman (1999), in responding to Quiggin’s criticism,
carried out another study applying two alternative measurement-
frameworks (i.e., DEA and SFA), but using the same assessment-
framework (i.e., scenario analysis). Although Whiteman’s use of
SFA was due to its advantage in making allowances for data noise
and errors, the results became even more paradoxical. In fact,
theoretically the inefficiency measured by SFA is supposed to be
less than that from DEA (SAIIR, 2002, p. 21), whereas the results
from SFA in Whiteman’s study, in contrast, were almost double
the results from DEA.
Perhaps, application of scenario analysis, using ext-ante coun-
terfactuals, is known as inevitable for assessing reform-impacts,
prior to, or in the early stages of implementation of a reform. For
instance, IC (1995), Quiggin (1997) and Whiteman (1999) were
among such analyses. In these studies, potential impacts of the
market reform were subject of assessment, while there were no
historical data available (at least, inside Australia) to conduct such
assessment. However, more studies continued applying similar
R.F. Aghdam / Energy Policy 39 (2011) 3281–3295
Measurement-frameworks
Frontier Approach (FA)
Overall Index Number Behavioural Framework Axiomatic Framework
TFP Sophisticated TFP e.g. Cost Minimisation Distance Function
Overall Index
Lawrence et al. (1990)
Lawrence et al. (1991) Abbot (2006)
Zeitch et al. (1992)
Coelli (1998) Coelli (1998)
Murtough et al. (2001) Murtough et al. (2001)
Swan Constultant (1991)
BIE (1992)
ESAA (1994), London Economics
Part 1 Part 2
This Paper
(hypothesis-testing)
IC (1995)
Whiteman (1999)
scenario analysis, years after implementation of the market
reform. A minor breakthrough could be found in Short et al.
(2001) that developed ex-post counterfactuals, while still using a
similar scenario analysis. In this study, reform scenario was the
actual trend, while no-reform scenario was estimated on the basis
of some (subjective) assumptions. Abbott (2006), which is the
most recently cited article on this topic using a trend analysis as
its assessment-framework, has also made no significant break-
through. In fact, despite valid criticisms, none of the studies have
adopted any alternative assessment-framework.
To sum up this discussion on methodology, one can note that,
in the literature, attentions have been paid to conceptual and
methodological weaknesses of conventional productivity ana-
lyses. This triggered some improvements. These improvements
however, in the context of the reviewed studies (Australia),
appear to be highly imbalanced, inadequate and skewed towards
measurement-frameworks. Application of more advanced mea-
surement-framework does not necessarily imply a better assess-
ment. Their theoretical underpinnings – intertwined with free
market philosophy and economic rationalism – render most of
these studies normative and subjective rather than positive and
objective. With regard to assessment-frameworks, improvements
have been trivial. Observations revealed that only trend analysis
and scenario approach were employed.
A robust assessment-framework should indeed allow for test-
ing hypotheses against a suitable panel dataset. Panel should
include both reformed and no-reformed firms/industries. In this
way, dataset would contain actual counterfactuals rather than
those of which are developed on the basis of subjective assump-
tions. In panel, a productivity measure is a quantitative variable,
whereas reform/no-reform state of a firm/industry is a qualitative
variable—in some texts called environment variable (Coelli et al.,
1998, pp. 166–171). Each qualitative variable can be associated
with a reform-driven institutional change as described earlier.
Such variables can be captured by well-defined dummy (binary)
variables. Consequently, examination of the causality between
 R.F. Aghdam / Energy Policy 39 (2011) 3281–3295
quantitative variables (productivity measures) and qualitative
variables (reform-driven institutional change) can be reduced to
development of an appropriate set of ‘hypothesis-testing’.
Such a methodology can be found in, for instance, Färe et al.
(1985), Atkinson and Halvorsen (1986). These studies employed
useful assessment-frameworks that allowed for testing signifi-
cance of ownership type (private vs. public) on productivity
measures. Pollitt (1995) also adopted similar assessment-frame-
work and evaluated the impacts of privatisation, restructuring
and management-reform on productivity of electricity industry.
These studies used several parametric and non-parametric tech-
niques for this purpose, including ANOVA. Steiner (2000) and
Hattori and Tsutsui (2004) are also among studies which
employed a useful parametric approach, as assessment-frame-
work. Hattori and Tsutsui (2004), for instance, focused on the
impacts of electricity reform on electricity prices, as the most
important constituent of productivity gains, in the context of
OECD countries. The study tested the impacts of functional
unbundling, private ownership, retail access (i.e., third party
access to the network which is one of key elements of recent
regulatory reform) and establishment of wholesale market on
electricity price.
Following studies of this sort, this paper adopts ‘hypothesis-
testing’ as its main assessment-framework. In addition, ‘conven-
tional trend analysis’ also accompanies ‘hypothesis-testing’ for
analysing dynamics of TFP changes by its decompositions.
3. Model structure
As noted in Section 2, methodological framework of this paper
has two folds. This section, hence, describes the structure of the
models in two sub-sections, as follows:
3.1. The measurement-framework
This paper follows Coelli et al. (1998, pp. 221–242) for its
measurement-framework. It measures various TFPs of the Aus-
tralian electricity industry on the basis of (input-oriented) Malm-
quist index. This index, using the concept of Distance Function
(Coelli et al., 1998, pp. 67–67 & 222–232), is modelled as follows:
" #1=2
dt ðyt ,xt Þ dt1 ðyt ,xt Þ dt1 ðyt1 ,xt1 Þ
mi ðyt1 ,xt1 ; yt ,xt Þ ¼ t1 i i
 i
di ðyt1 ,xt1 Þ dti ðyt ,xt Þ dti ðyt1 ,xt1 Þ
ð1Þ
where x is the vector of inputs; y is the vector of outputs; mi
represents TFP change; and dt1 ðyt ,xt Þ, for example, represents the
i
(input-oriented) distance of a representative firm at year t from
the Production Possibility Frontier (PPF) at year t  1.
PPF estimates the best practiced productivities in a certain
year, given the available technology. Each input–output data-
point ðyt ,xt Þ, located on PPF, refer to firms that are performing at
highest efficiency. Data-points that are falling away from PPF are
belonged to firms that are performing inefficient. Distance Func-
tion of dt(yt, xt), therefore, estimates comparative efficiency (or
inefficiency) of firms, which range between zero and one. Dis-
tance Functions of d  1(yt, xt) and dt(yt  1, xt  1) have also applica-
tions for capturing the dynamics of productivity changes.
In Eq. (1), mi measures TFP changes. A value of mi greater than
one indicates positive TFP growth from year t 1 to year t, while a
value of mi less than one indicates a negative TFP growth. The
ratio outside the square brackets in Eq. (1) measures the com-
parative efficiency change between years t and t 1—relative
proximity to PPF. The remaining part of Eq. (1) is a measure of
technological change—shifts in the PPF.
3285
The Constant Return to Scale (CRS) technology is assumed for
all models. This assumption, according to Grifell-Tatjé and Lovell
(1995), avoids the interpretational problem that is encountered
with TFP changes, when the Variable Return to Scale (VRS)
technology is assumed. In the case of VRS, the estimated TFP
changes using the approach used in this paper may not properly
reflect the TFP gains or losses (see also, Coelli et al., 1998, p. 224).
It should be mentioned that, in this paper, the following
criteria are imposed on the process of assigning inputs and
outputs in every model:
(i) An input is a factor for which, if other factors remain constant,
using less of it would be more desirable for the firm/industry
and
(ii) An output is a factor for which, if other factors remain
constant, making more of it would be more desirable for the
firm/industry.
In this way, inputs and outputs are treated slightly different
from what conventionally considered as inputs and outputs of a
system. On the basis of these criteria, physical inputs and outputs
(e.g., labour, capital and electricity generated) are assigned as
they have traditionally been assigned in most studies. This is
while, financial data (expenditure, revenue, or price/cost related
data) are assigned differently from conventional ways2. For
example, ‘average price’ is considered as an input, because the
lower prices would be reflecting more productive industry and,
hence, more desirable. Along these lines, data requirement would
be less cumbersome than conventional TFP analysis.
The key point behind these criteria is that they classify inputs
and outputs in a way that is consistent with the axioms of feasible
output set as described in Coelli et al. (p. 62). Throughout this
process of modelling, there is no need to adopt explicit beha-
vioural assumption for firms such as profit maximisation or cost
minimisation (1998, p. 221). Further, these criteria imply that,
unlike conventional modelling processes, one can measure tech-
nical and non-technical (i.e., allocative or economic) efficiencies
using the same process of modelling. In this way, it is the
interpretation of efficiency measures that varies from model to
model. While one model may measure ‘pure technical efficiency’,
one may measure ‘economic (price) efficiency’. Table 2, describes
the input–output configuration of eight (8) models that are
developed for this paper. In this Table, the interpretations of
efficiency measures for each model are indicated. As can be noted
from Table 2, models are configured at two (2) levels of aggrega-
tion, namely entire industry (Models 1–4); and thermal genera-
tion (Models 5–8). Due to low quality and quantity of data for
network segment of the industry, no model is configured for
transmission and distribution sub-sectors.
The Malmquist TFP index holds three important properties that
make it useful for the purpose of this paper. More specifically, this
index is: (i) based on a dynamic framework; (ii) more data-friendly;
(iii) free from conventional microeconomics behavioural assump-
tions (i.e., profit maximisation or cost minimisation) as imposed on
conventional modelling; and (iv) decomposable into efficiency
change and technological change (see Eq. (1), above). The forth
property, in particular, allows for decomposing, say, TFP growth into
those of which are due to comparative efficiency gains (moving
towards the PPF) and those of which are due to technological
improvements (shifts in PPF). In such decomposition, it is logical
to think that comparative efficiency gains would be the most
desirable outcome of introducing ‘competition’. This allows for
2
See Zeitsch et al. (1992), ESAA (1994), Coelli et al. (1998, pp. 161–165 &
209–112) for models that included financial data in conventional ways.
3286 R.F. Aghdam / Energy Policy 39 (2011) 3281–3295

Table 2
Input–output configuration of models.

Model Time period Level of Interpretation of No. inputs Inputs No. outputs Outputs
aggregation comparative efficiency

1 1969–2007 ESI Pure technical 4 X1, X3, X5, X6 1 Y1

2 1969–2002 ESI Pure technical 5 X1, X3, X5, X6, X7 1 Y1
3 1969–2007 ESI Economic (price) 5 X1, X3, X5, X6, X8 1 Y1
4 1969–2002 ESI Economic (price) 6 X1, X3, X5, X6, X7, X8 1 Y1
5 1969–2007 TG Pure technical 2 X2, X4 1 Y2
6 1969–2002 TG Pure technical 3 X2, X4, X7 1 Y2
7 1969–2007 TG Economic (price) 3 X2, X4, X8 1 Y2
8 1969–2002 TG Economic (price) 4 X2, X4, X7, X8 1 Y2

Notes: ESI: the entire electricity industry, TG: the thermal generation segment, T&D: the transmission and distribution, X1: Energy input—ESI (terajoules), X2: fuel
input—TG (terajoules), X3: installed capacity—ESI (MW), X4: installed capacity—TG (MW), X5: network capacity—T&D (MVA), X6: network length—T&D (Km), X7:
labour—ESI (persons), X8: average price ($/MWh), Y1: final electricity supply/consumption (GWh), Y2: thermal electricity generation (GWh).

examining the extents of which competition policies (NCP) have Table 3

proven success. This will be possible by developing appropriate Periods of which dummy variables score the value 1 in each State.
hypotheses against ‘efficiency gains’ that could possibility be asso-
S1 S2 R1 O1 O2
ciated to an institutional change, which is captured by a dummy
variable (see Section 3.2, below). NSW 1994–2007 1996–2007 2006–2007 1991–2007 –
VIC 1993–2007 1995–2007 2006–2007 1990–1995 1996–2007
QLD 1995–2007 1998–2007 2006–2007 – –
3.2. The assessment-framework SA 1997–2007 1998–2007 2006–2007 1995–1998 1999–2007
WA 2003–2007 2006–2007 2006–2007 – –
Five dummy variables are introduced by this paper to capture key TAS 1998–2007 2006–2007 2006–2007 – –
institutional changes that have taken place since the early 1990s: NT – – 2006–2007 – –
Australia 1993–2007 1995–2007 2006–2007 1990–1995 1996–2007

(1) Organisational structure, S1: the value is 1 if functionally

unbundled, and 0 if vertically integrated;
(2) Market structure, S2: the value is 1 if mandatory bid-base, and
0 if traditional order-of-merit;
(3) Regulatory framework, R1: the value is 1 if national, and 0 if
State-based;
(4) Public corporate ownership, O1: the value is 1 if ownership
type is Public Corporate (PC), and 0 if otherwise (including
public (Pu) and private (Pr) ownership);
(5) Private ownership, O2: the value is 1 if private ownership, and
0 if otherwise (i.e., Pu and PC ownership).
Table 3 shows the periods of which these variables score the
value 1. Using these dummy variables, the measured efficiencies
(symbolized by Z) are classified in different groups over time and
space. This allows for testing whether the mean value of com-
parative efficiency measures of the industry have significantly
improved as a result of the institutional changes that are captured
by the above-mentioned dummy variables. All tests are one-tailed.
The following set of hypotheses is designed for this purpose:
( (
H0 : ZS1 ¼ 0 ¼ ZS1 ¼ 1 H0 : ZS2 ¼ 0 ¼ ZS2 ¼ 1
ðiÞ ðiiÞ
H1 : ZS1 ¼ 0 r ZS1 ¼ 1 H1 : ZS2 ¼ 0 r ZS2 ¼ 1
( (
H0 : ZR1 ¼ 0 ¼ ZR1 ¼ 1 H0 : ZO1 ¼ 0 ¼ ZO1 ¼ 1
ðiiiÞ ðivÞ
H1 : ZR1 ¼ 0 r ZR1 ¼ 1 H1 : ZO1 ¼ 0 r ZO1 ¼ 1
( Therefore, the cross-section of the panel data includes: NSW,
H0 : ZO2 ¼ 0 ¼ ZO2 ¼ 1
ðvÞ ð2Þ
H1 : ZO2 ¼ 0 r ZO2 ¼ 1
where, for instance, hypothesis (2 i) is designed to assess the
impacts of ‘organisational restructuring’ (captured by dummy vari-
able S1) on efficiency measures. In this hypothesis, ZS1 ¼ 0 and ZS1 ¼ 1
refer to mean value of efficiency within ‘vertically integrated’ and
‘functionally unbundled’ firms, respectively. Null hypothesis (H0),
hence, refers to this statement that ‘there is no significant difference
between mean of efficiency measures within firms with different
organisational structures (i.e., ZS1 ¼ 0 and ZS1 ¼ 1 )’. These tests are
easily doable using the Analysis of Variance (ANOVA) technique for
unequal numbers of observations as described in Spiegel (1988,
pp. 310, 321–322). This is a non-parametric ANOVA test, based on
F-Stat. Färe et al. (1985) employs a number of alternative non-
parametric tests, namely Kruskal–Wallis, median scores, Van der
Waerden and Savage score. Such tests are based on w2-Stat. This
paper relies only on the ANOVA test.
4. Dataset
In this paper, a panel dataset for eight States/territories – for
simplicity, hereafter, are called States – over the period 1969–
2007 is developed. The data for inputs (Xs) and outputs (Ys) of
various State electricity industries, corresponding to those listed
in Table 2, are obtained mostly from the Energy Supply Associa-
tion of Australia3 (ESAA various-a; ESAA, various-b) publications
in various years. In this section, key considerations about the
dataset are explained.
The inputs and outputs of the Snowy Mountain Scheme – on
the basis of EANSW (1986) and also according to the assumption
made by Whiteman (1999) – are divided between the two States
(NSW and Victoria) in the ratios 23 and 13, respectively. The
Australian Capital Territory (ACT) is merged with NSW and
collectively is regarded as one State, named NSW hereafter.
Victoria (VIC), Queensland (QLD), South Australia (SA), Western
Australia (WA), Tasmania (TAS), and the Northern Territory (NT).
Fuel inputs data (X2) refers to energy content of fossil fuels
(e.g., oil products and gas) that are consumed by thermal
electricity plants. This data is readily available in ESAA publica-
tions. Energy input data (X1), in contrast, are not provided by
ESAA. This, according to a definition often used in ‘energy
balances’, refer to total energy content that are required to
produce gross electricity if entirely produced by fossil fuels. In
3
Prior to 2004, ESAA was the name of Electricity Supply Association of
Australia.
 R.F. Aghdam / Energy Policy 39 (2011) 3281–3295 3287

this definition, average energy efficiency of thermal plants is used
to calculate equivalent energy content of primary energy for
producing non-fossil electricity (e.g., hydro, solar and wind).
Labour force data (X7) is no longer produced by ESAA in a
consistent way, since 2003. This has caused a significant loss of
observation (2003–2007) for the models that include labour
variable as an input (Models 2, 4, 6 and 8). This variable, hence,
is not included in some models of this paper (Models 1, 3, 5 and
7), in order to utilise non-labour data for 2003–2007. This issue
seems to be not problematic because, according to most of the
previous studies, labour productivities have shown continuous
improvement over time and across States. What is more worri-
some in this respect is the fact that the existing labour data,
especially in recent years (after 1998), does not include out-
sourced contractors. This implies that many measured labour
productivities in previous studies entail overestimation.
With regards to financial data (e.g., expenditure, revenue), ESAA
no longer provides consistent time series. This, just like labour data,

Table 4
Summary of statistics of efficiency measures and the results of hypothesis tests—State efficiency measures are averaged for Australia.

Type of efficiency level of Technical-ESI Technical-ESI Cost-ESI Cost-ESI Technical-TG Technical-TG Cost-TG Cost-TG
aggregation model Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8

Number of observations
Total 39 34 39 34 39 34 39 34
Organisational structure (S1)
Vertically integrated 24 24 24 24 24 24 24 24
functionally unbundled 15 10 15 10 15 10 15 10
Market structure (S2)
Order-of-merit Mechanism 29 29 29 29 29 29 29 29
Bid-base system 10 5 10 5 10 5 10 5
Ownership arrangement (O1 and O2)
Public 9 14 9 14 9 14 9 14
Public Corporate 18 13 18 13 18 13 18 13
Private 12 7 12 7 12 7 12 7
Regulatory framework (R1)
State-base 37 34 37 34 37 34 37 34
National 2 0 2 0 2 0 2 0
Mean of efficiencies
Total 0.9547 0.9528 0.9641 0.9619 0.9336 0.9416 0.9354 0.9434
Organisational structure (S1)
Vertically integrated 0.9413 0.9419 0.9535 0.9540 0.9353 0.9437 0.9380 0.9461
functionally unbundled 0.9763 0.9788 0.9812 0.9810 0.9311 0.9365 0.9314 0.9370
Market structure (S2)
Order-of-merit mechanism 0.9481 0.9490 0.9591 0.9595 0.9367 0.9437 0.9391 0.9458
Bid-base system 0.9739 0.9748 0.9788 0.9760 0.9249 0.9294 0.9249 0.9294
Ownership arrangement (O1 and O2)
Public 0.8870 0.9181 0.9109 0.9371 0.9454 0.9509 0.9509 0.9539
Public corporate 0.9761 0.9780 0.9804 0.9799 0.9307 0.9348 0.9319 0.9364
Private 0.9736 0.9753 0.9797 0.9783 0.9292 0.9356 0.9292 0.9356
Regulatory framework (R1)
State-base 0.9536 0.9528 0.9632 0.9619 0.9350 0.9416 0.9369 0.9434
national 0.9755 – 0.9805 – 0.9080 – 0.9080 –
Standard deviation
Total 0.0248 0.0247 0.0211 0.0208 0.0215 0.0207 0.0213 0.0195
Organisational structure (S1)
Vertically integrated 0.0210 0.0210 0.0195 0.0195 0.0237 0.0221 0.0232 0.0204
Functionally unbundled 0.0118 0.0066 0.0088 0.0067 0.0179 0.0165 0.0179 0.0163
Market structure (S2)
Order-of-merit mechanism 0.0247 0.0248 0.0217 0.0216 0.0221 0.0205 0.0215 0.0188
Bid-base system 0.0124 0.0043 0.0097 0.0051 0.0179 0.0193 0.0179 0.0193
Ownership arrangement (O1 and O2)
Public 0.0020 0.0151 0.0037 0.0086 0.0138 0.0131 0.0139 0.0138
Public corporate 0.0108 0.0061 0.0082 0.0062 0.0165 0.0151 0.0166 0.0148
Private 0.0117 0.0039 0.0091 0.0060 0.0190 0.0190 0.0190 0.0190
Regulatory framework (R1)
State-base 0.0245 0.0247 0.0209 0.0208 0.0211 0.0207 0.0208 0.0195
national 0.0304 – 0.0233 – 0.0099 – 0.0099 –

Test 1 (S1)—Ho: no significant difference between mean of efficiencies within firms with different organisational structure.
F-value 34.5682 29.1171 25.3516 17.1812 0.3436 0.8555 0.8703 1.5549
Pr(F) 0.0000 0.0000 0.0000 0.0002 0.5613 0.3619 0.3569 0.2215
Test 2 (S2)—Ho: no significant difference between mean of efficiencies within firms with different market structure.
F-value 9.9010 5.2620 7.2268 2.6481 2.3000 2.1086 3.4997 3.2257
Pr(F) 0.0033 0.0285 0.0107 0.1135 0.1379 0.1562 0.0693 0.0819
Test 3 (R1)—Ho: no significant difference between mean of efficiencies within firms with different regulatory framework.
F-value 1.4956 – 1.2320 – 3.1712 – 3.7424 –
Pr(F) 0.2291 – 0.2742 – 0.0832 – 0.0607 –
Test 4 (O1)—Ho: no significant difference between mean of efficiencies within firms with different ownership (public corporate vs. otherwise).
F-value 68.5584 63.5185 37.5596 27.2384 0.6101 2.3893 0.9232 2.8849
Pr(F) 0.0000 0.0000 0.0000 0.0000 0.4397 0.1320 0.3429 0.0991
Test 5 (O2)—Ho: no significant difference between mean of efficiencies within firms with different ownership (private vs. otherwise)
F-value 13.2151 9.1211 11.5267 5.9931 0.7460 0.7417 1.5190 1.4418
Pr(F) 0.0008 0.0049 0.0017 0.0200 0.3933 0.3955 0.2255 0.2387
3288 R.F. Aghdam / Energy Policy 39 (2011) 3281–3295

Table 5
Summary of statistics of efficiency measures and the results of hypothesis tests—efficiency measures, at State levels.

Type of efficiency level of Technical-ESI Technical-ESI Cost-ESI Cost-ESI Technical-TG Technical-TG Cost-TG Cost-TG
aggregation Model Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8

Number of observations
Total 273 238 273 238 273 238 273 238
Organisational structure (S1)
Vertically integrated 205 200 205 200 205 200 205 200
Functionally unbundled 68 38 68 38 68 38 68 38
Market structure (S2)
Order-of-merit mechanism 224 213 224 213 224 213 224 213
Bid-base system 49 25 49 25 49 25 49 25
Ownership arrangement (O1 and O 2)
Public 225 205 225 205 225 205 225 205
Public corporate 27 22 27 22 27 22 27 22
Private 21 11 21 11 21 11 21 11
Regulatory framework (R1)
State-base 259 238 259 238 259 238 259 238
National 14 0 14 0 14 0 14 0
Mean of efficiencies
Total 0.9548 0.9527 0.9642 0.9619 0.9336 0.9416 0.9353 0.9434
Organisational structure (S1)
Vertically integrated 0.9446 0.9445 0.9546 0.9547 0.9271 0.9367 0.9293 0.9388
Functionally unbundled 0.9855 0.9961 0.9929 1.0000 0.9533 0.9672 0.9535 0.9676
Market structure (S2)
Order-of-merit mechanism 0.9480 0.9479 0.9572 0.9574 0.9261 0.9364 0.9282 0.9384
Bid-base system 0.9858 0.9940 0.9959 1.0000 0.9678 0.9861 0.9679 0.9862
Ownership arrangement (O1 and O 2)
Public 0.9465 0.9458 0.9566 0.9558 0.9248 0.9355 0.9265 0.9371
Public corporate 0.9943 0.9939 1.0000 1.0000 0.9829 0.9817 0.9866 0.9862
Private 0.9930 1.0000 0.9987 1.0000 0.9647 0.9745 0.9647 0.9745
Regulatory framework (R1)
State-base 0.9536 0.9527 0.9633 0.9619 0.9350 0.9416 0.9368 0.9434
National 0.9756 – 0.9804 – 0.9079 – 0.9079 –
Standard deviation
Total 0.0645 0.0668 0.0527 0.0539 0.0756 0.0723 0.0766 0.0732
Organisational structure (S1)
Vertically integrated 0.0690 0.0697 0.0556 0.0560 0.0768 0.0727 0.0782 0.0738
Functionally unbundled 0.0336 0.0137 0.0275 0.0000 0.0688 0.0655 0.0689 0.0657
Market structure (S2)
Order-of-merit mechanism 0.0678 0.0688 0.0549 0.0553 0.0775 0.0740 0.0789 0.0751
Bid-base system 0.0324 0.0166 0.0225 0.0000 0.0551 0.0305 0.0552 0.0305
Ownership arrangement (O1 and O 2)
Public 0.0305 0.0502 0.0470 0.0543 0.0004 0.0002 0.0002 0.0004
Public corporate 0.0166 0.0162 0.0000 0.0000 0.0278 0.0297 0.0283 0.0304
Private 0.0164 0.0000 0.0059 0.0000 0.0452 0.0397 0.0452 0.0397
Regulatory framework (R1)
State-base 0.0652 0.0668 0.0531 0.0539 0.0747 0.0723 0.0757 0.0732
National 0.0480 – 0.0438 – 0.0905 – 0.0905 –

Test 1 (S1)—Ho: no significant difference between mean of efficiencies within firms with different organisational structure.
F-value 22.1683 20.6314 29.8039 24.8353 6.2771 5.8111 5.1715 5.0297
Pr(F) 0.0000 0.0000 0.0000 0.0000 0.0128 0.0167 0.0237 0.0258
Test 2 (S2)—Ho: no significant difference between mean of efficiencies within firms with different market structure.
F-value 14.4638 11.1467 23.3832 14.7485 12.7490 11.0304 11.1578 9.9093
Pr(F) 0.0002 0.0010 0.0000 0.0002 0.0004 0.0010 0.0010 0.0019
Test 3 (R1)—Ho: no significant difference between mean of efficiencies within firms with different regulatory framework.
F-value 1.5357 - 1.4072 - 1.7144 - 1.9070 -
Pr(F) 0.2163 – 0.2366 – 0.1915 – 0.1684 –
Test 4 (O1)—Ho: no significant difference between mean of efficiencies within firms with different ownership (public corporate vs. otherwise).
F-value 13.2151 9.1211 11.5267 5.9931 0.7460 0.7417 1.5190 1.4418
Pr(F) 0.0008 0.0049 0.0017 0.0200 0.3933 0.3955 0.2255 0.2387
Test 5 (O2)—Ho: no significant difference between mean of efficiencies within firms with different ownership (private vs. otherwise)
F-value 8.1932 5.8974 10.0950 5.8736 3.8834 2.4121 3.3617 2.0978
Pr(F) 0.0045 0.0159 0.0017 0.0161 0.0498 0.1217 0.0678 0.1488

has caused unbalanced data-availability for the models that include
financial data. Real average electricity price (X8)4 seems to be the
most reliable variable that is available and, hence, can be included in
the models. There are, however, some considerations that must be
mentioned here. From 1969 to 2002, nominal average price was
calculated as ‘total revenue’ divided by ‘total consumption’. From
4
This is calculated as nominal prices divided by average annual State-CPIs
(1990 ¼100). State-CPIs are extracted from ABS (2010).
2003 to 2007, for NEM States (i.e., NSW, VIC, QLD, SA, and TAS), this
variable is replaced with volume-weighted average prices of the
wholesale electricity market (i.e., NEM). It should be noted that
proportionate volume-shares of Snowy are not included in this
variable for NSW and VIC. In order to have a consistent time series
for the Northern Territory during 2003–2007, data from annual
reports of Power and Water Corporation (PWC various years) are
used. These reports provide original figures of ‘total revenue’ and
‘total consumption’ for NT between 2003 and 2007. As for WA, ESAA
(2004, 2005) has provided the average price data for 2003 and 2004.
 R.F. Aghdam / Energy Policy 39 (2011) 3281–3295 3289

Table 6
Summary of test results about impact of reform-driven institutional changes on efficiency measures of the Australian electricity industry.

Industry State-based measures (State levels) Averaged measures at national level

segment M. efficiency/change S1 S2 R1 O1 O2 S1 S2 R1 O1 O2

ESI 1 Pure technical efficiency nnnn nnn nl nnn nn nnnn nn nl nnnn nnn
2 Pure technical efficiency nnnn nnn – nn n nnnn n – nnnn nn
3 Economic (price) efficiency nnnn nnnn nl nnn nn nnnn nn nl nnnn nn
4 Economic (price) efficiency nnnn nnn – nnn n nnn nl – nnnn n
TG 5 Pure technical efficiency n nnn nl nnn n nl nl nl nl nl
6 Pure technical efficiency n nn – nn nl nl nl – nl nl
7 Economic (price) efficiency n nnn nl nnn nl nl nl nl nl nl
8 Economic (price) efficiency n nn – nn nl nl nl – nl nl

Notes: nnnn, nnn, nn, n imply that null hypothesis is rejected at 0.0001, 0.001, 0.01, and 0.5 level of significance, respectively.‘nl’ implies that null hypothesis is not rejected.‘-’
implies that test is not applicable due to lack of data.

For 2006 and 2007, the volume-weighted average of MCAP5 and
STEM6 price is calculated for this purpose using data provided by
WA Independent Market Operator (IOM, 2008).
Finally, dummy variables (Table 3) are gathered from various
sources and the author’s personal communications with institutions
and industry professionals. At the national level, dummy variables
are generally implying the same interpretation as described for
States. However, as States are not synchronized, the variable-values
are assigned 1, if at least one State-base dummy variable has taken
the value 1. For example, variable S1 is taking value 1 for 1993–2007
and value 0 otherwise (see the last row of Table 3).
5. Empirical results
All models of this paper are run by the DEAP programme
developed by Professor Coelli of University of Queensland (Coelli,
1996). The results of ANOVA are calculated using Microsoft Excel
programme. This section discusses the results. Findings of
hypothesis-testings are presented in Section 5.1. This is followed
by a discussion, in Section 5.2, on main findings about dynamics
of TFP changes, where TFP trends are analysed by their decom-
positions, using trend analysis. The discussion of this section is
limited to the most intriguing findings at national and State
levels. The results are selective to conserve space. Full results in
tabular form are available from the author on request.
5.1. Findings of hypotheses-testings
Table 4 provides a summary of statistics for various compara-
tive efficiency measures (averaged for the whole Australia), for
the sample, as well as being aggregated over data-groups, where
different types of organisational structure, market structure,
regulatory framework, and ownership arrangement are observed.
Each efficiency measure at the whole national level is calculated
on the basis of geometrical mean of efficiency measures of State-
level data-points in each year. The number of observations,
means, and standard deviations of the comparative efficiencies
are presented in Table 4. Further, the results of the five hypoth-
eses tests (as described in Section 3.2) are presented by F-value
and F-probability in Table 4.
Table 5 shows similar summary for comparative efficiency
measures at State levels. This is a summary of entire State-level
data-points that includes total of 273 observations in Models 1, 3,
5 and 7; and 238 observations in Models 2, 4, 6 and 8.
Table 6 further summarises tests-results of Tables 4 and 5,
regarding the impacts of reform-driven institutional changes
5
Marginal cost of administrative price.
6
Short term energy market.
(captured by S1, S2, R1, O1, and O2 variables) on various efficiency
measures of the Australian electricity industry. As can be noted
the impacts are mixed.
For efficiency measures which are averaged for the whole
Australia, the results reveal that the efficiency gains at the level of
entire electricity industry, to large extents, are driven by func-
tional unbundling and public corporatisation, and to a lesser
extent, by market restructuring and privatisation. In these, state-
ment and similar statements to come in this section of the paper,
the extents of each impact are made quantitative, by the level of
significance.7 In Table 6, this is shown by the number of ‘n’
regarding the result of each test. The results, further, reveal that
regulatory reform has made insignificant contribution to effi-
ciency gains and that none of the reform-driven changes has
made any significant contribution to country-wide (average)
efficiency measures, at the levels of generation.
For efficiency measures at their (original) State-level data-
points (Table 5), the results reveal that the efficiency gains at the
level of entire electricity industry are driven by functional
unbundling, to a large extent; market restructuring and public
corporatisation, to a lesser extent; and privatisation, to a far lower
extent. Regulatory reform has shown insignificant contribution to
efficiency gains. At the level of thermal generation, efficiency
gains are relatively more attributable to market restructuring and
public corporatisation and, to a lesser extent, functional unbund-
ling. At this level, regulatory reform and privatisation have made
insignificant contribution to efficiency gains.
5.2. Dynamics of TFP changes
The findings in Section 5.1 were exclusive about comparative
efficiency gains of the market reform (1994-present) because, as
noted in Section 3, such efficiency gains should be a logical outcome
of implementation of competition policy (NCP). Thus, it deserved
such a careful and detailed assessment. However, apart from
comparative efficiency gains, the impacts of reform can also be
realised in terms of improvements in TFP measures. Improvements
of TFP measures may be caused by, e.g., technological developments
(shifts in PPF). 8The models of this paper allow analysis of the
dynamics of TFP changes by two components, namely comparative
7
Statistically speaking, level of significance refers to probability of Type-I error
– probability of rejecting a hypothesis, when it should be accepted – which is
quantified by Pr(F) as indicated in Tables 4 and 5. The smaller the amount of such
probability is regarded as the larger the extent of the reform impact, because it
implies that the differences between mean variables, before and after a reform
change, are more meaningful, in statistical sense.
8
There is yet another source of TFP changes, such as changes in scale efficiency
that may occur as a result of economies of scale. In this paper, as the CRS
technology is assumed (See Section 3), such efficiency, in this paper’s models, is
embedded in CRC efficiency measures and is not decomposed.
3290 R.F. Aghdam / Energy Policy 39 (2011) 3281–3295

efficiency changes and technological changes. This analysis is made
over a time period that not only covers the market reform period
(1994–2007), but also includes the internal reforms period (1986–
1993) and considerable portion of the industry consolidation period
(1969–1985). Understanding the dynamics of TFP changes is useful
for truly assessing the impact of the market reform on productivity
of the industry. This section is devoted to discuss the most intriguing
findings of this analysis.
Fig. 1 shows trends of the Australian electricity industry TFP by
States, corresponding to Model 3, where economic (price) effi-
ciency is incorporated in measuring the TFP at the level of entire
electricity industry. This figure generally reveals that the magni-
tude and direction of productivity changes across States have
been mixed. State TFPs are ranked differently over the past years
(1969–2007). Average national TFP (thicker line —scaled on the
right) generally shows an increasing trend in productivity of the

5.6

2.1

4.6
1.9

1.7
3.6

1.5

2.6

1.3

1.6
1.1

0.6 0.9
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
NSW VIC QLD SA wa tas NT AUS

Fig. 1. TFP by States in Australia, corresponding to the Model 3. (Note: Australia average (AUS) is scaled on the right).

4.6

3.6 1.85

2.6

1.35

1.6

0.6 0.85
1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

NSW VIC QLD SA wa tas NT AUS

Fig. 2. TFP by States in Australia, corresponding to the Model 4. (Note: Australia average (AUS) is scaled on the right).
 R.F. Aghdam / Energy Policy 39 (2011) 3281–3295 3291

Australian electricity industry. Some declines in average national
TFP are notable during the 1970s and the early 1980s. These,
according to many analysts, can be associated to external inter-
national events, particularly the oil shocks of the 1970s (see, e.g.,
Beardow 2002).
The sudden increase of TFPs in 2003–2004, which is followed
by a sharp decline soon after, is difficult to interpret. Similar
pulsations are observed in the models that labour input (X7) is
excluded (due to lack of data) but a longer observation-period
(1969–2007) is included. This pulsation can be mainly related to
the changes that have taken place in the basis of ESAA data, since
2003. This can be associated to data inconsistencies which were
discussed in Section 4—predominantly, State electricity prices.
Models 2, 4, 6, and 8 are relatively free from such inconsistencies.
These models use labour input (X7) but lose considerable number
of observations (2003–2007).
Figs. 2 and 3 show trends of the overall TFPs by States,
corresponding to Models 4 and 8, respectively. In these models,
economic (price) efficiency is used in measuring the TFP at the
levels of entire electricity industry and thermal generation,
respectively. Tasmania TFP is excluded from Fig. 3 because it
predominantly generates its electricity from hydro-powers.
There is, at least, one common finding in Figs. 1–3 and that is
that TFP measures show a faster increasing trend from 1985 to
1998. This is intriguing because no one can conclude that TFP gains
are exclusively attributable to the market reform (started in 1994).
In other words, it is clear that much of the TFP gains are already
realised during the State-wide internal reforms of the 1980s.
As noted in Section 3, changes in Malmquist TFP index are
decomposable into efficiency change and technological change.
Figs. 4–9 shows some of such decompositions, corresponding to
some of the models of this paper. Figs. 4–6 are associated with

3.4
2
3
1.8
2.6

1.6
2.2

1.4
1.8

1.2
1.4

1 1

0.6 0.8
1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

NSW VIC QLD SA wa NT AUS(excl. TAS)

Fig. 3. TFP by States in Australia, corresponding to the Model 8. (Note: Australia average (AUS) is scaled on the right).

1.5

1.4

1.3

1.2

1.1

0.9
1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

technical efficiency technology shifts TFP

Fig. 4. Technical efficiency and corresponding TFP index (Model 1) in entire electricity industry.
3292 R.F. Aghdam / Energy Policy 39 (2011) 3281–3295

1.7

1.6

1.5

1.4

1.3

1.2

1.1

0.9
1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001
technical efficiency technology shifts TFP

Fig. 5. Technical efficiency and corresponding TFP index (Model 2) in entire electricity industry.

2.2
2.1
2
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1
0.9
1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

economic (price) efficiency technology shifts TFP

Fig. 6. Economic efficiency and corresponding TFP index (Model 4) in entire electricity industry.

Models 1, 2 and 4, respectively, capturing TFP measures at the
level of entire electricity industry. In Model 1, only physical
inputs are used, whereas in Models 2 and 4, economic (price)
inputs are also incorporated. Fig. 7 shows the decomposition of
TFP in Queensland electricity industry. Fig. 8 shows the decom-
position of TFP index, associated with Model 8, where economic
(price) efficiency is incorporated in measuring TFP at the level of
thermal generation segment of the industry. Finally, Fig. 9 shows the
trend of TFP (of Model 8) by its decomposition in Queensland’s
thermal generation.
These figures clearly confirm that productivity gains of the
Australian electricity industry are largely driven by technological
changes (shifts in PPFs) and that the impacts of efficiency gains
have been either relatively small or insignificant, in many
instances. These figures further reveal that technological shifts
mainly stem from the internal reform period (1986–1993) and
not necessarily from the market reform.
Such technology driven productivity gains, then, continued
during the course of the market reform. This is plausible as
upgrading industry’s technology is naturally a gradual process
due to sunk-cost effects. This also confirms that technological
innovations of the 1980s have been really influential on industry’s
productivity improvements. This makes sense because innova-
tions and diffusion of technologies in Telecommunication and
Internet (or, generally speaking, ICT revolution) began in the
1980s. Distributed Electricity Generation and Combined Cycle
Gas Turbine (CCGT) technologies also emerged during the 1980s
(Hunt and Shuttleworth, 1996, pp. 1–8; Sharma and Bartels,
1997). Together, these became the technological breakthrough
that played a vital role in the reforms of the 1980s and onwards.
Reasons for this include an end to a 100 years old argument of
‘natural monopoly’ behind vertical integrated structure of the
electricity industry; and a possibility of separating generation
from transmission in the industry. Feasibility of functional
 R.F. Aghdam / Energy Policy 39 (2011) 3281–3295 3293

2.1

1.8

1.5

1.2

0.9
1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001
economic (price) efficiency technology shifts TFP

Fig. 7. Economic efficiency and corresponding TFP index (Model 4) in QLD electricity industry.

2.1
2
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1
0.9
1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

economic (price) efficiency technology shifts TFP

Fig. 8. Economic efficiency and corresponding TFP index (Model 8) in thermal electricity generation.

unbundling of the industry was therefore an integral element of
such technological breakthrough.
One should also note that the ICT has worked as an ‘add-on’
component of generation and transmission technologies. It is true
that generation and transmission technologies have not been
changed as fast as ICT. However, ICT revolution has contributed
to more efficient use of existing technologies (see, Booth 2003,
p.22). That is what a shift in PPF literally implies.
6. Conclusions
Analysis of TFP dynamics reveal that the productivity gains in the
Australian electricity industry have shown a strong and steady
growth over the last 22 years. Such productivity growth, the results
of this paper reveal, has been largely driven by technological
improvements and to a lesser extents by comparative efficiency
gains. This is consistent with the nature of the electricity industry
which, since its inception, has been a highly technology-driven. The
results also reveal that much of these technology-induced produc-
tivity gains were already realised during State-wide internal reforms
between 1986 and 1993 and prior to the inception of the market
reform of the 1990s and onwards. This, too, is plausible as ICT was
well revolutionised by the mid-1980s and consequently paved a
road for substantial technological upgrades in electricity industry.
The results of hypothesis-testing reveal that, at the level of
entire electricity industry, efficiency measures (averaged for
the whole country) have shown improvements that are, to
large extents, attributable to functional unbundling and public
corporatisation, and to a lesser extent, market restructuring
and privatisation. The results further reveal that the reform-
driven institutional changes have made insignificant contribution
to efficiency gains at the level of thermal generation of the
industry.
3294 R.F. Aghdam / Energy Policy 39 (2011) 3281–3295

2.8

2.6

2.4

2.2

1.8

1.6

1.4

1.2

0.8
1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001
economic (price) efficiency technology shifts TFP

Fig. 9. Economic efficiency and corresponding TFP index (Model 8) in QLD thermal electricity generation.

For State-level efficiency measures, the results reveal that GDP Gross Domestic Product
there are efficiency gains at the level of entire electricity industry, HVDC High Voltage Direct Current
attributable to functional unbundling, to a large extent; market IA Index Approach
restructuring and public corporatisation, to a lesser extent; and IC Industry Commission
privatisation, to a far lower extent. At the level of thermal ICT Information and Communication Technologies
generation, efficiency gains are more attributable to market MCAP Marginal Cost of Administration Price
restructuring and public corporatisation and, to a lesser extent, MCE Ministerial Council of Energy
functional unbundling. At this level, regulatory reform and NCP National Competition Policy
privatisation have relatively made insignificant contribution to NCPRC National Competition Policy Review Committee
efficiency gains. NECA National Electricity Code Administration
NEM National Electricity Market
NEMMCO National Electricity Market Management Company
Acknowledgment NSW New South Wales
NT Northern Territory
The author would like to express his profound gratitude to OECD Organisation of Economic Cooperation and Development
Professor Deepak Sharma of University of Technology, Sydney for PFP Partial Factor Productivity
reviewing various drafts of this paper and providing valuable PPF Production Possibility Frontier
inputs. He would like to thank Professor John Quiggin of QLD Queensland
University of Queensland for providing constructive feedback, SA South Australia
too. Thanks should go to Deanship of Scientific Research of King SAIIR South Australian Independent Industry Regulator
Fahd University of Petroleum and Minerals for providing one- SFA Stochastic Frontier Approach
month summer grant, which helped towards completion of this STEM Short Term Energy Market
paper. Sincere thanks also go to anonymous reviewers for their T&D Transmission and Distribution
valuable comments. The author is, of course, responsible for the TAS Tasmania
contents. TFP Total Factor Productivity
TG Thermal Generation
VIC Victoria
Appendix: list of Acronyms and Abbreviations VRS Variable Return to Scale
WA Western Australia
AEMC Australian Energy Market Commission
AER Australian Energy Regulator
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