Engineering-Model Company

A technique of comparative performance analysis noted here could be viewed as an extension of the metric method, generally referred as the “model company” method. This is an optimized economic and engineering model and differs from the earlier approaches because it is based on an idealized benchmark specific to each regulated industry—including the topology and density of the service territory, and not a cross-comparison of similar companies. This method consists of defining the needs of an industry in order to design a benchmark that most adequately reflects the optimal way in which to satisfy predicted demand. The model company approach combines both engineering efficiency (an analysis of the physical configuration of the network components of an industry) and economic efficiency (the application of least-cost functions to determine optimal operating costs) to design an optimized model of the firm or industry.

  • Advantages: Engineering models are not dependent on obtaining and analyzing the data of “real” companies. This point is important for two reasons. First, the use of the “model company approach” avoids the problem of insufficient data by which to measure a company’s efficiency. Secondly, it avoids categorizing a specific company as the ideal when it is inevitable that it would itself display some level of inefficiency, either due to capital wear and tear or managerial short-comings. This method identifies an optimal level of efficiency by which a company can be compared, thereby avoiding the problems that arise in a yardstick measure based on the similarity of companies and their production data.
  • Disadvantages: The engineering models that support such an approach can be very complicated, and the structure of the underlying production relationships can be obscured through a set of assumed coefficients used in the optimization process.
  • Application : The Chilean water sector utilizes this approach. In that particular case, it is called “ Empresa Modelo” (Model Company) approach. It consists of defining the firm and designing the efficient investments to satisfy the forecasted demand. Investments are then valued at what it would cost to make them.

Source: Morande F. and Doña Ilades, J. “Los servicios de agua potable en Chile: Condicionantes, institucionalidad y aspectos de Economia Politica”, Interamerican Development Bank, Documento de Trabajo R-308, 1997.

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