Facing a market structure of independent heating systems and cost-of-service regulation the regulator considers ways to create incentives for increasing efficiency in heat production. One way is to implement benchmark regulation. The aim of this paper is twofold: (1) To investigate the potential for increasing productivity in Danish district heating production and (2) to examine whether benchmarking has a role to play. Using data envelopment analysis our analyses show that by assuming variable returns to scale a potential exists to reduce production costs by 5-27% depending on the portfolio of inputs and outputs included in the model. Further, our analyses show that the ranking of producers is much dependent on the combination of inputs and outputs included in the model. Therefore, great care should be taken when deciding on the appropriate model to be used when implementing benchmarking as a regulatory mean. (c) 2004 Elsevier Ltd. All rights reserved.