The Efficient Utility: Labor, Capital, and Profit

Fortnightly Magazine - September 1 1995
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Are utilities working at top productive capacity? A novel look at 19 investor-owned electrics in the Sun Belt.

Major restructuring is expected to hit investor-owned utilities (IOUs) over the next decade. Competitive market forces, in place of rate-of-return regulation, will require many companies to evaluate their resource allocations. No longer will singular adjustments in resource use suffice when both capital and labor resources must be realigned. Realignments may well prove as significant to the electric industry as the triumph of AC over DC current in the late 19th century. Electric utilities must begin now to realign their firms to the market.

Several fundamental questions arise. How do we stand, relative to our peers? Is our production side aligned with the market? How do we move from where we are to where we need to be? What will we gain in profits from such moves? IOUs must gain insight into the answers to these questions before making major decisions.

In this study, we considered data for 19 IOUs located and operating in the southern air-conditioning belt of the United States (see Table 1 on page 26). We have analyzed how each utility, relative to its peers, transformed its labor and capital into gross profit. The results indicate significant opportunities to improve efficiency across this set of firms. Nearly all of the 19 IOUs studied could make more efficient use of their capital and labor. Most of them appear poorly positioned to compete in the forthcoming competitive arena. Several large and prominent utilities must change appreciably to become well-positioned. Otherwise, they may well represent attractive targets for independent power producers (IPPs), since significant profit potential exists.

Frame of Reference

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