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The Efficient Utility: Labor, Capital, and Profit

Fortnightly Magazine - September 1 1995

Lighting and Power Co., and DPC. Notably, as shown in Figure 3, some of these utilities (em i.e., HL&P and DPC (em are making needed adjustments; however, the Best Practice modeling results found here indicate that they must do more to be highly competitive in the unfolding market arena.

Relative to the results of this study, the 19 IOUs fell into four classes, as shown in Figure 4. The economically efficient utility, SDG&E, stands out as a best-in-class performer. Six other utilities were classified in the Best Practice quadrant: FP&L, TUC, SCE, SPSC, TEC, and HL&P. Several more utilities (em SC, CP&LC, APSC, FPC (em have Best Practice potential if they would place more emphasis on profits. EC could become Best Practice if it placed more emphasis on both efficiency and profits. The seven remaining utilities in the Targets quadrant seem to have formidable adjustment problems: TNMP, South Carolina Electric & Gas (SCE&G), C&SC, CLE, DPC, Oklahoma Gas & Electric Co. (OG&EC), and PSCNM. t

D. Thomas Taylor is principal of Palladian Analysis and Consulting in Houston, TX. Russell G. Thompson is president of The OPCON Corp., and a professor of operations research, statistics, and economic systems modeling at the University of Houston.This analysis compares profit-ability potential and efficiency at 19 investor-owned electric utilities (IOUs) in the southern air-conditioning belt of the United States. It covers two periods (1990-91 and 1992-93) and compares total assets, number of employees, and gross profit, as reported in FERC Form 1.

This particular method of economic analysis, known as Best Practice, or DEA Best practice (for "Data Envelopment Analysis") has been under development by statisticians and economists for nearly 40 years, and was reviewed in Fortune in October 1994.

Strikingly, most of the 19 utilities examined were very inefficient. However, nearly all these utilities exhibited considerable profit potential.

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