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Fortnightly Magazine - January 1 1996

at SDG&E made up nearly 20 percent of revenues in 1992-93. Moreover, the inputs of labor and capital cannot be separated in the data into electricity and gas functions. DEA Best Practice provides a method to analyze multiple output problems; stochastic frontier methods are limited to one output.

We believe that utility managers need simple tools, based on real-world data. DEA's Best Practice approach provides strategic guidance for the uncharted future.

Too Academic?

As an analysis of utilities, the Taylor and Thompson article (Sept. 1, 1995), offers a starting point, but appears too academic to provide valuable insight. The authors provide data, but they treat it as information. They fail to give the reader additional knowledge that explains the data (em knowledge that would turn the data into information. For example, what are the underlying reasons for the movements depicted by the article's Figure 3? Let me suggest other areas for more exploration: [Editor's note: All references to figures cite the original article.]

s It is well known that the net investment per kilowatt of nuclear generating stations greatly exceeds that for fossil-fired stations. Yet the authors' group of 19 utilities includes five that have no nuclear investment. Why do only two of the nonnuclear utilities show up at the extreme left of Figures 1 and 2? And why do the nuclear utilities range from the extreme left to the extreme right?

s Texas Utilities (TU) placed two nuclear units in service and went through a well-publicized downsizing during the authors' analysis period. How did these events influence past asset and profit amounts and future profit expectations?

s For many years Texas-New Mexico Power outsourced its power supply, then embarked upon the construction of a large generating unit that caused sufficient difficulties to trigger a management change during the authors' analysis period. How did this situation influence the amounts disclosed in the authors' Appendix?

s Some time ago, San Diego Gas & Electric (SDG&E) decided to quit building generating units. How do Figures 1 and 2 reflect outsourcing risk and the SDG&E decision? Also, the authors suggest that six of the utilities in the lower left corner of Figure 2 show "Good Cost and Revenue Management" (Figure 4). However, varying uses of outsourcing could be distorting the relationships.

In addition, I question the validity of the authors' suggestion that the relationship of TU to Tampa Electric Co. (TEC) and SDG&E on Figure 2 verifies the Averch-Johnson hypothesis. It's apples and oranges: TU is a nuclear utility, TEC is not, and neither has outsourced any significant portion of their power-supply function.

I also question the validity of the statement: "A utility can trade off labor and capital to move back and forth along the efficiency frontier." I doubt that electric utilities have the suggested substitution capability.

Greater elaboration of these and other aspects of the data would have truly informed the reader.

John S. Ferguson

Richardson, TX

.Pp

The authors respond:

We wanted to show that financial statement data can be analyzed using the DEA Best Practice technique. We skirted many additional complexities,