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Competitive Efficiency: A Ranking of U.S. Electric Utilities
1990 to 1995 for the 94 companies are listed in Table 1. From 1990 to 1995, American Electric Power, Washington Water Power, and Southwestern Public Service Co., followed narrowly by Allegheny Power and PacifiCorp, led other utilities in the group in average efficiency.
Bangor Hydro-Electric Co., Upper Peninsula Energy, and Maine Public Service Co. scored the lowest, lagging the leaders nearly 22 percent. In interpreting the figures, it should be noted these are normalized scores and represent relative rankings rather than absolute efficiencies. In other words, scores of 100 and 99 for AEP and PacifiCorp, respectively, should not be construed as the actual operational efficiencies for the two utilities. Instead, the figures mean that over the five-year period, Idaho Power has been, on average, 1 percent more efficient than PacifiCorp.
Comparing the top three performers with the bottom three, marked differences emerge between the groups regarding location and size, as measured in MWh sales. The differences in rates are most striking. During the five years of the analysis period, the average system rates for the bottom three utilities were almost exactly double the average rates of the top three. The best performers are much larger than the worst, and are concentrated in the Northwest. Marked differences between the two groups are apparent in several important dimensions, including labor productivity, average operating expenses and, especially, percentage of purchased power.
Six of the 10 top performers are in the Pacific Northwest; eight of the 10 bottom performers come from the Northeast. The data show that, compared with the top three utilities, on average, the bottom three utilities lag in sales per employee by nearly a 3-to-1 margin, and purchase a far greater portion of their power from outside sources. The bottom group also has slightly higher proportions of residential customers. No apparent differences emerge between the two groups regarding wages (Table 2).
Close examination of utility efficiency scores reveal several important patterns, as shown in Table 3. Size of the operation is a significant determinant of efficiency and matters considerably in overall rankings. It shows a strong relationship with efficiencies due to economies of scale. The results suggest as much as a 5-percent difference in efficiency between utilities in the largest group and those in the smallest group.
Contributions of economies of scale to efficiency are also apparent when we consider company structure (individual operating company vs. holding company). For example, holding companies show slightly higher efficiencies than individual operating companies. More important, five of the six holding companies resulting from mergers during 1990-1995 show above-average efficiency gains. The one-half of the utilities in the sample that are combined operations show slightly higher efficiencies, resulting possibly from economies of joint production.
Northwest utilities lead in overall efficiency. Southeastern, Southern and North-Central utilities follow the Northwest by a high 5-percent margin. A utility's reliance on nuclear generation, measured as nuclear fuel outlays, also shows a strong negative correlation with efficiency; the higher the share of nuclear fuel costs, the lower the operational efficiency. Inversely, we find a strong relationship between operational efficiency and the share