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Competitive Efficiency: A Ranking of U.S. Electric Utilities

Fortnightly Magazine - June 15 1997

of hydroelectric power in a utility's generation mix.

The Incentive to Improve

The efficiency by which a utility uses its resources directly influences its profitability. In fact, increased productivity may be the most important determining factor in a utility's operations for both regulated and competitive markets. Judging by current trends, there is little doubt that those functions of electric utilities that remain regulated will be subject to incentive ratemaking in one form or another. In all forms of incentive regulation, retained earnings are largely decided based on their specific factor productivities (partial incentive mechanisms) or overall efficiency gains (price cap formulas). It seems, therefore, reasonable to expect utilities will have every incentive to improve their efficiency by closely monitoring operations and controlling costs.

Efficiency also bears directly on price, determining the utility's ability to compete in commodity markets. Our study suggests a close association between

efficiency rankings and average system rates for utilities in the sample (Figure 2). In fact, the results suggest efficiency scores account for more than 60 percent of the variations in average system rates.

As John Kenneth Galbraith has said, "Things that are measured tend to improve." Operational efficiency has never been more important for electric utilities than it is today, as they embark on the new era of retail access and competition. As competition intensifies, market pressures will inevitably force prices toward marginal costs, leading to shrinking margins and a greater demand for operational efficiency. Productive efficiency will emerge as the survival condition in a competitive environment.

Hossein Haeri, M. Sami Khawaja and Matei Perussi and are economists in the Portland, Ore., offices of Barakat & Chamberlin Inc., a consulting firm that provides technical and strategic services to the utilities industry.

Table 1. Relative Efficiency Rankings for 94 Electric Utilities

Relative

Efficiency

Relative Change from

Rank Utility Efficiency '90 to '95

1 American Electric Power Co. 100.00% 1.62%

2 Washington Water Power Co. 99.99% -2.26%

3 Southwestern Public Svc. Co. 99.53% 2.33%

4 Allegheny Power System 99.36% -2.02%

5 PacifiCorp 99.21% 0.96%

6 Idaho Power Co. 99.17% 1.41%

7 Kentucky Utilities Co. 98.50% 4.11%

8 Portland General Electric Co. 97.50% -0.74%

9 Puget Sound Power & Light Co. 97.41% -0.89%

10 Minnesota Power 96.84% 0.89%

11 Southern Co. 96.67% 1.11%

12 Northern States Power Co. 96.54% 0.80%

13 Montana Power Co. 96.50% -0.79%

14 Louisville Gas and Electric Co. 96.11% 1.59%

15 Cincinnati Gas & Electric Co.,

Cinergy Corp. * 95.94% 4.38%

16 Union Electric Co. 95.93% 5.65%

17 Central and Southwest Corp. 95.76% 2.41%

18 Texas Utilities Co. 95.72% 1.92%

19 Duke Power Co. 95.06% 3.22%

20 Ipalco Enterprises 95.03% 2.27%

21 Kansas Power and Light Co.,

Western Resources * 94.55% 1.70%

22 Oklahoma Gas and Electric Co. 94.53% 1.32%

23 So. Indiana Gas & Electric Co. 94.44% 2.01%

24 Houston Lighting & Power Co. 94.29% 2.21%

Relative

Efficiency

Relative Change from

Rank Utility Efficiency '90 to '95

25 Scana Corp. 93.68% 1.16%

26 Entergy Corp. 93.67% 0.98%

27 Virginia Electric and Power Co. 93.50% 2.50%

28 Wisconsin Power and Light Co. 93.44% 2.44%

29 Iowa