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The Fortnightly 100: Which Utility Ranks the Highest?

Fortnightly Magazine - September 1 1998

level.

2 For a report on the application of the econometric technique used by the authors, see, H. Haeri, M. S. Khawaja, and M. Perussi "Competitive Efficiency: A Ranking of U.S. Electric Utilities," Public Utilities Fortnightly, June 15, 1997,

p. 26.

3 For a study using a simplified DEA approach, see, D. Thomas Taylor and Russel G. Thompson, "The Efficient Utility: Labor, Capital and Profit," Sept. 1, 1995, Public Utilities Fortnightly, p. 25. Certain weaknesses in that study were later noted by Matthew Morey and L. Dean Hiebert in the Jan. 1, 1996 issue,

p. 8.

4 With output being defined as net MWh and inputs including those associated with power trading, we may have introduced some bias against companies with large amounts of purchased power. However, we believe that the amount of resources dedicated to power trading is insignificant compared with those dedicated to power generation.

5 It is important to note that the issue of returns to scale and efficiency ranking are not directly related. In other words, a company may rank high on the efficiency scale and still operate under DRS conditions. In the case of this study, more than 60 percent of the utilities were found operating at DRS, with the remaining operating under CRS. CRS simply indicates that doubling your inputs doubles your output. DRS on the other hand, means that doubling your inputs leads to less than doubling of your output. Allowing efficiency scores to be determined under various return scale conditions allows for consideration to be given for relative size. Consider three utilities A, B, and C. Utility A uses 2 units of input and produces 2 units of output; utility B uses 40 units of input and produces 30 units of output; utility C uses 35 units of input and produces 30 units of output. Assuming CRS conditions, only A would be considered efficient. Under CRS, B should be able to produce 40 units of output given the use of 40 units of input; similarly C should be able to produce 35 units of output. Now, considering DRS, Utility C would be considered efficient as well as A since no other utility can produce as much output as C using any less input. In short, it does not allow for utilities such as C to be directly compared to a virtual utility A* (utility A scaled 20 times larger).

6 Furthermore, based on another analysis conducted by the authors (Fortnightly, June 15, 1997), Upper Peninsula ranked among the least efficient utilities. That analysis, however, covered 1990-95, which did not include the period during which Upper Peninsula showed the largest efficiency gains, and used a different modeling approach.

7 DEA computes overall underutilization, or the closest distance to the efficiency frontier. This measure provides an estimate of the overall proportional reduction in all inputs for the DMU to become efficient (produce the same level of output using less input). In the case of the companies in this study, the overall proportional reduction in all inputs required to make inefficient companies efficient, is nearly 40 percent.