[BETA] Fortnightly

THE SEPT. 1, 1998 ISSUE OF Public Utilities Fortnightly contained an article, "The Fortnightly 100," which promised to reveal America's "most efficient utilities." The authors used data envelopment analysis (DEA) to analyze historical operating and financial data for 140 utility holding companies. While DEA can be a useful tool for data analysis, used indiscriminately it can lead to misleading conclusions.

There are several rules of thumb to consider when benchmarking utilities, which were not incorporated in determining the "efficient" utilities from the ones who "misallocated" their resources.

Typically, when utilities benchmark against each other they create benchmarks for comparison that match generation costs to generation cost drivers (e.g., MWh produced), transmission costs to transmission cost drivers (e.g., mile of transmission lines) and distribution costs to distribution cost drivers (e.g., number of customers).

In their study, the authors only used one cost driver, MWh produced, to determine a company's efficiency. This methodology adversely biases the results of any utility whose company-owned production is relatively small compared to its transmission and distribution network. An example of this could occur in the case of a utility that divested the majority of its generation assets in favor for purchased power contracts.

The purpose of benchmarking, as the authors note, is to give companies an idea how much they can improve their current operations. Therefore, the analysis should be normalized for exogenous or uncontrollable factors. Some examples include:

• Asset Mix. The authors, without hesitation, compare all-fossil generation utilities against utilities with nuclear generation. An all-fossil utility will almost always look better than a utility with nuclear assets. Very little of that difference has anything to do with which utility is employing "best practices" as the authors suggest.

• Geographical Location. If the authors wanted to include fuel costs in their analysis, then it is difficult to see why they chose to compare utilities in producing regions against utilities in market areas. Transportation cost for fuel can be significant. Transport for coal can easily be as much or more than the coal itself for a plant not located near the mine mouth. Transport expense for gas in a heavily consuming region like the Northeast can reach 60 cents/ mmbtu (firm) or approximately 30 percent of commodity cost versus 10 cents/mmbtu for a power plant in Texas.

• Urban Versus Rural Utility. Urban utilities tend to have higher operating and maintenance and capital costs since maintenance and construction on a city street is much more expensive then trenching in a field. Also, an urban utility is likely to have more underground lines - more expensive than above-ground lines at

a rural utility.

While using historical databases for source data is convenient, there's always the chance of not fully understanding what is behind the numbers. For example, the authors included pension costs in their analysis. As a result of FAS 106 (an accounting rule requiring fully funded pensions), some utilities that were underfunded in the past will show a very high pension expense as they ramp their pensions up to fully funded status. The additional pay-in some utilities are making as a