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Fortnightly Magazine - November 1 1998

result of FAS 106 is significant, sometimes up to 10 percent of total labor costs.

Not adjusting for unique characteristic of some utilities is another instance of reaching questionable conclusions by using numbers without fully understanding them. For example, since reliability is seen as extra critical by the businesses in Manhattan (especially in the financial sector), Con Edison in New York has designed and operates an extremely high reliability system, which is relatively expensive to maintain. The authors ignore the special conditions companies like Con Ed operate under. They label the additional costs "misallocated."

While the SEC data the authors used is likely to be accurate and representative, caution should be used in drawing conclusions from FERC Form 1 data. While the FERC has set out detailed account descriptions and instructions for the population of these forms, there exists variability in the conformity of how utilities categorize their costs.

Additionally, and perhaps more significantly, each utility has discretion in what level of capitalization they apply to their overall costs to get the split between O&M expense and additions to capital (rate base). Differences in capitalization rates can significantly affect comparisons that include O&M.

Company benchmarking, at its best, exists in the form of benchmarking consortiums. In a benchmarking consortium, a number of companies in the same industry agree to provide very specific information to an impartial third party, such as an accounting firm or consultancy. The third party expends a considerable effort to assure comparability of the source data, normalize for one time or unusual costs, and select appropriate peer groups. The McKinsey Gas Pipeline Benchmarking Study and the Arthur Andersen E&P General and Administration Expense consortiums are good examples of this type of study.

Recognizing that limited resources may prevent such detailed analysis, large broad-based studies can be useful - only if these benchmarking "rules of thumb" are addressed.

David A. Foti

Economic Adviser

Enron Transportation and Storage (Gas Pipeline Division)

Enron Corp.

Houston

The writer has worked as an energy consultant for some of the "Big Five" firms and has performed more than a dozen utility benchmarking studies.

I WAS AMUSED TO READ THE ARTICLE ON UTILITY "EFFICIENCY" in your Sept. 1, 1998 issue. It reminded me of the weather reports we often get from so-called experts who haven't bothered to look out the window to see what the sky is doing. Econometric analysis is a difficult and challenging endeavor, one which can have great value in helping businesses and policy makers make the best decisions. The more elaborate and difficult the analysis however, the greater the danger in drawing conclusions that have no practical basis or use. This is in fact the case with the analysis presented - an elaborate and rather elegant theoretical study of "efficiency" in the utility sector, the results of which are totally useless.

The clue to this flaw is found in footnote 4, where the authors admit that "we may have introduced some bias against companies with large amounts of purchased power." In short, the study adopts as a key assumption the simplistic notion