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...
of the article were, for VELCO, absolutely meaningless.
The authors may or may not have produced a useful tool for utilities to compare and improve their performance, but they have certainly not found a way out of the data age adage, "Garbage in, garbage out."
Richard M. Chapman
Vermont Electric Power Co.
THE AUTHORS RESPOND: We appreciate the interest our article generated. The impetus for this paper came from the authors' interest in and experience with productivity measurement and analysis over several years. With the advent of competition in the electric utility industry, and the obvious effects of productive efficiency on the competitive position of utilities, it seemed rigorous studies of productivity using the available tools would be needed more than ever. The two studies we published in the past year (Public Utilities Fortnightly, Sept. 1, 1998 and June 15, 1997), and the interest they generated indicate this is indeed the case.
Our analysis was intended as a macro-level general model to demonstrate how raw data envelopment analysis (DEA), a linear programming approach, can be used as an alternative to the econometric methods in measuring operational efficiency across a large group of enterprises. We received many favorable responses and a few critical ones. Potential bias, resulting from some inherent heterogeneity in the population of utilities that we studied was the main critical theme in the majority of unfavorable responses. Variations among utilities in the mix of generating resources, in geographic location, in consumer density, and in the proportion of purchased power, were the main sources of bias mentioned.
At issue is whether such heterogeneity invalidates efficiency comparisons across utilities. Indeed, heterogeneity, a fact of life, necessitates the use of techniques such as DEA, which allow us to make efficiency comparisons across different technologies and input mixes. The DEA approach produces a ranking of efficiency scores based on "relative" performance to "peers." That is, efficiency of any particular utility is examined vis-à-vis other utilities that are alike in terms of input mix. The final performance ranking across utilities is, to a large extent, a function of the technology and input mix.
We do acknowledge, however, as noted in footnote 4 of the Sept. 1 article, that our efficiency ranking is biased against utilities with significant amounts of purchased power. Unfortunately, data limitations prevented us from performing the appropriate adjustments to eliminate such bias.
IN "CHARGING KWhS AND BTUS ON CREDIT," (Public Utilities Fortnightly, Sept. 15, 1998), I was taken by surprise by the comments attributed to Mychelle Jackson of Austin, Texas. She mentioned that her utility accepts credit cards for customers who have been disconnected for non-payment. I work for Northern States Power based in Minneapolis and am responsible for payment programs. NSP has been advised that accepting a credit card "on any account that has been assessed a late payment charge," would be out of compliance with Visa banking rules. We had been taking credit cards on past due bills and Visa wrote to us and informed us we were out of compliance. Obviously we discontinued the practice and