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That Giant Sucking Sound? Rural Distribution Territories and Utility Earnings

Fortnightly Magazine - November 15 2001

ComEd's territory but only 6 percent of the its 3.1 million residential customers.

Carolina Power and Light

Carolina P&L has the most complicated and diverse service territory of the four utilities. It covers portions of two states and diverse geographical regions.

For the purposes of our research, we defined three different rural areas within the utility's service area: rural counties in South Carolina surrounding Florence, rural counties along the North Carolina/Virginia border, and a combination of territory that surrounds Wilmington, Fayetteville, and Asheville. These three areas contain nearly one-third of CP&L's customers. For the purposes of our simulation, we used separate scenarios for each rural area. In other words, when we tested the impact of divesting CP&L North, we assumed that CP&L would maintain control over the rest of the service territory-including the other rural areas. This was done to work around Administrative and General expense allocation issues.

Entergy Arkansas

While not as drastic as the differences in Illinois and Florida, there is a fairly well defined urban and rural electric service territory in Arkansas. Entergy Arkansas's service territory covers nearly two-thirds of the state. The most densely populated regions center around Little Rock in the central part of the state and El Dorado in the South. For this study, we focused our analysis on two large rural areas: "Rural South" includes most of the land south of Little Rock and "Rural East" runs along the Mississippi River. These two rural areas comprise roughly 60 percent of Entergy Arkansas' territory but less than 30 percent of the utility's customers. As we did with Carolina Power & Light, the two rural areas were treated under two different scenarios. When "Rural East" was considered, "Rural South" was considered part of the urban area. Again, this was to avoid the implications of allocating A&G expenses between the rural and urban areas. As the model works now, there is very little change in the estimated A&G expense the core utility will face.


After specific regions had been broken out and the customer numbers ascertained the data were fed into our model. Because commercial and industrial customers were allocated on a per residential customer ratio across service territories, rural financial results will be overstated in many cases, a source of conservatism in the analysis. The model calculates the net plant and operating expenses required to serve a certain area. Additionally, it treats a utility's distribution system as a separate entity from its power production and transmission operations and thus computes an average cost of power charge. This allows us to build not only expense estimates, but also entire pro forma income statements for each geographical area. This, in turn, allows us to compute profitability ratios such as ROA.

Divestiture: A Path to Increased Earnings?

In every simulation we ran there was a notable increase in the utility's ROA after a hypothetical divestment of rural service territory. 2 () It is important to note that the greatest differences in performance between rural and urban areas correspond with those areas where the demographic situations are the most varied.