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Big City Bias: he Problem with Simple Rate Comparisons

Looking beyond ranking utilities on price.
Fortnightly Magazine - December 2002
  1. the pipeline's own efficiency" (Order 414-A, 1998).
  2. One example of a non-utility application in the United States is Medicare: If a hospital can treat a patient for less than what it costs other hospitals to treat a similarly diagnosed patient, it can keep the difference and realize a profit; otherwise it incurs a loss. See also, for example, Andrei Schleifer, "A Theory of Yardstick Competition," , vol. 16, no. 3, 1985, pp. 319-327.

Why comparing rates is not so simple.

A key ruling from the California Public Utilities Commission (CPUC) shows just how difficult it can be to assemble a meaningful comparison of costs and rates between utilities.

The case involved Pacific Gas and Electric Co. (PG&E), which filed a formal application with the CPUC on Dec. 12, 1997, seeking an increase in retail charges for electric distribution service. ()

To support its request, PG&E performed and submitted a unit cost study, in which it compared its 1996 operating costs across a sample consisting of the 100 largest electric utilities in the United States.

The study included costs for categories such as distribution plant per mile, distribution operations and maintenance per mile, and customer account costs per customer. PG&E compared its own costs against figures representing industry averages and industry medians. But the process became bogged down after Enron jumped into the fray and argued that the averages were skewed by outlier data drawn from just a few utilities. For instance, PG&E included Consolidated Edison of New York in its study, even though ConEd operated in Manhattan, an atypical environment.

With ConEd in the study, PG&E's cost profile looked fine. But average costs fell with ConEd excluded, making PG&E look worse in comparison. That was Enron's point, and the CPUC tended to agree:

See .
-Bruce Radford, Editor-in-Chief

-J.P.P. and M.W.J.

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