NU names new president and COO at Connecticut Light and Power; Jim Stanley leaves Duke to become NIPSCO CEO; plus executive changes at FirstEnergy, ...
Operations & Maintenance: Who Has the Best Margin?
Operations & Maintenance
The process of calculating meaningful benchmarks is fraught with pitfalls.
Regulatory reporting requirements for major U.S. utilities provide a wealth of data for benchmarking studies. Both the Federal Energy Regulatory Commission (FERC) Form 1 for electric utilities and FERC Form 2 for gas utilities involve the reporting of more than 2,500 unique data points per utility per year, across diverse aspects of utility operations, maintenance, and finance.
But the actual process of calculating benchmarks so that the results are meaningful is fraught with potential pitfalls, especially if we do not consider what is going on "physically" behind the numbers. This can be illustrated by the following simple example that compares the annual growth rate in operations and maintenance (O&M) expenditures for two hypothetical utilities. Let's assume that these two utilities have the same size asset base and same size customer base, and they report their electric or gas O&M figures as shown in Table 1.
The calculations indicate a huge disparity, with Utility A looking very inefficient, with a 25 percent increase in average O&M expense annual growth during the period, and Utility B appearing to be very efficient, cutting its O&M expense annual growth an average of 25 percent during the same period. But in reality, these utilities spent the same $400 million on O&M during the three years in question.
Let's say that these utilities repeated the same pattern every three years. As shown in the table below, our analysis would arrive at the opposite result-negative 25 percent instead of positive 25 percent-for Utility A's O&M annual growth value if we just happened to take the 1999 to 2001 slice of the same data.
What is going on "physically" here? Although this example is intentionally exaggerated, it demonstrates a true source of error in this type of analysis, stemming from the fact that a considerable portion of O&M costs do not occur in neat annual bundles. Major, planned plant outages, tree-trimming projects, and other O&M tasks often occur in 18- to 24-month intervals rather than annual intervals.
To weed out this effect, W.B. Causey's benchmarking work employs multi-year running averages of certain costs to eliminate false skew due to O&M timing differences between utilities.
As a side note, utilities are required to submit the full Form 1 to FERC if they have met any one of the following criteria in the prior three calendar years:
1,000,000 MWh total annual sales; 100 MWh of annual sales for resale; 500 MWh of annual power exchanges delivered; and 500 MWh of annual wheeling for others.
Multi-state utilities still report separately at the statewide subsidiary (pre-merger) level. As a result, we performed a separate amalgamation of holding company data to benchmark major holding companies against one another. A benefit of this amalgamation is that it allows for a meaningful comparison of general and administrative (G&A) expenses. When comparing G&A expenses between subsidiaries, it is not easy to separate a subsidiary's real G&A from allocated G&A, which comes down by fiat from the holding company, and which may not be distributed proportionately