IT TAKES LABOR, FUEL, OPERATING CASH AND INVESTMENT capital to produce and deliver electric power. Which utilities have managed to use these resources optimally to produce and sell kilowatt-hours? How do these utilities compare with each other? Is there room for improvement?
And what about financial success? Does efficiency, as measured by a ratio of inputs to outputs, serve as a reliable predictor of market-to-book ratios or merger premiums?
Some of these questions are answerable; others not. Yet a simple observation of the range of utility expenses on the four basic inputs - fuel, capital, labor and O&M - can provide a window of which company we might choose to label as "most efficient." This method also allows a less-efficient utility to identify "peer" companies higher up on the ladder, to mark as examples to emulate.
Economists have wrestled with these questions for a long time. Several ways to provide an answer have been proposed and used, from the simple back-of-the-envelope method to complex multi-equation econometric models. The questions and the tools are becoming increasingly relevant in today's utility markets. To stay competitive in a restructured environment, utilities are searching for ways to understand productive efficiency better, to cut costs and to ensure survival in the 21st century.
Using historical data for 140 holding companies in the United States, we analyzed the relative efficiency of the top 100 using Data Envelopment Analysis (DEA), an approach for measurement of operational efficiencies and identification of "peers" to be used as best benchmarks.