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.