THE SEPT. 1, 1998 ISSUE OF Public Utilities Fortnightly contained an article, "The Fortnightly 100," which promised to reveal America's "most efficient utilities." The authors used data envelopment analysis (DEA) to analyze historical operating and financial data for 140 utility holding companies. While DEA can be a useful tool for data analysis, used indiscriminately it can lead to misleading conclusions.
There are several rules of thumb to consider when benchmarking utilities, which were not incorporated in determining the "efficient" utilities from the ones who "misallocated" their resources.
Typically, when utilities benchmark against each other they create benchmarks for comparison that match generation costs to generation cost drivers (e.g., MWh produced), transmission costs to transmission cost drivers (e.g., mile of transmission lines) and distribution costs to distribution cost drivers (e.g., number of customers).
In their study, the authors only used one cost driver, MWh produced, to determine a company's efficiency. This methodology adversely biases the results of any utility whose company-owned production is relatively small compared to its transmission and distribution network. An example of this could occur in the case of a utility that divested the majority of its generation assets in favor for purchased power contracts.
The purpose of benchmarking, as the authors note, is to give companies an idea how much they can improve their current operations. Therefore, the analysis should be normalized for exogenous or uncontrollable factors. Some examples include: