System Average Rates and Management Efficiency: A Statistical Benchmark Study of U.S. Investor-Owned Electric Utilities

Proposals to restructure electric utilities have heightened interest in understanding what factors contribute to the variation in system average rates (SARs) across utilities. Direct comparisons of utilities' average rates have been used to assess management performance and the possibility of using mandatory restructuring to reduce rates. However, direct rate comparisons can lead to highly unreliable conclusions because they ignore the wide variety of regional, economic, and regulatory factors that affect rates across utilities. This paper presents a statistical benchmark study of SARs using 1984-93 data on 99 U.S. investor-owned utilities. The model is applied to evaluate the electric rates of three California investor-owned utilities. We find electric rates are affected to a large extent by factors outside the direct and immediate control of management. Controlling for these effects, there is no evidence that these California utilities, which have relatively high system average rates, suffer from poor management performance.