Benchmarking for Distribution Utilities: A Problematic Approach to Defining Efficiency

Benchmarking for ratemaking purposes may not be feasible. A proper benchmarking analysis would be extremely burdensome since it would be necessary to carefully review all the costs for all the companies included in the benchmarking study. Regulators who attempt to simplify the methodology to render it more manageable risk making arbitrary judgments that confuse inefficiency with heterogeneity and that are potentially harmful to companies who cannot “improve” their way out of fundamental differences in circumstances.