The Prius' gearbox is really optimal for engine operation. Since it has full control over engine RPM and power put to the wheels it can first load the engine up to maximize BSFC, after that it increases rpm while still optimally loading the engine to get more power. You can't do that with a manual, at least not to the level of precision that the Prius does.
Also, while driving the Prius at low speeds its actually beneficial to minimize electric usage. Using pulse and glide technique which is quite easy with the Prius will get you the best mileage. You accelerate at a moderate rate and then let off the gas pedal. Immediately push the pedal down just a very small amount and you'll be coasting with the engine off, but also with no electric assist (no arrows pointing anywhere on the display). With this technique its not real hard to hit 100+ mpg at speeds under 40 mph.
Using the electric is just as you said, you get the power ultimately from the gas engine. If you have a huge hill to go down and regen feel free to use electric before that so you can capture that extra energy. But, if you are simply going flat, using the engine is going to be more efficient.
Congrats to both of you though. You're both getting great mileage!
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