Competition and utility financial risks

While competition for electric utilities has grown steadily for over a decade, the inroads have been small. Utilities have lost load by being forced to buy power from cogenerators. They have foregone some of their normal growth by choosing to buy power from independent power producers instead of building generating facilities themselves. They have absorbed earnings erosion by giving discounts to large industrial customers to avoid having them move production outside their service areas. Yet although competition in these areas can be expected to intensity, the real financial risk for utilities lies on other fronts, principally direct price competition. The type of competition experienced thus far will constrain utility financial progress, but utilities will no doubt find ways to mitigate its impact, an example being investment in demand-side management (DSM) programs. Direct price competition, on the other hand, offers few if any avenues of escape, and it is only a matter of time before the barriers that prevent it are removed. One of the largest is the prohibition of retail wheeling, which is the principal source of price protection for utilities. Significantly, over the course of the last year the prohibition of retail wheeling has been transformed from an untouchablemore » issue into the central issue in the struggle over competition. Price competition, when it develops, will be driven by the cost of producing electric power with new generating facilities and whatever excess generating capacity exists in the industry. How important price competition becomes will depend on what customers want. If low-cost power turns out to be a top priority, price competition will be a very important part of the competitive picture. The experience of industries that have been deregulated, such as the airlines, suggests that low prices will have a high priority.« less