CROSS THE COUNTRY, CRITICISM RISES FROM INVESTOR-owned utilities as public power agencies are drawn into regional or national markets through power pools and the geographic expansion of power...
The Growing Strategic Role of Fuels
The advent of a competitive electric utility industry will fundamentally change the role of fuels in the industry. The fact that fuel is the dominant variable cost in power generation will reverse the relationship between the fuels and power production functions in many companies. Only plants that are competitive will operate; only operating plants will produce revenues. Economic survival will require a generating company (or that part of an integrated company responsible for generation) to: 1) compete successfully on variable cost for both offsystem sales and native load, and 2) ensure that fixed costs are profitable at the average price of electricity. Companies that position themselves for this shift will prosper; companies that do not will have these changes imposed on them by the market and will risk their continued viability.
Traditionally, the fuel adjustment clause and utility franchise laws were thought sufficient to limit a company's fuel risks and opportunities. Although subject to prudence review, rising fuel costs could usually be passed on to captive customers. Savings were similarly passed on to customers. Fuel has been even less of a concern over the last decade because fuel costs have been the only declining component of operating costs (see Figure 1).
A competitive business environment that allows customers to take power from the lowest-price offeror is quite different (em neither fuel cost recovery nor customer retention are guaranteed. Moreover, success is determined by the relative fuel costs of competitors, not the absolute fuel cost that a regulated firm is charged with minimizing. A company can satisfy regulators by lowering fuel costs and still lose to its competition. The financial impact of even a small fuel-cost advantage over a competitor is highly leveraged; saving a potential customer a few thousand dollars can result in a power sale many times that amount. These realizations are spreading. Customers, not regulators, are seen as the constraint on fuel costs. Aside from their growing irrelevance, a movement toward eliminating fuel adjust-ment clauses is gathering steam before state commissions. All of this argues that fuel costs will no longer be a neutral factor in utility performance. Fuel management will greatly hurt or help a company's bottom line.
In a competitive environment, customers are sensitive to the cost of fuel when the utility's fuel costs can affect either the amount of power purchased or the price paid. The degree of customer sensitivity to fuel costs depends on three factors:
The share of fuel costs in the rate charged. Rate designs and cost responsibilities, and hence the relationship of prices to fuel costs, vary for different customers under regulation. These will continue to vary under competition. Since fuel is a variable cost, the price of power to virtually all customers covers those costs. The prices customers pay differ more, however, as to the amount of fixed costs they cover. Fuel costs represent a larger share of rates charged to those customers less responsible for a utility's fixed costs (em typically bulk-power and larger industrial or institutional customers.
Customer supply choices. Customers with other options for meeting their electricity