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).