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The Growing Strategic Role of Fuels

Fortnightly Magazine - April 1 1995

and energy needs are more likely to react to higher fuel (or other) costs

recovered in the rates they pay by reducing electricity usage or switching to their other supply options. The mobility of many larger customers will increase with growing competition.

Customer electricity price sensitivity. Electricity is a large part of the cost of doing business for certain customers (em such as wholesale customers or large electricity-intensive industries. These customers will be the most sensitive to fuel costs. Customers that consume large amounts of power and are in price-sensitive commodity businesses themselves will be especially sensitive to electric prices.

Overall, customers that are the most highly fuel sensitive are also exhibit the greatest propensity for being lost to a competitor (see Figure 2 on p. 30). In recent years, as wholesale power markets have grown, industrial customers have begun to demand open access and rate concessions. Utility attention, not surprisingly, has been focused on these customers (em customers that are clearly the most fuel sensitive. But this is only part of the story. Fixed (capital and O&M) costs must be covered for a company to be profitable. Some customers must pay more (em typically much more (em than variable costs. Regardless of cost-cutting measures, a company must maintain a core of committed customers that are willing and able to pay the

remaining fixed costs. Unfortunately for many utilities, competition may soon extend to these customers as well. They too may have other options. Fixed costs and the executives responsible for them will continue to play a key role, but fuels will take the lead.

The crucial issue is the balance between variable and fixed costs. It does little good to minimize fuel cost if doing so creates capital or operating and maintenance (O&M) costs that cannot be recovered. Similarly, it does little good to minimize O&M costs or improve efficiency or reliability if fuel costs are driven so high that the power output becomes noncompetitive. In addition, customer needs vary and the services offered (em and the mix of fuel and nonfuel components in those services (em must still be matched to those needs. Fuel and power production managers (em as well as others throughout the company (em must work together to reach a balance that ensures both competitiveness and profitability over the long term.

Managing Fuel Costs

Utility fuel departments already work hard to minimize fuel costs. (In some utilities, they work with the power production department to minimize generation costs, which is a more relevant goal.) But, ultimately, the fuel department's efforts are constrained by the physical and operational infrastructure of the company's power plants. Plant fuel flexibility, location, access to fuel sources (rail lines, navigable rivers, pipelines), emission limits, and prior contractual relationships all place limits on what the fuel department can do.

In many high-fuel-cost companies, plants will not be dispatched if their fuel costs are higher than competitors (em certainly not for offsystem sales, and in many cases, not for native-load sales. Increasingly, the distribution/retail operations of integrated companies will be empowered (em or forced (em