Take No Prisoneers? A Price-War Strategy for Electric Utilities

Fortnightly Magazine - July 1 1995
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In talking to electric utility managers from across the country we have found that most believe direct access will have major repercussions on all aspects of their business by the end of the decade. Not surprisingly, there is an emerging consensus that revenues will drop rapidly as supply options grow for retail customers. Several key factors (among many others) will help determine how much equity owners will lose: 1) the magnitude of the decline in retail prices, 2) how quickly customers will gain access to new suppliers, and 3) the proportion of an electric utility's retail customer base that will participate in direct access.

The Gathering Storm

One of the assumptions many electric utility managers are making is that the move to retail wheeling will be driven by regulators. History has shown, however, that regulatory change is itself driven by market forces and technological advances. Having saved millions through the direct purchase of natural gas, large industrial customers are the strongest advocates for a rapid transition to retail wheeling. They are using their political clout to force new legislation that will allow direct access, ostensibly to promote competitiveness, job retention, and regional economic development. These market forces will only intensify as new technology arises to boost transmission line capacity and cut line losses. The resulting decline in transmission costs will increase the number of suppliers who can profitably serve another utility's customers.

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