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

Fortnightly Magazine - July 1 1995

oranges, electric utilities that establish strong corporate identities for their services will be able to charge higher prices.

When price is the sole purchase criterion, some utilities have been able to "lock up" value-sensitive customers through long-term take-or-pay type contracts. Under cost-based rates, a discount is possible since a guaranteed revenue stream enables the utility to secure lower cost debt. The value of such guarantees should increase as the likelihood of future sales to existing customers becomes less certain.

Battle Plans

Increasingly, electric utility managers are beginning to recognize that the light at the end of the tunnel is a rapidly approaching express train. In addition to aggressive cost-cutting, many are positioning themselves for the onslaught of price competition by identifying those customers most valuable to their utility and most likely to be targeted by other energy suppliers in a retail wheeling environment. They are beginning to take actions that will minimize the possibility of losing these key customers to other suppliers (em for example, entering into long-term contracts like Detroit Edison's agreements with its automotive customers, or establishing partnering relationships with key customers. Increasingly, large customers are also seeking this sort of closer relationship: Since early 1993, DuPont has sought a partner to handle its steam, electricity, and compressed air requirements for nine of its fiber plants.5 For an electric utility, a closer relationship can include specifying performance standards for things like power quality, DSM initiatives, consolidated billing, and even joint venture projects.

Competitor analysis projects are also ubiquitous. Some managers are beginning to identify potential customers in neighboring utilities' territories. As the prisoner's dilemma demonstrates, such a "retaliatory strike" capability should be developed as a contingency plan. In all likelihood, certain utilities will quickly adopt price-war tactics in a direct-access environment. This will reduce revenue and profitability throughout a region. Utilities should try to maximize the monopoly rents they can extract for as long as possible under the current regulatory environment, recovering otherwise uncollectible asset values from those segments least at risk.

With all the rhetoric about proactively embracing the new competitive environment, we should not forget that higher prices are better than lower. Getting ready for competition and working to postpone it are complementary strategies.

Lastly, what is critical to the successful implementation of any retail wheeling strategy is a sense of extreme urgency. Senior managers must quickly create a culture in which employees are obsessed with delighting customers and slashing costs. t

Louis Rizzi recently retired as vice president of customer services for Public Service Electric & Gas Co. Eric Novak is a manager in Arthur Anderson's Chicago office utilities operational consulting practice. The authors wish to thank McClain Group consultant Andrew Reisinger for his assistance in preparing this article.

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