[BETA] Fortnightly

When Niagara Mohawk Power Corp. announced its competitive restructuring plan on October 6, 1995, it broke ranks with what had been a curiously united front against competition. The opposition had learned to genuflect before the altar of competition, but then fight doggedly to keep markets closed. This united front had implied that competition would produce largely the same impact on all utilities, but that is not true. Competition offers lucrative long-term opportunities for some utilities and potential disaster for others. These differences suggest a wide diversity (em not unanimity (em in the positions that utility managements should take with respect to competition.

At some point, the growth of competition will force utilities to compete head-to-head against each other and against third parties as power producers and power marketers. Preparing for battle is now the top priority of utility managements, and the associated cost-cutting can be expected to produce substantial changes in relative competitive position among different utilities.

Relative Position

The position of a particular utility at the time competition begins in earnest will depend on three factors:

s A utility's present position. Costs and financial resources in 1995 will reflect past decisions and events, and will add up to a net asset or liability. If the utility carries low, per-unit operation and maintenance costs and no overcapitalized generating facilities, its present position will obviously offer some advantage. But if the company is burdened by operating inefficiencies and high-cost nuclear plants, its situation will present a distinct disadvantage.

s How well a utility prepares for competition. The amount of time a utility will require to become an effective

competitor will depend on its management skill and the amount of costs it must cut. In general, utilities with the most effective managements and the lowest costs now will emerge first in bringing down costs to competitive levels; those with the highest initial costs and least effective managements will lag behind.

s When and how competition is implemented. Given enough time, most utilities will probably succeed in trimming their costs to levels at or close to the competitive plane. As preparation for competition progresses, the differences between the costs of the most and least efficient utilities will diminish, but not disappear. Accordingly, the competitive positions of the high-cost utilities will improve relative to those of the low-cost utilities.

Once competition begins, high-cost utilities will see their regulatory protection steadily diminish. They will come under increasing financial pressure. The sooner retail wheeling arrives, the greater the pressure and the smaller the success in recovering stranded investment.

Fleeting Advantage

But from this adversity will come

opportunity. Low-cost utilities will find that they can take market share from their high-cost counterparts, or at least force them to sell power at inadequate margins. Low-cost utilities will enjoy the potential to gain long-term earnings and to entrench themselves in dominant competitive positions. The greater the cost difference between efficient and inefficient producers, the greater the opportunity for the low-cost company. Since the cost differences between low- and high-cost producers will likely diminish over time, low-cost utilities will profit more from