Off Peak

Fortnightly Magazine - June 15 1997
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Downsizing has trimmed the work force, but utilities may have given up those savings by going outside to purchase labor, goods and materials. Electric utilities might be overlooking the obvious (em the rapidly increasing costs of purchased goods and services (em while trying too hard to trim internal costs through downsizing and personnel cuts.

While utilities cut labor costs by less than 1 percent per year from 1992 to 1995, the costs of purchased goods and services rose by an average of more than 4 percent each year (see Chart 1), according to a study of utility economics by A.T. Kearney Inc., a consulting firm.

"We are convinced that utilities that do not manage the costs of purchased goods and services in a manner approaching best-in-class performance will be at a significant disadvantage when open competition becomes a reality," said Pratap Mukharji, A.T. Kearney vice president.

Nearly 25 percent of the utilities in the study experienced an increase in the cost of purchased goods and services of more than 11 percent during the four-year period. Only 25 percent experienced a decrease in those costs of less than 4 percent.

While utilities haven't cut costs, customers have enjoyed rate cuts (em especially the large commercial and industrial classes. However, according to the study, the endurance of those rate cuts is questionable, since the correlation between pricing and the cost of purchased goods and services is so high. According to the utilities surveyed, most of the significant cost reductions came from cuts in capital spending, not extensive reductions in overall operating costs.

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