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Investor-Owned Utilities: Adjusting the Focus

Fortnightly Magazine - October 15 1997

Throughout the 1990s, investor-owned utilities have redefined the way they do business to position themselves for competition better. The downside of these efforts is higher rates for small customers and employee layoffs.

Today, IOUs are more focused on improved efficiency. IOUs are concentrating on keeping large customers, investing less in their utility systems and retiring debt.

Though IOUs continue to dominate electric generation nationwide (74 percent), electric output has increased by only 8.1 percent since 1990. During the same period, growth in wholesale power purchases by IOUs has risen by more than 74 percent (em topping 900,000 gigawatt-hours in 1996. IOUs spend more annually for bulk power ($34 billion) than fuel ($31 billion). Driven by lower fuel costs (down 12.2 percent since 1990), overall generation O&M costs fell to $20.7 a megawatt-hour in 1996.

Most growth in buying and selling wholesale power and decline in bulk rates is a result of increased activity from power marketers and independent power producers, many of which are IOU affiliates.

IOUs have reduced the work force by more than 113,000 people (23 percent) since 1990. Despite this tremendous decline in staff, IOUs are spending more on administrative and general expenses than ever before. Since 1990, A&G expenses have risen by more than 30 percent, or just more than $14 billion in 1996. The increase in A&G costs reflects greater spending for outside services (up 77 percent since 1990 to $1.6 billion) and pensions and benefits (up 51 percent to $4.5 billion). Though employee numbers are down primarily due to downsizing, utilities are transferring many people from the regulated business groups into affiliate non-regulated companies.

IOUs derive revenues differently today than at the beginning of the decade. Since 1990, revenues from electric sales to residential and commercial customers have grown by more than 25 percent, topping $125.7 billion in 1996. During the same period, the combination of sales to industrial and wholesale customers rose by less than 8 percent to $58.3 billion. IOUs have cut rates to keep large customers, often at the expense of smaller buyers. Since 1990, rates have increased for residential (up 8.1 percent) and commercial customers (up 4.5 percent), while rates have declined for industrial (down 3.4 percent) and wholesale customers (down 12.6 percent). Ironically, this occurred during a period when overall electric O&M costs declined, reflecting a strategy to maintain high rates of return to reduce debt. Also, the cost of debt has declined by more than 20 percent to 7.2 percent since the beginning of the decade.

IOUs are investing less in their utility systems. Since 1990, overall capital additions have dropped from $16.60/MWh of sales to $9.04/MWh. Most of this decline occurred in the generation sector where capital additions fell from $10.09/MWh in 1990 to $2.94/MWh in 1996.

These trends are likely to continue given the primary strategic goal of IOUs to cut costs. A focus on larger customers will continue with more emphasis on commercial buyers as they pool and begin to form sizable markets. Downsizing staff will continue as well with a heavier reliance on outsourcing for technical