Competition
Power-supply costs and nonproduction operation and maintenance (O&M) costs differ markedly, both between regions and between utilities within regions. In an open market, only companies with a competitive cost structure will be able to compete effectively.
High costs reflect high embedded costs; above-market, long-term coal-supply and power-purchase contracts; and relatively high nonproduction O&M expenses. Competitive strength correlates to relatively low and declining O&M expense per kilowatt-hour of sales. Although most utility costs are fixed (em such as cost of capital, taxes, depreciation, and a portion of O&M expenses (em they can be mitigated by:
s Optimizing management and administrative processes
s Buying out "above market" portion of coal and power contracts
s Working with fuel and power suppliers to profit from downstream market opportunities
s Instituting aggressive power-marketing programs
s Improving operating efficiencies through merger or acquisition
In a recent analysis of operating costs in the Southeast region, Research Data International ranked companies based on overall O&M expenses and improved cost-effectiveness over the past four years. The analysis considered investor-owned utilities (IOUs) with at least 5,000 gigawatt hours (Gwh) of electric sales in 1993.
The Southeast region is diverse, extending from Kentucky and West Virginia in the north to Florida in the south. Operating costs vary widely. Utilities in the north are predominantly fueled by competitively priced coal from mines in Central Appalachia. As you move farther away from available fuel, down the Atlantic seaboard and into the south, companies typically show higher operating costs.
Not surprisingly, Kentucky IOUs displayed the lowest operating costs in the region. Kentucky Utilities tops the list: O&M expenses accounted for just 2.39 cents per kilowatt-hour (›/Kwh) of sales in 1993. Louisville Gas & Electric (2.43›/Kwh) and Kentucky Power (2.53›/Kwh), a subsidiary of American Electric Power, rank second and third, respectively. Rounding out the top five is Appalachian Power (2.87›/Kwh), another AEP subsidiary, and South Carolina Electric and Gas
(2.94›/ Kwh). Of these five companies, three showed a real reduction in overall O&M costs per unit of energy sales over the past four years: Louisville Gas & Electric (down 12.1 percent), South Carolina Gas & Electric (down 5.0 percent), and Appalachian Power (down 4.4 percent).
Even some companies with relatively high O&M expenses have found ways to cut costs. In 1993, for example, Florida Power & Light had the second-highest operating expense per unit of energy sold (4.29›/Kwh). However, the company has reduced overall costs by more than 8.1 percent since 1989. Mississippi Power & Light, a subsidiary of Entergy Corp., reported the highest overall O&M expense (5.11›/Kwh), yet has reduced rates (em albeit modestly (em by 1.7 percent over the past four years.
In sharp contrast, other companies have not faired so well. Since 1989, O&M expenses per Kwh have increased by more than 11 percent at both Tampa Electric and Baltimore Gas & Electric. The two companies rank fourth and fifth among systems with the highest operating costs in the region.
The Southeast power market reveals that many companies are already seeking creative solutions to their cost problems and new strategies to reduce their rates. These companies are better positioned for competitive power markets. As the power industry continues toward open markets, other utilities should look to their costs as well. t
Kent Knutson is senior vice president of Resource Data International, a Colorado-based firm that maintains databases and analyzes trends in the utilities industry.
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