Average generation costs for the nation's electric utilities fell in 1994, primarily due to reductions in delivered fuel prices. Production costs declined by 3.5 percent, averaging just $1.89 per kilowatt-hour (Kwh) by year's end.

The WSCC is the only NERC (North American Electric Reliability) region where production cost increased (em 2.6 percent in 1994 (em as reduced hydro output in California was replaced by more costly natural gas-fired generation. The greatest cost reductions occurred in ERCOT (11.3 percent), MAIN (5.9 percent), SPP (5.3 percent), and NPCC (4.6 percent) as a result of increased electric output by nuclear power plants and competitively priced natural gas and coal.

Natural gas prices began to fall in March of last year, reaching a low in October of $1.94/MMBtu delivered. Gas prices declined by more than 24 percent overall, resulting in a 9.8-percent increase in gas burn. In contrast, both coal and oil evinced slight decreases in electric output, despite a significant decrease in coal prices (down 7.2 percent) during the second half of 1994. Spot coal prices fell to near $1.13/MMBtu at the end of 1994, after reaching a four-year high of $1.28/MMBtu in October 1993. The lower prices reflected an aggressive spot coal market that provoked significant inventory-building. Coal stocks nationwide reached 127 million tons in December (em up 14.3 percent from the same period in 1993.

The trend toward increased reliance on the short-term coal market has been underway for some time. Spot-coal deliveries have increased steadily over the past four years, from 15 percent of the total coal market in 1991 to over 22 percent in 1994.

During 1994, the U.S. power industry produced almost 2.9 trillion Kwh of electricity, a 0.6-percent increase over 1993. Increased generation from nuclear (up 29.1 billion Kwh) and natural gas (up 27.7 billion Kwh) more than offset declines in coal (down 3.7 billion Kwh), hydro (down 21.5 billion Kwh), and oil (down 7.6 billion Kwh). Gas consumption for electric power generation increased in all regions of the country except the West South Central, Where nuclear output increased by over 14 billion Kwh. The most significant increase in gas burn occurred in California (up 15.1 billion Kwh) where utilities replaced a hydro deficit of nearly 15.4 billion Kwh.

Overall electric generation by regulated utilities increased a modest 0.6 percent, despite load growth of nearly 2 percent last year. The primary reason for electric output lagging load was the continued increase in nonutility generated (NUG) power. Through final NUG sales statistics for 1994 are unavailable at this time, we project NUG power sales to top 224 billion Kwh--7.1 percent of the available energy in the United States. (Available energy includes all electric generation by regulated companies and NUGs, as well as net electric flows with Canada and Mexico.) During 1993, NUGs accounted for 6.1 percent (190 billion Kwh) of the electric market. We expect production expenses to continue to decline as utilities find ways to cut costs. During 1995, look for increased coal generation as utilities burn existing inventories and/or competitively priced spot coal. In addition, look for hydro to rebound, offsetting some of the recent growth in natural gas. But if gas prices stay low (near the $2/MMBtu level), expect gas to garner an increasing share of the utility fuel generation mix. The mild winter and spring will result in lower fuel demand and continued competitive pricing for coal and natural gas.

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