Trends

Fortnightly Magazine - February 15 1995
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Cost Cuts

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

Recharge the Economy with Renewable Energy Tax Credits

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

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