The question I am asked most frequently is "Who will emerge as the 'winners' and 'losers' among today's electric utility companies?" The short answer is painfully simple. The winners will offer the best prices (a.k.a., the low-cost producers). The losers will be unable to cut prices to meet the market (a.k.a., the high-cost producers).
Unfortunately, real-world answers rarely come in black and white. The electric utility industry enjoys less pricing flexibility than one might imagine. An analysis of industry cost options reveals that "production costs" do not vary significantly enough to create major differences in credit ratings between companies. Today, capital investment, as reflected in both the "Assets" and "Liabilities & Capital" sides of the balance sheet, is the single most critical variable driving costs. This fact raises serious questions about the ability of many companies to hold asset values at currently stated levels. For some, at least, assets have indeed become liabilities.
The Cost vs. Rate Debate
In the United States, we have seen electric rates set historically on a cost-plus basis, yielding a high correlation between "costs" and customer rates. Where rates are high, costs typically are also high. If this were not so, some utilities would be earning attractive returns (em but that's clearly not the case. In 1994, for instance, it appears that the average return on common equity (ROE) for the industry will come in at just under 10 percent. The single-digit nature of the aggregate ROE suggests that prices and costs track each other closely. But further examination of electric utilities and their flexible and inflexible production costs yields some interesting observations.