The financial community's focus on utility competition has been riveted on the proceedings now in progress at state regulatory commissions. The fear that something immediately damaging will come out of these proceedings seems to have diminished in recent months, and the stock market has reacted favorably. However, regulatory developments are only one of four paths leading to competition; the others are the marketplace, the legislatures, and the courts. Each could play a critical role in the emergence of competition.
The engine that drives competition is the marketplace. It is fueled by technological progress that has greatly reduced the economies of scale from electric generation. In the past, large central power plants were far more efficient than small plants, which provided a rationale for granting monopoly franchises to utilities. The new technology has taken the cost advantages of large-scale production away from the utilities and created forces that make the emergence of competition inevitable.
Ten years ago, the efficient generating unit had capacity of 800 to 1,000 megawatts (MW), a unit cost of $1,200 to $1,500 per kilowatt, and involved an investment of $1 to $1.5 billion. By contrast, combined-cycle gas turbines (CCGTs) offer efficient production at one-tenth the capacity and one-thirtieth the investment. A 75-MW CCGT costs about $550 per kilowatt and requires an investment of only $40 million. Such units achieve capacity factors of 90 percent, have heat rates of about 7,500 Btu per kilowatt-hour (Kwh), and can produce power at the buss bar for less than 3›/Kwh, assuming a gas price of $2.50 per million Btu and a generous pretax capital cost of 12.5 percent.