How a sample electric company could reduce risk of loss by upgrading performance to industry benchmarks. Competition in electric generation will expose utility costs that exceed those of alternative suppliers. Roughly speaking, these above-market ("transition") costs should track the difference between the new market price and the embedded cost set by traditional cost-of-service regulation.
The problem has attracted no shortage of proposals. They range from opening retail markets immediately (and letting utility shareholders pay all transition costs) to delaying competition (and assigning the bulk of costs to ratepayers). But what's missing in the debate is how specific proposals will affect transition costs.
For instance, if a utility looks for expenses to cut, where should it begin? With generation, operating and maintenance (O&M), or administrative and general (A&G) costs? Or perhaps customer service or purchased power?
To examine the potential of cost reductions, we studied various mitigation strategies designed largely to raise company performance to industry benchmarks in certain cost categories. We tested real-world numbers taken from an actual utility. For activities other than generation, we found that A&G offered the greatest potential to mitigate transition costs, followed by customer service. O&M for distribution and transmission lagged a bit in potential for our sample utility. For utility-owned generation, nuclear (O&M) costs held substantial opportunities for mitigation (em and not by closing plants, but by reducing expenses to industry benchmarks. Coal (O&M) showed some limited potential, but not oil, natural gas, or hydroelectric generation.