In any issue of the Wall Street Journal or Business Week, one can read about the ongoing downsizings and restructurings that are besetting the electric industry. Over the past three years more than 33,000 jobs have been lost due to downsizing at investor-owned utilities. Now that the first few waves of downsizing and restructuring are over, electric utilities realized that to survive, they must be leaner still. Friendly mergers - including the merger of Northern States Power and Wisconsin Energy to form Primergy - have started to occur. The rationale is that by merging, many duplicate But not all utilities are willing to look for friendly partners.
Recently, larger utilities started looking to buy out their neighbors. Earlier this year, PECO Energy in Philadelphia bid to purchase Pennsylvania Power and Light (headquartered in Allentown), and Baltimore Gas and Electric moved to purchase Potomac Electric. But what brings about these wrenching changes to the electric utility industry? Their large industrial customers (including the Big Three automakers) are increasingly finding that they must compete with lower-cost countries such as Korea and Thailand. This means that the suppliers to the large industrials are being pressed hard to hold down their costs. But the electric utilities, being regulated, cannot reduce costs to their customers without hearings and debate.
Under existing state regulations, electric utilities have been rate-based, not price-based. Thus, electric utilities are able to place the cost of constructing generating plants (including expensive nuclear plants) into the rate base and pass these costs on to their customers. The United States government realizes that to compete globally, the service industries should be deregulated. Based on the successes in deregulating the trucking, airline and telecommunications industries, the federal government responded in 1992 with the National Energy Policy Act (NEPACT). This act allows independent companies to build generating units to compete with the regulated electric utilities. These Non-Utility Generators (NUG's) can sell power directly to electric utilities. Also, large industrial customers can generate power for their own use and sell excess power back to the utilities.
In mid-1995, the Federal Energy Regulatory Commission (FERC) ruled that electric utilities must wheel power through their service territories at the same price they would wheel power for themselves. Now utilities and municipals needing power can purchase this power from any generator they desire, although they will incur a transmission access fee.
The impact of deregulation on large industrial customers already is being felt. The Big Three automakers in Detroit have negotiated a 10-year agreement with Detroit Edison. This agreement will cost Detroit Edison about $30 million in lost revenue. Under the terms of the agreement, Detroit Edison also is guaranteeing a specified level of power quality and is even supplying the Detroit automakers with engineering staff inside the plants to assist with in-plant processes and assistance in addressing internal power quality and demand-side management issues.
As the electric utilities struggle to compete they are finding that with lower prices they are able to attract new customers. Many electric utilities (working with state authorities) are finding they can lobby large industrial customers to place their plants within their service territories. Recently, several off-shore automakers decided to construct and operate manufacturing facilities in the United States. The newplant is one example. BMW AG, looking for lower electricity costs and lower rates, has located in Spartanburg, SC. Likewise, Mercedes-Benz AG is building a plant in Vance, AL. Another success story is Corp's Saturn plant in Spring Hill, TN.
As electric utilities realize that they must get closer to their best customers, the trend to sign long-term contracts will accelerate. But large industrial customers do not want just inexpensive electric power. Just one outage can cost hundreds of thousands of dollars. By assisting in the analysis of the processes used inside America's largest plants, the electric utilities are impacting the equipment that is being purchased and the design of the manufacturing systems. This assistance is of tremendous value to the large industrials, including automakers.
In the deregulated environment, each automaker is partnering closely with the local electric-utility provider, so that both companies are better able to compete in this increasingly global marketplace.