Academic journal article Management Quarterly

Size Matters: Getting Bigger without Consolidation

Academic journal article Management Quarterly

Size Matters: Getting Bigger without Consolidation

Article excerpt

Electric utility restructuring is designed to create competition, and that in turn is supposed to lead to lower prices paid by consumers. Proponents of restructuring believe that the rules of competition that apply to other industries can be made to work in our industry. Competition will lead to the elimination of "unnecessary" and "inefficient" work processes and even the elimination of entire companies. Only the strong will survive, and that is supposed to be better for all of us.

In response to this new competition, many utilities are merging or consolidating to achieve greater cost economies and a stronger market presence. In the case of IOUs, that means merging into companies that serve one million, two million or even more customers. In the case of cooperatives, consolidations do increase system size, but still result in companies that are only a small fraction of the typical IOU.

Although more cooperatives are consolidating than ever before, that is not the only initiative that co-ops are undertaking to become more competitive. Increasingly, cooperatives are developing other kinds of alliances in which two or more co-ops work together to be more efficient without joining to become a single corporation. For these co-ops, economies of scale can still be achieved without going through the legal and member vote processes required in a consolidation. This article will explain the background factors driving this trend, and will discuss examples of how coops are working together in response to the new competition.

Competition, Rates and Costs

The introduction of competition into the electric utility industry inevitably leads to a greater focus on rates and costs. In states that have implemented retail wheeling, large industrial and chain account customers have already benefited by being able to pay lower rates for electric energy. For example, the state university system in California is said to have negotiated electric energy rates that will lower its total electricity expense by some $16 million over four years. (It remains to be seen if residential and small commercial consumers will benefit from restructuring.)

Although retail wheeling creates competition only for electric energy, the focus on rates and costs will also extend to the energy access side of the business. In states with competition, distribution costs are identified separately on the bill, and in some of those states, each utility's distribution tariffs will be posted on a web page managed by the public utility commission. Publishing this information will enable customers to compare energy access costs charged by different utilities, and could impact local distribution utilities in a number of ways:

* Consumers may consider energy access charges too high in comparison with other energy access companies, leading to complaints to the state public utility commission and demands that it investigate "unreasonable" access charges.

* In the case of cooperatives, a perception that energy access charges are too high may lead members to advocate selling off the cooperative.

* Commercial and industrial accounts that have high energy access charges could become motivated to install self-generation technologies, including disconnecting from coop lines, and leaving it with stranded distribution costs.

* Commercial and industrial accounts that are seeking to expand or build new facilities may refuse to move onto coop lines if they perceive their energy access charges to be too high.

* Finally, competitive energy suppliers could try to promote the idea among "their" customers that local distribution companies must be forced to unbundle and make competitive such functions as metering or billing.

Any of these results could be extremely disruptive for distribution companies, increasing demands that they "do something" to address distribution costs.

In reviewing these issues, it is not assumed that customers in a restructured environment will focus only on price. …

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