5 insights for executives

Conserving costs, powering growth

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Service company costs for support services in the energy utilities sector have not historically been line-of-sight with customer rates or market prices.

Service costs have been difficult to predict and harder to control.

The core challenges are simple: costs are rising, revenues are falling, and neither public utility commissions (for regulated operations) nor commodity markets (for merchants) are offering relief. Given a soft economy and the impact from shale gas, these trends are likely to continue for the foreseeable future.

Such costs have traditionally been allocated across business lines in one-size-fits-all manner, and the result has been lack of transparency between general and administrative costs and end product costs.

In a fundamental shift, many energy companies are interested in more tailored allocations that better reflect each business’s need and profit opportunity. For example, allocating costs to a transmission line with Federal Energy Regulatory Commission incentive rates versus to a merchant supercritical coal plant.

This blanket approach wasn’t such a concern in the past, when rate cases were more reliably granted and/or wholesale prices offered plenty of margin.

But in a tough economy, public utility commissions don’t want to inflict further pain on consumers. In fact, regulators are increasingly considering significant reductions in ROEs.

In wholesale markets, natural gas forward prices show few signs of strengthening. There is no relief in sight, and the situation might get worse.

 


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