Future Survival Requires Competitive Skills

Issue 10 and Volume 100.

Future Survival Requires Competitive Skills

By P.J. Adam, Black & Veatch

The companies that will succeed in the global power business in 25 years will be those that best understand the productivity implications of the current power game. In the competitive free market for electricity, the inefficient will be driven out. This will include the developer that is unable to achieve higher productivity in developing and financing projects, the engineer-constructor that longs for the old risk-free, cost-plus environment and the trading company that fails to enter into new relationships with the most productive companies in the world.

Also in jeopardy will be the operator who can`t reduce O&M costs and the manufacturer who is unable to control overhead or labor costs. Succeeding will be all about productivity, and if we don`t believe in it or fail to achieve it in our own companies, we will join the withered organizations which stood fast in their support of regulated markets and state-owned utilities to the end. Free market competition drives productivity improvement. In a competitive environment, companies must operate at a more efficient level. In the United States we learned about this accidentally as we sought energy conservation through the Public Utilities Regulatory Policies Act, but instead got free market competition and lower electricity prices. In other countries the practice of socialism and its final bankruptcy forced adjustments to free market policies.

At present, global industry players must achieve low-cost electricity with a continued emphasis on maintaining a reliable supply and increasing supply when needed. Fortunately for the savvy players, the market can deliver on these three objectives because it imposes fear of competition which, in turn, drives productivity improvement. One result of the free market approach to power generation is that the market is now open to new participants. Innovative new participants can maximize profit at the market price by achieving higher productivity. The ultimate result is lower cost electricity.

The connection of free market competition, higher productivity and low cost electricity is evident in all areas of the power industry. Just the threat of a free market lowered the average industrial rate for electricity in the United States from 7 cents per kWh in 1985 to 4.8 cents in 1994. This was accomplished through competition and resulting productivity improvement throughout the value-added chain.

Competition has lowered prices for fuel and for building a power plant. The delivered price of coal has dropped about 18 percent between 1984 and 1994 and, in the last four years, the cost of a new plant has dropped as much as 40 percent. The threat of competition is leading to dramatic productivity improvement at the power plant. Power plant employees per megawatt have been

reduced up to 35 percent in countries where competitive pressures have been introduced.

Even capital is subject to competi-tive pressure and productivity improvement. The cost of equity investment in new power plants continues to decline, even in the absence of profit regulation.

So, the current power game is wide open, it is competitive and it will del-iver good results to consumers. But, who will be the survivors in 25 years?

We believe the profitable companies will be first, world-class competitors. We are operating on the principle that 20 percent of all companies active in the global power business will do 80 percent of the projects.

While we are reasonably sure who the builders of the new power plants will be, we are not as sure who the owners will be. We suspect they will be strong capitalists with good access to financial markets.

Will all of today`s electric utilities be in this business tomorrow? I have my doubts. Only the large and very competent utilities will have the muscle and know-how needed. Witness the large number of mergers as utilities attempt to get bigger and more sophisticated.

How about the major energy companies? Can they shed their overhead and become productive enough to compete? Or, how about institutional investors? Some speculate power plants will be owned by financial institutions and leased to operators like aircraft or railroad cars. That, too, is possible.

Regardless of who builds, owns or operates the plants, one thing is certain–high productivity will be an essential feature, and this will lead to low electricity prices everywhere. Low-cost electricity will be a key factor in driving an even larger and ever stronger global economy. The companies that understand this and prepare their employees for the free market will be the ones enjoying a world-class position in 2020.

P.J. Adam, Black & Veatch chairman and chief executive officer, is responsible for all of the firm`s activities which include design and construction of facilities for industry and government in the fields of energy, environment, manufacturing and commercial and institutional buildings.

In addition to serving on the firm`s management committee, Adam is a director of Black & Veatch Power Development Corp. and The Pritchard Corp., wholly owned subsidiaries of Black & Veatch. He is also a director of Boatman`s First National Bank and Townsend & Bottum Inc.

Adam currently serves as the chairman of the Joint UNIPEDE/World Energy Council Committee on Performance of Thermal Generating Plant.s