Perspectives

Published Article

10 Ways to Respond to the New Reality
of Commodity Price Volatility

September 2008

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By Tushar Narsana and Robert Zabors

Over the next few months, more and more consumers will wake up to sharply higher electricity bills. The primary driver of this increase will not be a populist theme like global warming or deregulation.

The root cause will be an aspect of cost that has been traditionally ignored in the context of electric utilities, namely commodity prices.

The cost of commodities represents more than half of the cost structure of a typical utility. Commodities purchased include fuel, metals, chemicals and gasoline for power plants, transmission lines, distribution operations and vehicles.

Traditionally, companies preach a tough stance for their purchasing department to force vendors and suppliers to contain prices. In an environment of tightening global supply and consolidation, there needs to be a paradigm shift in dealing with this challenge. Utilities should form a coherent approach that involves key business leaders across the organization, and in many cases, a discussion with regulators.

With a common approach, there are several available options to control costs. We offer 10 ideas, based on experiences with leading utilities.

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