Another challenge to Verve's business is that they have supply contracts with Synergy, the electricity retailer in Western Australia. These contracts drive much of the revenue for Verve, but lock in electricity rates. The lack of change in revenues from 2008 to 2009 illustrates this, and the increasing costs illustrate the challenge of operating without the ability to increase rates to match input costs.
A further challenge is in the steady deregulation of the Western Australian electricity markets. With this deregulation, Verve's contracts with Synergy will be smaller going forward as the latter picks up supply from new entrants. This leaves Verve with a decreasing revenue stream but plants that they must continue to maintain. At some point, they may be able to decrease capacity to meet lower demand, or Verve will need to find new markets. The closest markets are other Australian states, but the long distance of transmission will put Verve at a competitive disadvantage to suppliers based in the eastern states.
Conclusion:...
Over the long-term, these trends should continue. The result of this will be decreasing demand for Verve energy with a corresponding further erosion of revenues. Verve will ultimately need to address this issue through cost reductions. These will include potential shutting a plant. The timing of capacity reduction is the most important cost reduction strategy for Verve. It incorporates not only the state's electricity capacity but also forecasts of supply from new entrants and negotiations with the company's labor. Verve needs to know several years in advance when it will need to reduce capacity and begin to negotiate contracts and take other steps to allow that capacity reduction to happen. Accurate long-range forecasting is essential, although at least Verve appears to have governmental support in the form of a new tariff coming, which will help the company maintain itself during the interim until it is able renegotiate labor contracts and plan for the…
