Rising fuel prices on top of the need for rate
recovery of-bils in investment mean the next decade could be much like the
1970s for regulated utilities, warned panelists at the Edison Electric
Institute Financial Conference.
R.J. Rudden Associates expects industrywide spending of $200-bil to $300-bil
just on transmission and distribution over the next 10 years, requiring 40%
to 50% rate hikes.
"Combine that with the volatility of commodity prices [which I think will
continue], and over time, that's quite a bit of rate shock for regulators to
deal with," added Richard Rudden, managing director of the Black & Veatch
unit.
"This period feels like the 1970s: a growing deficit, inflation and interest
rates," said Cinergy Chairman, President, and CEO James Rogers. "Look at gas
prices this winter. A lot of residentials will see 50% to 60% increases. I
think we're in for a tougher period."
But, Rogers noted, "In Ohio we've basically had a rate freeze for 12 years.
There's a whole generation of regulators and staff not well-versed in rate
increases. We've almost had to train them in rate cases. The whole
environment will be fundamentally tougher."
"I agree with Jim. We'll have to find some skills that have been gone for a
number of years," said Progress Energy Chairman and CEO Robert McGehee. "In
the Carolinas, we've had no rate case since 1988. We've had fuel increases,
which were a lot of dollars, but still 3% to 4% increases."
But McGehee believes fuel price increases may have reached a peak, and if
so, "we can manage those costs going forward with manageable increases. I
don't see anything like that 40% increase Richard mentioned over the next 10
years."
Rudden replied that "the 40% is the average over 10 years, i.e., 4% a year.
My concern is it will be front-loaded. That's the rate shock I'm most
concerned about."
At Southern California Edison only 15% of the capital spending budget going
forward is expected to be on generation: steam generator replacement at the
San Onofre nuclear plant and the Mountainview power plant, formerly an
independent power project. But even so, CEO Allan Fohrer sees the return of
prudence/reasonableness reviews, which also bedeviled the industry in the
1970s and 1980s.
"The whole issue of reasonableness reviews is now much more critical and
risky," he warned. "You don't see anyone question if you could have put up a
$10 pole for $9.50. I guarantee, when the Mountainview plant is finished,
you'll have people crawling all over it. 'Did you have to spend that
$10-mil?' "
"Coming off of rate freezes we'll see regulators take a very close look at
the prudence of those costs," agreed Rudden. "We've been underinvesting.
When the bill comes due there will be a lot of scrutiny, you can be sure.
... [There will be] a lot of pressure on [transmission and distribution]
utilities to keep rates down. The industry is in for a very challenging five
years."