Utility CEOs Weigh In On America's Needed New Power Plants

NEW YORK June 5, 2006

A quartet of top electric utility executives at the Standard & Poor's Ratings Services' 2006 U.S. Utilities Annual Credit Conference in New York City took on some of the hottest topics in their industry at a June 2 panel discussion, excoriating--for the most part--last year's federal energy law, disagreeing with each other on the best way for the industry to combat global warming, and figuring out how to get a frequent target of utility companies--state and local regulators--on their side as they embark on the biggest wave of plant construction in a decade. Indeed, the executives, who represented some of the largest utilities in the U.S., all foresee rising demand that will be met through both purchased and self-generated electricity. Some will also make acquisitions to supplement organic growth.

The chief executives on the panel were Kevin Burke, Consolidated Edison Co. of New York Inc.; Michael G. Morris, American Electric Power Co. Inc.; and David L. Sokol, MidAmerican Energy Holdings Co. Also in attendance was David L. Hauser, Duke Energy Corp. chief financial officer, substituting for Duke CEO James E. Rogers.

With a growing population and a robust economy, the U.S. needs new generating capacity, the executives all agreed. But getting it built is another matter. Americans want plentiful and cheap energy, but they also want it without the power plants being built near where they live. As Mr. Morris put it, "Americans are trying to figure out how to get to heaven without dying." As a group, all the executives suggested that their companies had the most positive experience with regulators and their staffs when they had established good working relationships long before requesting permission for a new plant, or a rate hike for that matter. "You've got to get a working relationship when you're not asking for something," added Mr. Morris. "That takes years."

Building new capacity could also be fraught with financial risks. "Cost overruns in construction are a key risk for us," said Mr. Sokol. He noted that even ordinary capital costs are rising. The same coal-fired plant MidAmerican built three years ago, he noted, now costs 35% more. "That creates a huge headwind for the industry, which is now in a building cycle."

In addition, he cautioned that the industry should not promise to build plants with the ability to radically reduce emissions before the technology is soundly tested. "Those who run ahead and make those commitments can saddle the customers with additional costs. Bondholders should be quite concerned about that," he said.

Con Edison's Mr. Burke also noted the risks in limiting the types of generating plants that are built. In the Northeast, he pointed out, most of the new generation that has come on line in recent years has been natural gas-powered. And gas prices, of course, have risen greatly over the past few years. "There is a risk in the [lack of] diversity of fuel sources," he said. "At the same time, it would be tough to get a coal or nuclear plant built in this part of the country."

Of the four companies represented on the panel, only Duke said it's making an effort to open a nuclear plant anywhere. With three already in operation, Mr. Hauser said Duke is in the process of obtaining licensing for a fourth. That's contingent, he noted, on resolving the problem of where to dispose of spent nuclear waste from these reactors. The Yucca Mountain repository, in Nevada, where all nuclear waste is supposed to be deposited, has not yet been green-lighted and still faces considerable opposition.

The executives disagreed sharply over policies to reduce greenhouse gases such as carbon dioxide. On one end of the spectrum was Duke's Mr. Hauser, who felt that regulators need to force the industry to take action on the problem. "Duke favors doing something mandatory on carbon," he said. Mr. Morris, on the other hand, was equally adamant that any attempt to force the industry into mandatory action would have dire consequences. "We need a post-Kyoto voluntary action," he said, warning against mandatory action. "That economically penalizes the manufacturing base, and it's foolhardy to saddle the U.S. economy with restrictions when India, China, and Brazil are not."

The executives noted that the patchwork U.S. regulatory system didn't help resolve the problem. Unlike other nations, where utility regulation is more centrally directed, the combination of state and federal regulation here, said Mr. Sokol, makes it difficult to devise a universal and effective policy on greenhouse gases. "Out of the seven countries we deal with," he said, "this is the only one where energy policy, environmental policy, and economic policy are not correlated."

The federal government, of course, made a stab at dealing with several of these overlapping problems last year with the passage of the Energy Policy Act of 2005, which President Bush signed last August. At best, the executives at the Standard & Poor's conference said the law offered some help for electric utilities. But some said it failed miserably in its other provisions.

In grading the bill overall, that disappointment was manifest. "I'd give it a C at best," said Mr. Morris. MidAmerican's Mr. Sokol said he'd give the bill a B for the electricity industry, "but an F for everything else." The energy law also left Mr. Burke uninspired. "It gets a B- or a C+ for the electric industry." Duke's Mr. Hauser did not give the law a grade, but he did say that one thing he found admirable in it were provisions that would speed up nuclear plant construction, which came to a standstill in the U.S. after the Three Mile Island incident in 1979.

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