CEOs Say Public is not Ready for Cost of Climate Change Fight

Several industry chief executives at Standard & Poor's Annual Utility Conference, held in New York City on May 31, expressed the fear that one of the hottest topics in the power sector, global warming, was likely to become ever more contentious and difficult as consumers become aware of the costs of remediation. Those costs would almost surely result in rate hikes that could generate a regulatory and political backlash and have major implications for ratepayers, investors, and the utilities themselves.

The five CEO panelists at the conference, "Will Surging Demands Jolt Credit Stability?" emphasized that the best approach to combating global warming would include a gradual phase-in of remediation costs for ratepayers who--despite the growing emphasis on renewable energy sources--are still likely to depend heavily on fossil fuels in the next dozen years. Finally, the panelists agreed that successfully reversing the effects of greenhouse gases will require serious commitments from governments, utilities, and industries in fast-growing overseas economies, notably China, which have become a rising source of carbon emissions.

Domestically, the full cost of reducing greenhouse gases is probably not yet apparent to ratepayers, said Thomas F. Farrell II, president and chief executive of Dominion Resources Inc., a major power generator in Virginia. "It will cost hundreds of billions of dollars and take decades to accomplish," he said. "It will have to include cars, be nationwide, and won't just hit electrical utilities." But consumers and businesses will have to be ready to contribute to the effort by reducing the amount of energy they use. "Before we leap to rate increases," said Ralph Izzo, chairman, president, and CEO of New Jersey-based Public Service Enterprise Group Inc., "there is a fair amount to be done in conservation."

Coal-burning utilities, which are heavy producers of carbon emissions, are likely to bear the brunt of remediation costs. However, rate hikes could prove palatable to customers if they are levied gradually. "The phasing in is important," said Bruce Levy, president and CEO of International Power America. "The impact will be disproportionate to coal states." But he believes that a backlash could also grow with utilities tethered to natural gas. Even as prices at coal-burning plants rise, the cost of natural gas--the recent fuel of choice for many generators--is likely to rise as well because relatively clean fuels like natural gas will be in more demand. Mr. Levy believes that ultimately, U.S. consumers will grow inured to higher prices, much as their European counterparts have. "People will get used to higher prices as rates go up. That is an evolution that will happen. You can't convince people in advance."

Ultimately, ratepayers will have to acclimate themselves to some combination of energy conservation and paying more for power. John Whitlock, panel moderator and Standard & Poor's managing director, asked how many CEOs thought that even 15% of U.S. power needs in 2025 might be supplied by solar or wind power; none of the panelists thought the U.S. would meet that threshold. "Something has to give," said Mr. Farrell. "People don't want nukes, coal plants, offshore drilling, or LNG [liquefied natural gas] storage. Americans like it easy, but it won't be easy."

How well utilities can work with state and federal regulators will partly determine just how difficult that will be, especially at a time when power supply systems are fully or partially deregulated, costs are rising or projected to rise, and private equity firms are buying into investor-owned utilities. "There is always a risk of a political backlash when you ask for a rate increase," said Anthony J. Alexander, president and CEO of FirstEnergy Corp. "We are working with the [Ohio] general assembly, the customers, and the [utility] commission."

Some states, such as Virginia, have taken a step back from deregulation after the California power crisis in 2000-2001. "Regulators wondered whether deregulatory policy was right. In Nevada now, there is no particular appetite for deregulation," said Walter M. Higgins, chairman and CEO of Sierra Pacific Resources, which operates in Nevada and California.

Mr. Higgins, along with the other panelists, was forceful about the need for global cooperation to control greenhouse gas emissions. "This will not be an easy problem to solve, and it will be a very expensive one," he said. "If we try to do it on our own, it will probably have no effect at all. The effort must be global." The possibility for some form of worldwide accord on global warming received a new boost the same day as the Standard & Poor's conference, when President Bush proposed new international negotiations to control global warming.

The utility CEOs made their remarks at a time when their industry is generally prospering but still requires substantial capital, both debt and equity, to meet future power demands. "Dividends have helped attract capital," said Mr. Alexander, "and will be more helpful in the coming building [that we will have to undertake]. We may need all forms of capital going forward." That capital will be essential, agreed the panel, as the industry explores new power generation technologies and attempts to meet the demands of ratepayers and regulators who are increasingly specific about the type of facilities they're willing to approve, even among conventional production facilities.

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