Beacon of Light

Beacon of Light

Location: New York
Author: Ken Silverstein, EnergyBiz Insider, Editor-in-Chief
Date: Thursday, March 12, 2009

The utility sector will fuel the light at the end of this dark tunnel. And while power companies are enduring during this difficult time period, they too have had to adapt to declining economic growth.

The Federal Reserve's cautiously optimistic forecast that the recession could end this year and a recovery could begin in 2010 -- lasting up to three years -- provides a reprieve from the steady dribble of bad news. It's a message that got energized after President Obama's speech to a joint session of Congress on how he plans to resurrect the ailing economy -- a prescription involving $200 billion in stimulus to energy projects.

But the economic misery seems unending. The tumult comes at a time when utilities need access to capital. While Standard & Poor's says that the regulated electric utility sector must spend an estimated $180 billion to upgrade its infrastructure and to install pollution controls, it now says that much of this outlay will have to be deferred until credit eases.

Consider American Electric Power: It says that its 2009 sales will be about the same as those in 2008. Because the economy is expected to remain soft, however, the utility has cut spending. As such, it has reduced its capital expenditure budget for 2009 by $750 million, a decline of more than 20 percent -- something that the company says will cause it to revise its long-term growth to between 4 percent and 6 percent annually.

"Our focus, as always, is on ensuring we have sufficient reliable energy production and delivery infrastructure to meet our customers' needs, both today and in the future," says Michael Morris, chief executive of AEP. "We will continue to invest in those areas and to manage our commodity costs. But it's also important that we improve the systems for cost recovery provided by utility regulations in our states. That's a discussion that we will be having with our regulators."

According to Richard Rudden with Black & Veatch Corp., utilities are expected to cut their planned capital expenditures in 2009 by 10 percent to 15 percent. That equates to between $8 billion and $13 billion. However, even with these reductions, capital investments for generation, transmission, and distribution will be substantial, averaging about $75 billion per year between 2008 and 2010, he says.

Still, to pay for planned improvements and to attract investment, industry must boost its prices by 6 percent to 8 percent a year. That may have to wait, Rudden says, noting that only those utilities that are now building plants or wires will be filing rate cases with their state public utility commissions. Any hearings will be trying, given that regulators are currently reluctant to raise consumer and business rates.

Stimulus Package

It's a point that is underscored by Southern Company's Chief Executive David Ratcliffe, who says that most in the industry are facing a huge build-out. Most such companies, meantime, have BBB ratings or worse. The lower the grade, the more it costs to borrow the money. Even in these tough times, he adds, utilities need to get regulators on board as over time, the demand for power will trend higher.

According to the Sierra Energy Group, a division of Energy Central, 56 percent of utilities are cutting their capital expenditure programs and one-third of those are information technology undertakings. At this point, utilities seem to be mostly trimming proposed projects, or those that had not been funded or started. About 70 percent of all deals are not being cut, although some of them are being reduced or stretched out.

Sierra Energy cites the Jacksonville Energy Authority, which had 60 people in its information technology unit and had to eliminate 40 of them, although most were contractors. It was unable to get its bonds renewed or refinanced.

FPL Group is also slicing its capital expenditure programs from $9 billion in 2009 to $5.3 billion. Reuters, meantime, reports that the hard-hit auto industry in Michigan means that CMS Energy there will have to postpone a proposed 800-megawatt coal-fired plant for two years. While part of the delay can be attributed to regulatory issues, the high cost of capital is also inhibiting progress -- charges that would also need approval from public utility commissioners. Needless to say, with power consumption drastically down in the state, the utility is in no hurry.

In an otherwise dreary time, utilities, generally, are performing up to snuff. Eventually, though, most aspects of the economic base will get re-charged and power companies will once again be pressured to increase their earnings. Part of that growth will come from building generation and transmission projects. Industry stats, in fact, show demand rising about 30 percent or so over the next 25 years.

The time frame in which to prepare for that expansion is "immediate." But it's a tough sell now because reduced consumption has hurt sales and because the capital markets are off limits to some borrowers, including utilities.

To facilitate a rebound, President Obama plans to take action that would ease credit to businesses, particularly those that want to invest in the green economy. That, in turn, should spur more development in energy causes, including a digital transmission grid that provides two-way, high-speed communications between utilities and consumers. The $200 billion in the recently enacted stimulus plan focuses on such efforts.

"They are cranking out tons of dollars," says Warren Causey, vice president of the Sierra Energy Group. "However, if the money retains value in the face of massive deficit spending, it will be good for the energy industry. Another question is whether the infusion of cash targeted at renewables will help with base-load requirements."

While some may question current national policies, the thinking in official Washington is that the utility sector could lead the way out of this recession. As new funds are plowed into innovative technologies, the administration is hopeful that the endeavors will catalyze the country and bring it back to its feet.