March 29, 2010
Ken Silverstein
EnergyBiz Insider
Editor-in-Chief
With the economy on the mend, investors may be ready to step up and help finance the energy sector's growth. But to do so, they will need greater regulatory certainty both at the state and federal levels so as to encourage risk taking.
National policymakers are wrestling with the direction that environmental laws will take. Until it becomes more defined, utilities will be left in limbo. Likewise, as rates cases before state public utility commissions come forth, companies will argue that they need to earn reasonable returns or else see their cost of borrowing jump. That, in turn, would inhibit their ability to raise money and expand their infrastructure.
"Making a low rate of return is not a way to lower a customer's bill," says Ed Tirello, managing director and senior power strategist for Berenson & Co. at the EnergyBiz Leadership Forum. "You actually raise it."
While the current demand for power has stalled, the government is projecting the need for new energy supplies to be at least 23 percent greater in 20 years than they are now. According to the Energy Information Administration, the nation needs about 50,000 megawatts by 2014 and 258,000 megawatts by 2030. That will cost about $412 billion through 2030. The North American Electric Reliability Corp., meantime, adds that 11,000 miles of high voltage transmission is needed by 2013.
Tougher times have forced Pepco to delay its $1.2 billion investment in the Mid-Atlantic Power Pathway for at least a year. The project, which was to be done by 2014, now awaits a report from its grid operator, the PJM Interconnection. That entity is now reassessing what it thinks annual electricity growth will be in the coming years. Altogether, the utility removed $400 million from its five-year capital expenditure plan, which had totaled about $5 billion.
Speaking at the EnergyBiz Leadership Forum, Pepco's Chief Executive Joe Rigby said that the company is focused on its regulatory business from which it derives the bulk of its revenues. It therefore tries to maintain open and transparent communications with its regulators, who determine what cost can be passed along to customers. In an ideal world, he says that utilities need to keep their rate hikes below 10 percent a year -- a level that avoids dramatic price jumps and one in which customers can digest.
"You have to believe that you can put a business case in front of your regulators and get a fair shot, and if you can do that ... you can go out and actually finance it," says Rigby. "So whether it's through cash from operations, whether it's through active rate cases, we need to see ourselves as a rate case machine."
The company's transmission revenues are set at the federal level. In the case of the Mid-Atlantic transmission project, Rigby adds that Pepco will get a 12.8 percent return on equity -- an amount that will allow the utility to finance the expansion.
Customer Concerns
All utilities face a dilemma, which is to say how they finance the future and by extension attract investors without alienating their customers. The issues are well known and involve paying for cleaner air and water as well as for the new technologies so that it can all fall into place. All this is transpiring, however, during the worst economy in decades and is compounded by growing federal budget deficits. At the same time, millions are now jobless and Washington is stalemated.
Consumer advocacy groups say that they understand the pressures that utilities face -- to invest in their infrastructure at a point in time of stricter regulations. But with such services unaffordable for so many, it then becomes essential for companies to accurately reflect the true costs and benefits of their businesses in an open and verifiable manner.
"We are not naysayers," says Mary Healey, Connecticut Office of Consumer Counsel and president of the National Association of State Utility Advocates. "We are skeptics."
In the short run, the recession has dampened the load forecast and helped put downward pressure on fuel prices. But that won't last. And utility executives are cautioning that electricity requirements and the associated costs will only rise.
DTE Energy has been hammered by the downturn. It says that its sales have fallen by 6-7 percent over the last year and that its challenge is to try and size its revenues and expenses. It won't be a typical recovery, notes Tony Earley, chief executive, who says that his auto-heavy region will take four or five years to rebound
Southern Co., meanwhile, has seen its industrial load decline by 12 percent. It says that business will bounce back but that it will take three or four years to do so.
It is therefore allocating $15 billion to its capital expenditure budget over the next five years -- an amount that it acknowledges is out-of-reach for many smaller companies that do not have its balance sheet. The company will be implementing 4.5 million automated meters while it is putting money to work on coal gasification and nuclear projects.
"We will continue to invest significant sums," says Southern's Chief Executive David Ratcliffe, at the EnergyBiz Leadership Forum. But without proper guidance from Washington and particularly in the area of carbon controls, he says that the utility will "struggle with what technologies and revenue streams to invest ... It is clear to us that there will be significant economic costs on an industry already burdened."
With so many daunting challenges before it, the utility sector must extend its outreach program so that all of its stakeholders are better informed. While state and federal regulators appreciate the need to expand and modernize the nation's infrastructure, they will be reluctant to grant wholesale requests unless consumers are on board.