Monopoly Utilities Doomed

Jim Rogers on the Pivot Ahead

BY MARTIN ROSENBERG
Editor-in-chief, EnergyBiz

Jim Rogers has helped steer the evolution of the U.S. electric utility industry for 25 years. His passionately held, innovative insights about the business grew out of a varied career that included stints as a journalist, lawyer and consumer advocate. He chaired the Edison Electric Institute, the industry trade association. And he has appeared on the Colbert Report.

After recently stepping down from leading Duke Energy, he spoke with EnergyBiz about the future of the industry and the challenges that await him. His edited comments follow.

EnergyBiz: You started your utility career in 1988. How would you characterize how this business has changed?

Rogers: Over the past 25 years, I've seen a continued erosion of the utility companies' monopoly. That model is not going to work in the 21st century.

ENERGYBIZ: How did we get to this point?

Rogers: In 1978, you saw the emergence in the national energy act of a small provision called PURPA – the Public Utility Regulatory Policies Act. It really led to the building of a lot of generation. With the Energy Policy Act of 1992, we started to see the development of robust wholesale markets coupled with the deregulation of generation in many markets and the building of new gas generation by independent power producers. Add to that renewable portfolio standards in 29 states plus the District of Columbia, and we have had a significant erosion of utilities’ generation monopoly. If you take a look at transmission, the vast majority of utilities operates in RTOs or ISOs and no longer have the ability to make decisions about the dispatch of generation or the building of new transmission. As you look at distribution, you see an incredible number of new technologies such as solar on the rooftop and productivity gains in the use of electricity. So two components of the utility company have been significantly eroded since 1988. The attack on distribution is beginning. It raises the question of what will be the role of utilities over the next three to four decades.

ENERGYBIZ: Are utilities prepared to proactively embrace change?

Rogers: The utility industry has been like the proverbial frog that's been put in a pot of cold water, and the heat's been turned up. And it's been turned up slowly. The many challenges ahead are going to fundamentally change this industry. Leaders in this industry in the future are going to have to run to the problems that they see on the horizon, embrace the problems, and then try to convert the problems and challenges they see into opportunities to create value for their customers as well as their investors.

EnergyBiz: Will mergers and cost reductions be adequate to address capital spending needs?

Rogers: There have been significant cost reductions from consolidation in our industry. Cost reductions are going to be key to earnings growth in the future. There will be a few large, vertically integrated regulated businesses like Duke and Southern that will have major building programs. Where you have no major building programs to drive earnings, the industry still will experience significant capital expenditures much greater than their annual depreciation expense. Their capital expenditures are going to be on aging infrastructure. There will be an increased cost associated with moving from an analog to a digital grid. There's going to be a great public demand for greater resilience in the grid in the face of potential cyber-attacks and storms. These costs are going to put a lot of pressure on earnings. At the same time, power demand will be anemic or declining.

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