ETRM & Markets

Snake Oil & Smart Meters

Customers deserve the straight truth about electricity costs.

The utility industry faces the difficult task of trying to educate the general public about the realities of delivering electricity service in the 21st century. California’s recent experience trying to put smart thermostats into the state’s building code provides a cautionary example.

Post-Meltdown Valuation

Credit-quality concerns join fuel and market factors to affect power-plant valuation

Lenders know there are billions of dollars of weak financial assets in the market, such as securities backed by bad mortgages. The problem is no one knows who is exposed at what level to those weak financial assets. This causes a lack of confidence in the lending industry, and a credit crunch that — if unabated — could cause a recession.

Linking Risk and ROE

Financial-risk coverage is falling short in utility returns

When setting the allowed returns on common equity of jurisdictional utilities, state regulatory authorities apply the virtually universal standard that the allowed returns should be similar to returns on common equity investments in companies of equivalent risk. Such returns generally are accepted as fair if they are no higher than necessary and still sufficient to attract investment. Despite the universality of this regulatory standard, our investigation of recent allowed returns by state commissions shows that a key risk—financial risk—as measured by accepted, measurable metrics, has not been a factor affecting the level of allowed returns in the United States in recent years.

Texas Ring Fence

TXU’s buyout structure creates a potential model for utility M&A and refinancing deals

2007 was a big year for TXU Corp., as it went private in the largest leveraged buyout in history. To sweeten the deal for environmentalists and regulators, TXU made structural and financial concessions. Now TXU’s ring-fencing structure might become a template for future utility M&A and refinancing deals.

Biomass Fuel Foibles

Fuel-supply risks stunt the growth of biomass power.

Utilities can meet state renewable portfolio standards—and reduce greenhouse gases—by burning biomass fuel. Whether utilities are prepared to jump into the biomass game, however, depends on how effectively they can manage fuel risks.

The Wonderful Curse

Production constraints and demand pressures mean high gas prices are here to stay.

Volatility in energy prices is both a scary and wonderful thing. It brings risks that must be managed under uncertain future conditions. It also brings opportunities to profit from price movement and competitive market advantages exploited through strategy, skill and luck. Just how good the outcome of such volatility can be depends on how well each market participant studies the fundamentals, manages uncertainty and remains flexible.

RECs Get Real

Green credits are maturing to become real, tradeable assets.

By displacing electricity produced from fossil fuels, renewable power plants produce two distinct products—commodity electricity and a set of environmental attributes (particularly avoided emissions). These environmental attributes can be packaged into a product called a renewable energy certificate, or REC, and sold separately from the electricity. As REC markets develop, key issues are being addressed regarding market interaction.

2007 Finance Roundtable: Pricing Regulatory Risk

Despite a favorable outlook for utility finance, cost pressures are straining rate structures.

Utilities are bringing monumental capital-expenditure plans before rate regulators just as they’re dealing with a barrage of rising costs—for fuel and other commodities, as well as labor, pension-fund obligations, and interest payments. Ten energy-finance luminaries elaborate on the industry’s fortunes.

When the Price Is Right

How to measure hedging effectiveness and regulatory policy.

Hedging programs promise protection against energy-market price spikes, and they can be important to the regulatory goal of sustainable, lowest long-term service cost. But how much price protection is enough in natural-gas markets? What is the most efficient use of risk capital when hedging energy supplies?

Sub-Primed and Ready

Will the turmoil on Wall Street spur a massive flight to utilities?

There remains a concern that during the next economic downturn investors will pass on utilities again. The reason is that the industry’s risks are still opaque to investors.