Obama has set high expectations for his administration. But as the president acknowledged in his inaugural address, fulfilling those expectations won’t be easy. For the U.S. power and gas industry...
on Energy Regulation in Montreal, Tirello even then had begun to question why foreign utilities were so eager to acquire U.S. utilities that had put their faith in a wires-only strategy.
"Scottish Power, PowerGen, and National Grid all made mistakes with their U.S. acquisitions," said Tirello. Instead, he suggested, "The big utilities will be controlled by the oil companies." In other words, Tirello believes that control of the utility sector will pass to companies with big investments on the production side. He sees evidence for that in today's stock market.
"The gencos are selling at 30 to 40 times earnings," noted Tirello, "but the utilities are selling at only 12 times. So utilities have been dropping their generation into unregulated subsidiaries, then spinning it off. That's how they get their money out of their merger deals-to get around the fact that the regulators often force the savings in mergers to go to the ratepayers."
And why are these stand-alone gencos selling at a premium? Tirello sees electricity demand skyrocketing in the next few years-forcing up prices and threatening shortages-and putting power producers into the catbird's seat. As a consequence, utilities that divested their power plants will become nonplayers.
"It's not getting better," he says. "It's getting worse."
Tirello continues. "I don't see prices coming down. You're going to have tremendous price swings in every region and the discos [the wires-only local distributor] can't do anything about it."
Remember Commonwealth Edison and its notorious fleet of nuclear plants, once the subject of a scathing report on the TV show, "60 Minutes"? Tirello now likes those plants. "They're getting more efficient," he says, "Why did the PUCs force them to sell?"
On that point, Illinois regulator Ruth Kretschmer answers, "Utilities sometimes want to do stupid things."
According to Kretschmer, Commonwealth Edison wanted to divest its generation when it came to the state utility commission.
"Com Ed wanted to freeze rates. They agreed to do it [divest] to get their way on legislation. But now," adds Kretschmer, with the price spikes of early summer running up purchased power costs, and with no flexibility to boost prices at retail, "Com Ed has been eating millions a day."
IS THERE ANOTHER WAY? Electric utility Detroit Edison and its parent company, DTE Energy, have proposed a different model. In early May they filed plans with the FERC to divest some 6,000-plus miles of regulated, utility-owned transmission lines (120-345 kilovolts) to a new stand-alone subsidiary to be named the International Transmission Co., which would operate initially as a subsidiary of DTE. In other words, Detroit Edison would make "a complete exit from the transmission business."
Edison and DTE fixed the net book value of transmission at $440 million. They said Edison would transfer the grid assets to ITC in a tax-free exchange for stock under Internal Revenue Code sec. 351. Edison would then transfer its ITC shares to DTE.
Of course, this proposal could be seen simply as a required first step for Detroit Edison to cement its membership within the proposed Alliance RTO, a group that includes American