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Frontlines

At a posh dinner event and conference, industry experts speculate on the issues that could affect the industry in 2005.
Fortnightly Magazine - December 2004

believed he was doing a noble thing and giving back to society.

This bit of nostalgia was striking-incontrovertible proof that utility leaders are looking to the past as a model of the future in a way that may be surprising. Back-to-basics was a mantra of returning the industry to its roots, to their core business of delivering and generating power. But not a return to the regulatory compact. The regulatory environment is not what it was 40 years ago. Furthermore, others say renewing the regulatory compact of years ago may not be in the industry's best interests.

At a Merrill Lynch conference a few months ago, another Midwest CEO, Michael Morris of American Electric Power, said, "It's time to reconstruct the regulatory compact. I know how old-fashioned that sounds. … We have a joint obligation and a duty to continue to serve our customers. We need to reestablish the notion that this is a business we are in together. There was a time when we [utilities and regulators] really did work together."

As the financier at my table at the EEI finance conference pointed out, one should remember the involved in that compact.

Experts I discussed this issue with said that if utilities are seriously contemplating the regulatory compact, they must not remember that the compact means earning less. One told me, "Sure, some utilities may be able to go back to the regulatory compact and have their monopoly territories back again, but in exchange for that monopoly or service territory, and to ensure they get on the golf course by 3 p.m. every day, they'll have to accept less earnings."

That's what makes Morris' comments so startling-they don't seem to mesh with his efforts to make AEP part of the PJM RTO so he can sell his cheap coal megawatts for top dollar in the Northeast. His statement may have been designed as an effort to protect his service territory from other suppliers, but you can't have it both ways, many say. If you want to earn top dollar in other markets, you have to be willing to risk someone earning top dollar in your market. That's what competitive markets are all about. Furthermore, most finance experts say that if the industry were to truly return to cost-based rates, the only entity wanting to buy utility stock would be the utilities.

 

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