The time-honored discounted cash flow method for determining appropriate utility returns falls short when interest rates are low. Inadequate ROEs ultimately increase cost of capital and wipe away...
A rash of rate hikes around the country could have utilities facing a public-relations disaster.
It wasn’t that long ago: Some utility executives can still remember the protesters, the picket lines, and the verbal abuse they sometimes received on a daily basis for building nuclear or coal power plants, for forcing rate hikes, or for just being the environmental lobby’s favorite target.
Paul Bonavia, president of Xcel Energy’s Utilities Group, at a 2005 M&A conference remembered being shocked during the 1980s by busloads of protesters on the front lawn of a home of a Florida utility CEO with whom he once worked. Not only did they know where the poor man lived, Bonavia recalled, but he was constantly harassed through crank calls, in public, and in the mainstream media.
For anyone who remembers the 1980s, and has been watching the trials and tribulations of Baltimore Gas & Electric (a subsidiary of Constellation Energy) and its efforts to push through a 72 percent rate hike in Maryland, well, it’s déjà vu all over again.
Constellation Energy CEO Mayo Shattuck has complained that he and the utility have unfairly been demonized in the public and in the press. In one interview with a Maryland paper, Shattuck showed distress over the verbal abuse his executives had received from angry ratepayers.
And who can blame him? Utility executives have done a lot in the last two decades to cultivate an image as caring, responsible members of the community, providing a vital service.
What sort of industry would it be if utilities were reviled by customers, politicians, and even regulators? It is a question that Shattuck and those who lived through the 1970s and 1980s can ponder.
Yet had you attended the Edison Electric Institute’s annual convention in Washington, D.C., in late June, you would have concluded that the American power industry has reached a never-before-seen apex in culture and society. The conference began with all the pageantry and ceremony locals normally would associate with a state visit from foreign dignitaries, or perhaps a meeting of the World Bank—a full military marching band, a personal welcome from the mayor, and a personalized video message from President Bush welcoming conference goers and telling them how vital they are to America’s future.
Rate hikes are all but assured in many parts of the country. Nuclear and coal- burning power plants still could receive the type of fierce environmental opposition of the past. Finally, as a result of siting difficulties, power-plant development again is falling behind demand—a sure recipe for higher power prices in the future. If nothing is done, the industry will become a public pariah—ridiculed by overzealous politicians, such as is happening in Maryland.
The evidence already shows that build-outs now in the pipeline won’t be enough to meet future demand. Consider a July report by Merrill Lynch, in which equity research analyst Steve Fleishman spells out the problem:
“Capacity additions through 2010 look slightly higher than we projected a year ago,” he writes, “but