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Casino Royale?

Utilities place billion-dollar bets on infrastructure, but the deck may be stacked against them.

Fortnightly Magazine - December 2006

Something seems deeply disturbing about the utility industry these days. An almost palpable tension rises whenever the utility CEO is asked how he will build enough power plants to meet the skyrocketing demand for power. Some consultants predict that sometime after this decade the time will come when utilities won’t be able to build enough to meet demand, no matter what they try.

The companies, of course, won’t tell you directly they can’t build enough plants. Such an admission would not go over well with politicians, regulators, investors, and the general public.

But they will tell you indirectly what the odds are, in subtle fashion, by talking about the siting issues, financing difficulties, the technology challenges, personnel shortages, and the billions in needed capital that their balance sheets can’t manage.

Industry veterans may have heard this all before, but at this year’s EEI Finance conference—in Las Vegas, aptly—attendees discussed and debated newly proposed utility business plans.

“I give you 10-to-1 odds,” said one, “that TXU CEO John Wilder brings his coal plants in on time and under budget.” That comment referred to TXU’s Nov. 6 announcement that the utility could miss its target of completing the first of nine planned new coal-fired power plants in Texas by the summer of 2009, due to delays in securing permits required to start construction.

“Oh yeah? I give you 3-to-2,” said another, “that Duke Energy CEO James Rogers doesn’t live long enough to see his nuclear plant get built.” The speaker was skeptical over the so-called nuclear renaissance, and also mindful of Duke’s recent upward revision on its proposed nuclear power-plant costs, which now are projected to exceed $2 billion. (On Oct. 20, the North Carolina attorney general challenged Duke Energy to raise customer rates there to help pay for nuclear plants yet to be built.)

I overheard such playful banter many times among conference attendees. And I did see Duke’s Rogers at the Merrill Lynch CEO dinner. He looked to be in good health and was optimistic on the regulatory front, so I’d give odds that rumors of his demise are quite a bit exaggerated, though he does face significant challenges in providing for rate recovery of all those construction costs.

They say that what happens in Vegas stays in Vegas. That may serve well for the casino, but not for the conference proper. With neon lights blazing on the Strip, the utility executives competed to dazzle investors, analysts, bankers, and the rest of us with their plans for construction, corporate spinoffs, and joint ventures.

It would be a shame not to share with you details on the deals that drew the most buzz.

Deal Number 1

The Players. American Electric Power, Mid-American Holdings

The Project. AEP announces a 50-50 joint venture (JV) with MidAmerican to build new transmission assets in Texas. AEP will contribute about $100 million of Texas transmission assets under construction. A subsidiary of MidAmerican

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