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A Utility Executives' Guide to 2007: A Cloudy Forecast

Experts predict the top issues that utilities will have to weather this year, and beyond.

Fortnightly Magazine - January 2007

transaction in retrospect had,” he said.

In fact, Rich Charles of Alliance Data Systems told the Fortnightly recently, the canceled Exelon/PSEG and FPL/Constellation mergers suggest the multi-region mega-mergers may not pan out. However, regionally based deals, such as between WPS Resources and Peoples Energy, still will be attractive. “The characteristics of the consumers and commissions are more homogenous; issues affecting one commission are likely affecting neighboring commissions,” Charles said.

Furthermore, Charles foresees utilities emphasizing—and needing to prove—the customer-care benefits of potential mergers more than they have in the past. “Customers are critical of how much they’re spending on electric and gas, and rising fuel costs aside, there’s an assumption that the more you spend, the better service you should receive.”

Climate Change and NSR

Hot winds are rising on Capitol Hill, and in courts and statehouses across the country. In 2007 and through the rest of the decade, trends toward tougher environmental regulation—most notably mandatory greenhouse-gas (GHG) constraints—likely will pick up steam, challenging utilities to find effective and economical ways to manage fossil-fuel consumption and carbon emissions.

After the 2006 mid-term elections, the Senate Democratic caucus nominated California Sen. Barbara Boxer to chair the Senate Environment & Public Works Committee. Boxer replaces James Inhofe, R-Okla., the Senate’s most strident skeptic on global-warming issues. As an indication of how this change will affect the legislative agenda in the 110th Congress, Boxer’s first announcement after being named chairwoman included a pledge to advance climate-change legislation. Congress considered GHG constraints in 2006 as part of multi-pollutant legislation (S. 2724 and H.R. 1873) and dedicated climate-change bills (S. 1151 [McCain-Lieberman] and S. 4039 [Kerry-Snowe]).

However, while political winds seem to be blowing in the direction of federal carbon constraints, climate legislation will face a practically insurmountable set of barriers in the 110th Congress—namely, a potential filibuster in the Senate and the veto pen of President Bush. As outgoing Chairman Inhofe stated in a recent press conference: “Our government is not going to embrace economy-killing carbon caps next Congress. Since it only takes 41 senators to defeat legislation, it is hard to imagine any scenario where the McCain-Lieberman bill would pass even two Congresses from now.”

Thus federal carbon constraints probably will not be enacted this year or next. At the same time, however, regulatory pressures are building on several fronts. How those pressures might evolve in 2007 will affect how and when greenhouse-gas constraints might arrive.

For example, the U.S. Supreme Court will rule on Massachusetts v. EPA, in which the U.S. Court of Appeals for the District of Columbia Circuit decided in 2005 that states cannot force the Environmental Protection Agency (EPA) to regulate greenhouse gases under the Clean Air Act (CAA). The lower court produced a fractured ruling, and depending on how the Supreme Court handles the case, it might establish whether states have standing to sue the federal government in future climate-change cases—and, potentially, whether the CAA gives EPA the authority to regulate carbon emissions at all.

“If the court rules global warming is a political question, beyond the scope of the courts,