Adopting digital capabilities to transform operations and processes holds immense promise for utilities. Indeed, it’s the best path to growth.
2007 Finance Roundtable: Pricing Regulatory Risk
Despite a favorable outlook for utility finance, cost pressures are straining rate structures.
would be optimistic.
Cortright: Commissioners are political animals and are subject to a whole host of different and opposing constituencies. Even the most supportive commissions will come under increasing pressure. At some point regulators will be looking for ways to restrain the increasing cost to consumers.
I think the burden of proof on utilities will get heavier and heavier. Pension obligations, medical liability, all that stuff will be put under a microscope. So certainly the more fully fleshed out and transparent a utility’s big capital-expenditure programs are, the better.
Fortnightly: How is the risk of GHG regulation affecting the financial picture for utilities and power generators? How are capital markets pricing GHG exposure?
Petrosino: That’s the multi-billion dollar question right now.
In regions where coal is setting the price of electricity, the cost of electricity will go up. But in the Northeast or Mid-Atlantic, where gas generation is more on the margin and nuclear comprises a sizeable share of baseload capacity, coal-fired power plants might lose margin because the cost of carbon may not be fully reflected in the price of electricity.
Young: Because of political realities, the financial impacts of carbon removal likely will be mitigated through safety valves and other approaches, and state regulators will feel pressure to mitigate them further. If that happens, and you price carbon at $12 a ton but the cost to remove it is really $50 a ton, then you’ve discounted the cost to the public. You won’t get much carbon removal.
Hempstead: We don’t know where the legislation is going. It’s reasonable to assume the regulations will treat you in a fair manner, and allow you to recover the costs. But it’s a big unknown, because we’re still in very early days.
Rogers: Given the timeline to build a plant that is likely to be affected by GHG issues, companies will be deferring those investment decisions until there is more clarity.
Hyman: I attend a lot of meetings on Wall Street, and until recently I rarely heard anyone say much about carbon. It’s almost as if we know it’s there, but we won’t take it seriously until it’s three months away.
Cortright: It’s impossible to make judgment calls right now. All we know is costs will be going up, but we don’t know how much, when, or how those costs will be spread around the industry. The focus is on coal burners in the Midwest and South. Will they take it on the chin? It’s an important question to answer.
Bodington: The old strategy for many companies was to get as much coal-fired capacity as possible, sell cheap power, and become heroes. GHG regulation has turned those heroes into potentially big losers. Fasten your seat belt if you’re in a coal-driven territory.
Nastro: While legislation isn’t expected until 2009, at the earliest, investors are beginning to quantify the impact of GHG and highlight, in broad strokes, the winners and losers from policy changes. We think the market increasingly will differentiate between companies that have an implied cost versus a benefit [such as coal