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.
The public markets have been slower to reach a consensus about GHG costs, but certainly strategic buyers in private markets already are making bets. Goldman Sachs sold the Horizon Wind portfolio to Energias de Portugal for a record $1,950/kW of installed capacity. That’s in indication of how far the market has moved, in terms of pricing a clean portfolio.
Redefining Regulated Utilities
Fortnightly: Many utilities are working to implement time-of-use metering and conservation programs. Are utility investors concerned about how these changes might affect utility business models?
Petrosino: Management teams are talking about it, regulators are talking about it, and conferences are focusing on new rate structures and decoupling. It’s a significant change, and investors still view it as a “show-me” proposition. It’s more of a risk than an opportunity—particularly on the conservation side.
Innovative rate structures will happen because conservation, efficiency and renewable energy are important for the industry. It doesn’t make sense for a utility to build a 500-MW plant it could avoid through other measures, particularly in a world of carbon taxes. But rate structures need to provide incentives so the utility gets paid in a way that is similar to building the plant.
A lot of education needs to happen among consumers. For too long, consumers have been compla- cent about the cost of electricity. They accept rising gasoline costs, but they think they should be able to leave the lights on and it shouldn’t cost them any more than it did in the past.
Hyman: Clearly we need some sort of time-of-use (TOU) pricing so companies don’t put in a lot of equipment and assets that wouldn’t be needed if people knew what the real costs were. There’s no doubt smart-metering technology can make an enormous difference. It’s the difference between blundering along or making plans that are sensitive to customer needs. But I’m not sure the regulators are willing to let go and actually let this happen.
Sauvage: If those investments are made, they will take pressure off other parts of the company’s cost structure. That in itself has value, because you want stable rates or relatively predictable increases. Regulators will realize that, and the companies that are investing in these technologies will work in partnership with regulators. They will find paradigms that provide the right incentive for what everybody understands is the right economic and environmental outcome.
Maloney: You will see more innovation in tariff provisions, eventually working toward TOU pricing. And if the shifts are persistent, it could have some surprising effects.
Fortnightly: Given all the changes that are occurring in the industry—not to mention the changes that already have occurred—are utilities still the right investment for widows and orphans? What do you see happening with dividend trends?
Rogers: This is a great topic for the industry right now, because there are a myriad of opinions about it.
Our company just declared a dividend at the end of July, for the first time in about five-and-a-half years. Because of our high organic growth rate and our capital-investment needs, it seems