Severe upward pressure on electric rates after a decade of stability has regulators, legislators, utility executives, consumer advocates, and myriad other stakeholders searching for solutions....
The Color of Money
Wall Street sees “green” in demand response, energy efficiency, and distributed generation. Will the industry step up?
which is independent of energy sales. For most businesses the idea of selling less product is not a good strategy and leads to reduced revenue and earnings. Wall Street is concerned that alternatives such as DR, EE, and DG will put existing earnings, which are derived from the sale of the energy commodity, at risk. Risk and uncertainty are key concerns for Wall Street. Separating the recovery of fixed costs and earnings from the volume throughput, or the sale of energy, provides a mechanism for managing the risk of earnings recovery on existing assets. In addition, investors expect certainty of rules.
For analysts it is important to be able to model financial performance and risk. To do that effectively, the rules for cost recovery and return on investment need to be clear. Clearly, ambiguous rules lead to uncertainty and risk that the expected returns from DR, EE, and DG will not materialize. Clarity is especially important because the cost recovery and earning rules are relatively new in most cases. As a result, there is little history to support specific earnings levels or likely regulatory actions on investments. That’s why a proven track record will be a key indicator.
With all the interest and activity around a clean environmental footprint, and DR, EE, and alternative DG solutions, it is difficult at times to separate the hype from actual results. To do this, analysts look to a proven track record of both operational and earnings results from these alternative solutions. A proven track record reduces the implementation and technology risks associated with new solutions, affirms management’s commitment to implementing alternative solutions, and confirms management’s ability to deliver earnings and cost reductions from these solutions.
Moreover, concern about the sustainability of the business has become a focus for Wall Street and the analysts. Liability that may be associated with environmental impacts and a utility’s carbon footprint is attracting concern on Wall Street. Analysts want to know that management is focused on managing the potential environmental liabilities and are leveraging the goodwill of the community and regulatory environment that comes from managing the carbon footprint and being a “good” corporate citizen. With the heightened awareness of climate change, not meeting customer and regulator expectations in this area can have significant good-will and monetary consequences. By pursuing these focus areas, management is taking innovative steps to manage the risks associated with implementing DR, EE, and DG solutions, as well as increasing the choice and value of the products being offered to customers.
The Role of Legislators and Regulators
Based on the findings from our Wall Street analyst interviews, the trends in the utility industry, and recent regulatory policy decisions in California, Colorado, New York, and New Jersey, legislators and regulators have a key role in enabling the sustainability and viability of utility-driven DR, EE, and DG programs. This role has three primary dimensions.
First, to attract capital, regulators will have to establish a level playing field among DR, EE, and alternative DG resources and traditional infrastructure investments with respect to earnings and risk. For example, in the