The capital pressures squeezing utilities today need to be offset by stronger alignment among the four critical dimensions of capital planning: strategic, regulatory, financial, and managerial....
An economic slowdown might buy time for regulatory change.
Last month’s “Frontlines” column invoked the dreaded “R” word: “recession.” (See “ Sub-Primed and Ready .”) In what turned out to be Executive Editor Richard Stavros’s final column in this space (Richard left the Fortnightly in September to join Dominion Resources in Richmond, Va.), he suggested the industry’s fortunes might actually benefit from an economic downturn, as Wall Street money flees toward defensive investments.
In this month’s cover story, “ Pricing Regulatory Risk ,” our panel of finance gurus agreed: Utility securities are looking good during the current flight to quality.
Of course, a recession would be nothing to celebrate. It would make life more difficult for consumers—and therefore for utilities and regulators. Ironically, though, Richard’s prediction could prove correct in more ways than one.
By slowing demand growth and delaying the capacity shortfalls predicted by power planners, a recession could allow additional time for planning next-generation technology investments— i.e., nuclear plants, carbon-capture and storage projects, and the grid updates necessary to achieve conservation goals.
It also might give the industry time for sorely needed updates to the regulatory compact.
Unavoidably, a recession would put stress on rates. Fewer kilowatts and BTUs sold means each electron or molecule must bear a larger load of increasingly heavy “fixed” costs, not to mention cap-ex spending. In this environment—or any other—the best way to prevent rate shock is for utilities and regulators to face facts as early and honestly as possible … and to make sure ratepayers understand those facts. Therein lies an important opportunity.
For too long, opaque rate structures have shielded American consumers and businesses from the real costs of utility service, while discouraging efficiency and conservation. Now, as the industry contemplates a massive buildout and a carbon-constrained future, the first order of business should be to update the regulatory compact—to accommodate time-of-use rates and decouple utility profits from sales volume, once and for all.
Utilities are planning vitally important investments, and those investments will cost consumers and businesses a bundle. Ratepayers deserve to know the true costs and benefits of what they’re buying—not only in rate-case hearings, but on an ongoing basis, through real-time price signals. Indeed, customers bear a responsibility to participate as active consumers in the supply-demand interchange, not just as passive ratepayers behind the shield of an outdated meter.
A recession, although painful and disruptive, might be just the catalyst for a regulatory transformation.