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Sticker Shock!

Increasing prices for materials, equipment and services are driving utility infrastructure costs into uncharted territory.

Fortnightly Magazine - December 2007

risen substantially in the past few years, for the same reasons cited above for metals. Cement in particular is an energy-intensive commodity that is traded in international markets, and recent price patterns resemble those displayed for metals.

Likewise, prices for plant components, such as large pressure vessels, condensers, pumps and valves, have risen sharply since 2004. While equipment and component prices reflect underlying material costs, some price increases and delivery lags are driven by manufacturing capacity constraints. Recent orders largely have eliminated spare shop capacity, and delivery times for major manufactured components have risen as a result.

To the degree delays in component deliveries cause construction schedules to lengthen, financing costs likewise will increase—with commensurate effects on overall plant costs.

Building Backlog

A significant component of utility construction costs is labor—both unskilled (common) labor as well as craft labor, including pipefitters and electricians. Labor cost increases—while less dramatic than those experienced by commodities—nevertheless have exceeded the general inflation rate (see Figure 4, “National Average Labor Costs”).

Specifically, between January 2001 and January 2007, overall inflation caused general prices to rise by about 15 percent. During the same period, the cost of craft labor and heavy construction labor increased about 26 percent, while common labor increased 27 percent. 10

Although labor costs have not risen dramatically in recent years, utilities increasingly are concerned about an emerging gap between demand and supply of skilled construction labor—especially if the anticipated boom in utility construction materializes. The average age of the current construction skilled workforce is rising rapidly, and high attrition rates in construction are compounding the problem.

The industry always has suffered high attrition at entry-level positions, but now many workers in the 35 to 40 year-old age group are leaving the industry for a variety of reasons. As a result, the construction industry must recruit 200,000 to 250,000 new craft workers each year to meet future needs. Both demographics and a poor industry image are working against the construction industry as it tries to address this need.

Similar issues might affect the supply of electrical lineworkers who maintain the electric grid and perform labor for T&D investments. DOE forecasts qualified candidates might fall short of requirements by as many as 10,000 lineworkers, or nearly 20 percent of the current workforce. 11 Such shortages likely will place upward pressure on the wages earned by lineworkers.

Finally, conditions in the market for EPC services are driving major cost increases. While the Brattle Group was unable to obtain specific information from the major EPC firms on their worldwide backlog of electric utility infrastructure projects, these companies’ financial statements specify the financial value associated with their backlog of infrastructure projects.

The cumulative annual financial value associated with the backlog of infrastructure projects at four major EPC firms—Fluor Corp., Bechtel Corp., The Shaw Group and Tyco International—rose sharply between 2005 and 2006, from $4.1 billion to $5.6 billion, an increase of 37 percent (see Figure 5, “Annual Backlog at Major EPC Firms”) . This significant increase in the annual backlog of infrastructure projects at EPC firms is consistent with