Back in 1978, Congress passed an energy bill, the National Energy Act, including an obscure provision that seemed like an incremental tweak to U.S. energy policy. But eventually, that incremental...
How to Tango With a Regulator
Utilities and financiers want ratepayers to fund the next wave of power plants. Will higher electric rates spoil the party?
You’ve heard the story. The local utility ought to be investing billions in new power plants, but the company CEO wants a guarantee from regulators for upfront costs and future operating expenses before laying down dollar one on the project.
What to do?
Utility CEOs attending the Edison Electric Institute’s 40th Financial Conference last month in Hollywood, Fla., were shuffling to the old rate base song-and-dance. But this time, they were working out a few new moves.
Just listen to AEP CEO Michael Morris, calling again for the “regulatory compact.” Or Progress Energy CEO Robert B. McGehee, who says that regulation today means brushing up on political skills. And Allan J. Fohrer, CEO of Southern California Edison, who still worries about after-the-fact prudence reviews.
Fear of being underappreciated affects every close relationship. Nearly every utility CEO who took the podium for his own presentation displayed a clear affection for the regulator—plus a warning for any who might dare neglect that relationship. One executive from Exelon recounted various ups and downs with the Illinois Commerce Commission. It seems that ComEd was planning to buy energy using a “reverse auction.” A research analyst at a prominent investment bank was not amused, later calling Exelon a “work-out story.”
This re-emergence of the regulator in all sorts of utility development plans promises a return to a set of dynamics not seen for a decade or more. Whereas it was the investor community that carried the risk for the most recent (and speculative) boom in power-plant construction, the financiers and now the utility executives clearly aren’t willing to take the same risk again. They want “a sure thing,” as one executive put it. That means ratepayers will be carrying most of the risk.
While most expect that competitive markets eventually will lead to new plant construction, many financiers now say they won’t back the projects without long-term contracts. Yet even that strategy carries uncertainty. For example, even as utility executives and their financiers take comfort in rate base regulation, the billions needed to finance the next development boom would certainly raise electric rates to a point beyond political feasibility.
What else can utilities do?
Alternatives to Rate Base
Without a regulated rate base or a long-term contract, there are few options to get plants built. Even with today’s competitive markets, which often feature a separate payment for capacity value, on top of the basic energy price, many merchant developers still are loath to take the same risks they did just a few years ago. They probably would have a difficult time building “on spec.”
In addition, utility executives increasingly are concerned that efforts in the Energy Policy Act of 2005 to promote energy infrastructure are being misinterpreted by state and federal regulators. Specifically, many worry that the repeal of the Public Utility Holding Company Act (PUHCA) will be replaced by more restrictive regulation both at the