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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?

Fortnightly Magazine - December 2005

state and federal level, further stifling investment. Even one of the architects of the legislation, Congressman Joe Barton, recently warned the Federal Energy Regulatory Commission (FERC) about going beyond the intentions of Congress:

“I take particular exception,” he wrote, “to the view that [the] PUHCA Repeal Subtitle is merely a congressional punch list with tight deadlines that make it difficult for the commission to engage in a ‘comprehensive review’ needed for rethinking and recreating regulatory infrastructure in fundamental ways.”

Instead, Barton saw repeal as an instruction to FERC to back away:

The fact of “tight deadlines,” he continued, showed that Congress saw “no need, or authority, for the commission to engage in a wholesale re-regulation in the wake of PUHCA repeal.

“Now is not the time,” he concluded, “to revive PUHCA by recreating obsolete regulatory infrastructure.”

Other efforts to promote investment continue to be a matter of heated debate, like the different ICAP and LICAP models that are being bandied about the industry to promote infrastructure development in competitive markets (see “ PJM's New Game ”).

On Time and Under Budget?

In a world where rate base rules the roost, questions again are being voiced about how the industry will avoid the cost overruns, overbuilding, and inefficient operations that dogged the last great expansion of power-plant capacity, which lasted at least through the mid- to late 1970s.

The answers by utility execs at the conference were not always reassuring. Some admitted that many companies had lost project-development skills after going so long without building. Southern California Edison’s Fohrer said that his utility would be expanding its skill set over the next few years.

“We’re focusing on skills that we didn’t have before. … We’re looking at $2 billion budget with projects of $700 million. … We have to rebuild project management skills.” Fohrer said the utility had been engaging in only million- dollar projects previously.

In fact, many of the CEOs who chaired panels during the conference expressed the need for expansion in power project or construction skills. Others were extremely optimistic that they would be able to build effectively. TXU CEO John Wilder boasted that his company’s management expertise on planned coal plants would mean returns of 15 percent, whereas other competitors operating within ERCOT (the Electric Reliability Council of Texas) might earn only 5 percent. Wilder saw some opportunities in the “merchant” coal space throughout the country, but he may have been the only executive who uttered the word “merchant” the entire week of the conference.

How to Spend Billions

Will power-plant development be money well spent? Fohrer said his company would spend $2 billion per year for five years on transmission, distribution, and generation. The CEO of AES said he would spend $700 million on maintaining his capital investment, $150 million on environmental compliance, and possibly more than $1 billion on new capital projects. Progress Energy claimed $1.5 billion in future capital expenditures over five years. And Cinergy’s CEO said he’d spend $5.4 billion over five years (50 percent of that on maintaining the capital infrastructure.)

Those sums