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....
A solution to high electricity prices in restructured states.
the regulated distribution company and the unregulated generation company would be accounted according to each company’s operating structure. For a regulated distribution company, revenue would be compared with cost of service. If the revenue exceeded the cost of service, such excess would be returned to ratepayers or could be used to finance additional energy efficiency or renewable investments. If there were a shortfall in revenue relative to the cost of service, rates would be increased to make up the difference.
And for an unregulated generation company, the revenue would belong to the company— i.e., it would produce profits or losses depending on the company’s success in building, operating and selling plant output. Experience has shown that the profit motive would assure efficient and effective operation of the plant.
Use of Rate-Reduction Bonds
Rate-reduction bonds could be included in the market hybrid approach to maximize ratepayer benefits. These bonds would be structured to achieve AAA credit ratings on the debt, thereby minimizing interest costs. Bonds of this type could be utilized in various ways as part of the market hybrid approach.
These bonds could replace the distribution company’s weighted average cost of capital, which is based on a mix of debt at an embedded rate of interest, common equity at an allowed return and preferred stock at an embedded dividend rate. The substitution of 100-percent tax-deductible debt for the distribution company’s weighted average cost of capital would give rise to substantial customer savings. An alternate approach would be for the rate-reduction bonds to be used in place of the distribution company’s debt in the capital structure used to finance the baseload investment. The investment would be financed at the weighted average cost of capital with rate reduction bonds replacing the traditional utility debt. Some combination of these approaches might be used depending on circumstances, but full substitution of the utility’s revenue requirement with rate reduction bonds isn’t recommended.
The rating agencies normally don’t view rate-reduction bonds as company debt, thereby preserving the debt capacity of the utility, which could be utilized to finance further investment in energy conservation and renewables. Rate-reduction bonds could be incorporated into the market hybrid approach to further reduce the cost of capital—a critical factor in financing baseload generation.
The market hybrid approach will allow the cost-effective construction of new, highly efficient baseload generation. This construction would be accomplished through the provision of low-cost capital and regulatory oversight associated with rate-of-return regulation and the cost control and efficiency associated with competitive markets. Rate-of-return regulation assures that only environmentally sound baseload projects, nuclear or clean coal, would be included in the cost of service.
New baseload generation is characterized by lower heat rates and higher capacity factors than existing generation. Coal-fired power plants built years ago with outdated, inefficient technologies burn inordinate amounts of coal for each unit of electricity produced. Because older, less efficient coal-fired generation frequently operates on the margin, the new efficient generation would reduce significantly both smog ( e.g., ozone) and soot ( e.g., particulate matter) pollution while producing fewer or