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Twist and Sulk

A fearful economy cries for industry leadership.

Fortnightly Magazine - October 2011

securities and driving yields downward. With lower interest rates, corporations and consumers are supposed to borrow money to buy things like durable goods and real estate.

The problem with this strategy, of course, is that low interest rates have lost their power to fuel growth in an economy where people are too fearful to spend money, much less borrow it. People are afraid the economy is going into a double-dip recession—or maybe a protracted period of stagnation, à la Japan’s lost decade—and that fear is becoming a self-fulfilling prophecy of doom as families cut spending and corporations hoard cash instead of putting it to work.

Adding insult to injury, political forces are causing this vicious cycle to spin faster. The two parties are engaged in an all-out war to control Congress and the White House. But while grandstanding and stonewalling might make good politics, they’ve squelched America’s chances for a timely economic recovery. This summer’s embarrassing budget standoff deepened our sense of uncertainty; conflated concerns about deficit spending at a time when unemployment is the more acute problem; and weakened America’s hand in global economic and security matters.

So here we are—hoarding cash and waiting for the crash.

To be fair, utility companies are facing some major unanswered questions about the industry’s future regulatory framework, and few things are more paralyzing for regulated utilities than not knowing the rules of the road. Will lawmakers reverse green energy policies? Will states retreat from renewable portfolio standards (RPS) in the face of cheap natural gas and a weakening economy? Will the Environmental Protection Agency continue the Obama Administration’s tactical retreat from clean air and climate regulation, or will it draw a line in the sand and hold firm on new air quality rules? Will the Commodity Futures Trading Commission persist in its plans to regulate energy traders as derivatives dealers under the Dodd-Frank financial reform rules? Will the Federal Energy Regulatory Commission prevail in its efforts to make demand response resources a tradeable commodity in organized power markets? (See “Yes, We Have No Negawatts.”)

With such regulatory ambiguity, it’s little wonder that most utilities are stepping back from big investments or strategic moves. But on the other hand, our industry offers greater stability and bankability than just about any other business today; if a regulated rate of return isn’t enough to provide utilities the confidence they need to invest in infrastructure, then what in the world is enough?

A Time to Lead

Finance executives interviewed for this issue’s cover story (“Interesting Times ”) all agreed on one thing: utilities have pretty easy access to cheap money. Bonds are selling for ridiculously low yields, in the 2- and 3-percent range. And equity investors are clamoring for stable returns in a volatile stock market. So a lack of money obviously isn’t what’s stopping the industry from investing in infrastructure.

What’s stopping the industry is a sense of fear that’s similar to the one that has companies in other industries hoarding their cash, and the fear that’s preventing individuals from buying new homes and new cars.