True story: At the dinner table recently, my 11 year-old son—who’s running for 6th grade student council—bemoaned the arguments he’s having with other candidates. I asked what they’re arguing about, and he said “Everything.”
“Oh really? What’s your position on the mortgage bailout.”
“It sucks!” he blurted.
I countered, “But if we don’t do it, the financial system will collapse.”
To my astonishment, he answered, “Well, sometimes it takes some pain before things can get better.”
Pundits and politicians say the current financial crisis represents a tipping point, and possibly the end of American preeminence in the global economy. Germany’s Finance Minister Peer Steinbrück said in a teleconference in late September, “The U.S. will lose its status as the superpower of the world financial system.” And in an article titled “How to Lose an Empire—Gracefully,” Forbes magazine Executive Editor Paul Maidment wrote, “While it is difficult to imagine the U.S. accepting a diminishing status gracefully, it will have to find a destiny in that seam where finance and commerce meet politics and strategy.”
But if these people are right, the financial crisis marks not just a challenge, but a moment of opportunity for America—and especially our energy and technology industries—to chart a path to a better future.
Before the financial crisis began, America faced a colossal challenge to make our energy economy more secure and sustainable—the “green revolution,” in the shorthand offered by Thomas L. Friedman in his best-selling book, Hot, Flat and Crowded. That challenge remains, and the financial crisis has raised the stakes. What will happen now? Will America seize the challenge, and marshal the forces of innovation and investment to address it? Or will we retreat from the challenge, and allow other countries to surpass America in terms of efficiency and productivity?
This question hits home for our industry in particular, because U.S. utility companies are uniquely positioned to capitalize on the opportunities of the green revolution—and in the process, to lead America out of its financial quagmire. But are we willing to lead?
In the past couple of years, the U.S. power and gas industry has begun an unprecedented wave of infrastructure investment—much of it aimed at making the utility system smarter, cleaner and more efficient. At the same time, utilities and regulators are seriously considering some major changes in the way electric power is produced and sold to customers, mostly to facilitate conservation and efficient use of resources.
In the months and years ahead, these changes and investments will encounter increasing resistance. After all, smart infrastructure will cost more to build than dumb infrastructure, and that’s money ratepayers can scarcely afford to spend during this period of economic stress. And experiments in time-of-use pricing, revenue decoupling and retail competition increase regulatory risks, which companies can scarcely manage during the best of times—much less uncertain times like these.
But as economist Paul Romer wrote, “A crisis is a terrible thing to waste.” A sure way to waste this crisis would be to pull back from the innovations and investments we’ve started. Of course decision makers bear a responsibility to ensure customers’ rates are wisely spent, but also they bear a responsibility to take a long-term view on the U.S. economy—and utilities’ role in it.
Utilities are America’s biggest industry. Our product is vital to every aspect of the economy, yet we’re stuck with an outmoded pricing system that encourages waste and overbuilding. This might’ve been acceptable when resources were cheap and infrastructure was easy to build, but those days are past. Wastefulness is a luxury our economy can’t afford in an increasingly competitive global market.
A long-term viewpoint recognizes the green revolution is exactly the right answer to America’s current financial trouble. It capitalizes on the crisis by putting America to work—that is, employing American workers, unleashing American innovation and investing American dollars in the biggest and most important project of the 21st century: building the most efficient and intelligent energy infrastructure on the planet.
Such statements might sound like platitudes, but they’re based on sober realities:
1) Supply-Chain Capacity: The economic slowdown is hurting many sectors of the economy, but for infrastructure projects this might be a good thing. Steel prices, for example, already were falling in the months before September 2008. Costs for materials and labor likely will continue falling along with slowing global demand. And as construction backlogs thin out, project sponsors will gain flexibility to negotiate prices and terms with suppliers and contractors.
In short, the Big Build just got cheaper, and smart companies will take advantage of better prices by accelerating development plans. Regulators and ratepayers should demand it.
2) Risk-Adjusted Returns: Investor owned utilities offer an amazingly attractive investment in the current market. Where else can investors place huge amounts of money and get total shareholder returns exceeding 20 percent a year, including rate-regulated equity returns in the 10 percent range? Compared with other investments in today’s volatile and bearish market, utility stocks are a no-brainer investment.
Likewise, this market presents a unique opportunity for IOUs to raise equity funds for building a smart and efficient power system. In many respects, the timing is perfect for companies to issue new stock. Of course doing so might dilute existing share value in the short term, but it’s well worth it considering the industry’s golden opportunity for growth.
3) Breaking Bottlenecks: One year ago in this column (“Recession Reprieve,” October 2007) I wrote: “By slowing demand growth, a recession might give the industry time for sorely needed updates to the regulatory compact.” The same thing remains true today, but the financial crisis provides a compelling reason for regulatory reforms that will break development bottlenecks, such as:
– More rational transmission permitting and generation queue processes;
– Functional and technical standards for smart-grid and smart-metering systems;
– Rate structures and market mechanisms that foster dynamic pricing, conservation and distributed resources;
– Stable tax policies and other government mechanisms that encourage clean energy investments, and fairly apportion social costs and benefits;
– Adequate and reliable methods for funding clean- technology R&D; and
– Certainty about the cost of greenhouse-gas emissions.
Americans recognize the serious challenges we’re facing in the near-term future, and they no longer want leaders to rely on American exceptionalism to justify inaction or to dodge accountability for our problems.
Americans—including my 11 year-old son—know that any worthwhile achievement requires some measure of sacrifice. They’re ready to make sacrifices for a long-term vision that strengthens America, and raises our chance for prosperity in an increasingly competitive world.
America’s utilities have begun gradually transforming themselves into something smarter and more efficient. Now the financial crisis calls our utility executives and policymakers to exert leadership, and escalate the industry’s transformation into a full-blown green revolution.
Utilities, America is calling. It’s time to lead the way.