Infrastructure challenges are redefining utility capital-planning methods.
The electric-utility industry faces a looming capital-commitment challenge. To meet this challenge in a way that satisfies the expectations of boards, capital markets, and regulators, many utilities will need to overhaul their existing capital budgeting and management processes.
The anticipated near-term need for capital resources is at the highest level ever experienced. Rate freezes have built up a bow-wave of deferred investment. Major investments lie ahead in environmental compliance, capacity addition, grid extension, network growth, and infrastructure refurbishment. By an inconvenient stroke of timing, this need for capital renovation and expansion coincides with a rapid rise in the cost of raw materials. Moreover, at many utilities the large-project management skills that took years to develop have atrophied through retirement of critical personnel and through past capital cut-backs.
Yet while the need for capital resources is clearly rising, the capacity of the “regulatory compact” to absorb capital expenditures is constrained. Under pressure to keep overall consumer bills within a range of political tolerance as wholesale prices continue to rise, regulators are likely to tighten review standards for new, significant rate-based investments.