Regulation

IIt’s ironic that in today’s market, as the cost of hedging against commodity price increases has declined, support for utility hedging programs has sunk to a historic low. The ideal time to hedge is when prices are low and markets are relatively calm, because that’s when hedging costs and risks are the lowest. Conversely, waiting until prices rise and markets become volatile will expose customers to higher costs. Convincing regulators to approve hedging programs now will require a collaborative approach to educating and enlisting support from stakeholders.

By some measures, merchant power assets look like a bargain, selling for well below their replacement cost. But whether low prices signal a buying opportunity or a value trap depends on the outlook for electricity demand growth—not just in the long term, but also in the fairly immediate future.

Six years after Congress granted FERC “backstop” siting authority for electric transmission projects in the Energy Policy Act of 2005, the regulatory landscape is still evolving as a result of federal court decisions and new FERC orders. But despite a lack of certainty at the federal level, project sponsors have filed numerous applications at the state level for new transmission projects. Can these projects proceed without greater certainty at FERC?

New air quality regulations, including the Cross-State Air Pollution Rule, have prompted substantial investments in emission control upgrades. But a series of additional standards—for mercury, toxins, cooling water and ash residue—are driving delays and shutdowns in the coal-fired power fleet. Investment decisions depend on a clear understanding of where EPA is headed, and how the new regulations will affect generators’ costs—and market prices.

Federal and state regulators play a critical role in the evolution of the smart grid. Lawmakers face a host of questions, from deciding who owns consumer data and how it can be used, to defining a new range of regulated and unregulated utility services and applications. How much regulation will be needed to manage the transformation to a smart grid? And how much regulation will be too much?

Under business-as-usual regulation, electric utilities must file more and more rate cases to keep up with rising costs. New approaches provide for modest but stable recovery of costs outside rate cases, while providing ongoing regulatory oversight and creating strong incentives for utilities to efficiently manage construction projects.

The next decade will bring serious disruption to the utility industry. But with cooperation from regulators and legislators, utility companies will be able to shift their business models to capture significant value—both in existing businesses and emerging ones.

When regulators grant changes to utility rates of return, they estimate growth on the basis of gross domestic product (GDP). But do utilities have any chance of growing at the same pace as GDP? The answer is no — with huge consequences for utilities and their consumers. With equity costs outpacing allowed rates of return, utilities aren’t being valued correctly. As a result, the industry risks falling behind other sectors in terms of infrastructure investments and technology innovation.