Financing Reliability

NASUCA Annual Meeting - 2012

Ron Binz, Public Policy Consulting

November 12, 2012 • Baltimore

Outline of this Presentation• Utility capital requirements are growing sharply

amid difficult circumstances– Reliability investments are special case of a larger trend

• A new utility business model will emerge• This challenge requires two fundamental changes

– “Risk-Aware” regulation

– A new regulatory model

• This presents an opportunity for consumer leaders

• Authors– Ron Binz

– Richard Sedano

– Denise Furey

– Dan Mullen

Available at www.ceres.org

High Stakes

• The US electric industry is entering a “build cycle” with much higher investment than in recent history– Brattle Group estimates $2 trillion by 2030

• Causes– Aging infrastructure– New transmission requirements– Demand side and smart grid – Much stronger air and water regulation, including GHGs– Fuel economics

• Challenges to utilities– Flat load growth– Distributed generation– Uncertain economy– Financial metrics less forgiving than in 1980s

The US generation fleet is aging

US Electric IOUs Rating History1970 – 2010

4%

22%

46%

27%

1%

Source: Standard & Poor’s, Macquarie Capital

AA

AA AAAA

A

AA

A

A

BBBBBB

BBB

BBB

BBB-

The Key Question

How do we ensure that $2 trillion is spent wisely?

With incentives

No incentives

CO2 costs

Notes

•Unadjusted 2010 cost estimates were used for consistency

•Costs for wind and photovoltaics have fallen sharply in last two years (faster than these 2010 estimates)

•Cost of nuclear power has risen post-Fukushima (more than these 2010 estimates)

A Catalog of Investment Risk

• Cost-related– Construction cost overruns

– Capital availability

– Operational surprises

– Fuel cost escalation

– “Bet the company” investments

– Management imprudence

– Resources limited

– Consumer reaction to rates

• Time-related– Construction delays

– Changing markets

– Environmental regulations

– Changes in load

– Technology advancement

– Catastrophe

– Contingent projects

– Government policies

Seven categories of risk used in scoring…• Construction cost

• Fuel and Operating cost

• New Regulations

• Carbon Price

• Water Constraints

• Capital Shock

• Planning

Cost Risk

Seven Essential Strategies for Risk-Aware Regulation

• Diversify utility supply

• Utilize robust planning processes

• Employ transparent ratemaking practice

• Use financial and physical hedges

• Hold utilities accountable

• Practice active, “legislative” regulation

• Reform, re-invent ratemaking policies

Utilities 2020• Foundation funded• Run by two former state regulators named

Ron

• Advised by board of experts• Goal: to explore new business models and

advocate new regulatory models to enable new utility business models to evolve.

• The Thesis: Regulation may not be up to the task– May not reward utilities for desired behavior– Society’s goals for utilities are changing; regulation is not– Progress on demand side, not so much on supply side– Lack of incentives for

• firm efficiency• clean energy investment• energy efficiency• innovation

– Rate structures need revision– Examples of “poisoned” relationship

Advisory Council Members• John Bohn

– GlobalNet Partners, LLC • Paul Bonavia

– Tucson Electric Power

• Ashley Brown– Harvard Electricity Policy Group

• Ralph Cavanagh – NRDC

• Richard Cortright– Standard and Poor’s

• Peter Fox-Penner– The Brattle Group

• James Newcomb and Lena Hansen– Rocky Mountain Institute

• John Nielsen – Western Resource Advocates

• Sonny Popowsky– PA Office of Consumer Advocate

• John Quackenbush– Michigan Public Service Commission

 • Lisa Schwartz

– Regulatory Assistance Project • V. John White

– CEERT

• Methods:– Interviews with utility CEOs and leading states

regulators– Evaluations of other systems here and abroad– Dialogues with utility execs and commissioners

• CEOs want a clearer, more consistent direction from state energy policies

• Utilities have little incentive for innovation, firm level efficiency

• Commissions need a better understanding of the utility business and its needs

• Utilities want certainty on climate policy• Utilities want healthier working relationships with

commissioners and staff

What we’ve heard from utility CEOs:

• A primary concern is with increasing utility rates• Regulators are open to modifying the regulatory

model; looking for ideas• Some commissioners are dissatisfied with the

adversarial process• Many commissioners face severe barriers to

communications with stakeholders, and even fellow commissioners

• Commissions have inadequate resources

What we’ve heard from commissioners:

Three Potential Regulatory Models

• The UK “RIIO” model– Price cap built on RPI-X– Output regulation

• Reliability, Environmental, Innovation, Price, Efficiency, Social Responsibility

• The “Iowa Model”– Seventeen years of constant rates, settlements

• The “Grand Bargain”– Comprehensive multi-year output-oriented deal– Regulator led

I look forward to your questions.

Thanks for the invitation