It’s easier to predict the future 30 or 40 years out. When 2050 rolls around, who’s going to care whether Energy Information Administration projections were right or not? It will all be water under the bridge. What we asked Jeff Sterba to do is harder: Tell us what the electric industry will be like in five and 10 years. ¶ He’s the perfect person for this mantic task. Chairman of the Edison Electric Institute for the past year, he appreciates the difficulty of balancing investor demands with consumer interests. As CEO of Albuquerque-based PNM Resources, parent company of utility subsidiaries PNM and Texas-New Mexico Power, he knows first hand what it’s like in the trenches, so to speak, with the public utility regulators. Grounded firmly by his economics education, he’s also a big believer in innovation and technology, involved for years with the Electric Power Reseach Institute. ¶ If Faith Popcorn misses a trend, it’s a blip on the marketing radar screen. If the Maya prediction for the end of the world in 2012 is wrong, we’d be happy. But if electric utilities don’t plan well for the future, life could be pretty darned dismal. Jeff Sterba’s an optimist–he thinks the industry is up to the challenge. Read on.
In the next five years…
What’s the worst mistake we could make?
Approaching the significant capital expansion that needs to occur in the same way we approached capital expansion in the 1980s. We must learn from the lessons of the 1980s in a couple of ways. First, we need to be much more transparent in terms of how we are approaching our challenges and the cost of addressing those challenges–like the cost of building resources and the approach we use with our vendors to construct those resources, as well as the costs and challenges of making the smart grid work. Second, I think we have to be very cognizant of the level of rate relief that may be required by capital expenditure programs that we all, as an industry, are looking at.
If you could change one thing about how our system works, what would it be?
I believe we need to be much more collaborative in the shaping of public policy and regulatory decision making when it comes to meeting the energy needs of our customers over the next decade. Sometimes institutions, such as regulatory or legal, get in the way of a collaborative approach. I don’t mean that the accountability requirement on the part of utilities should change, but rather that we need to develop mechanisms that create greater engagement and understanding of the public and decision makers about the options that are faced and the costs and other implications of those options.
Can the public’s expectations–reliable and affordable electric power–be met?
Yes, but I would change the question a bit. We use an equation in our company, “V must be greater than P, must be greater than C.” This means the value customers get for the services they receive has got to be greater than the price that they pay, and that price has got to be greater than its cost. If either end of that equation isn’t being met, you’ve got a problem. Whether it’s from your customers or your owners, you’ve got a problem.
PNM Resources CEO Jeff Sterba in Albuquerque, N.M., the company’s headquarters.
The expectations that our customers have in terms of value, I believe, needs to be fundamentally changed so that we are not just focusing on being a low-cost commodity provider, but rather, a high-value services provider. That means helping our customers use energy more efficiently and changing the regulatory structures that we have in place so that incentives exist to help customers minimize energy costs rather than realizing cost savings only by building new infrastructure. When we operate on the value side of the equation as well as the price side of the equation, I believe that the expectations can be met because we will reshape what the expectation of an integrated utility is.
Is there a wild card or a monkey wrench that worries you?
There are a lot of things from a policy side that create consternation for the future. One of them is certainly whether we can develop the technologies necessary to move into a carbon-constrained world and, more broadly than that, a challenge to make sure that we do not end up with decisions being made on climate change legislation that don’t recognize and understand the cost implications that will be faced. The worst situation would be for decisions to be made about climate change because it feels good and then, when customers are all of a sudden faced with the costs that are being incurred, for them to say that they didn’t know climate change would be so costly, and therefore, it must be the utility’s fault. That’s the worst situation.
Our industry must help people to understand that climate change legislation will be costly, but in spite of that cost, we need to do it, and we need to focus on the ways in which we can move to the carbon-constrained world, while minimizing the cost of that transition. That’s what we’ve got to focus our time and attention on.
Looking ahead 10 years ”
Will our electric system be fundamentally altered?
Yes. I believe it will be altered technologically and this will necessitate a change in the customer/utility relationship. The way the customer/utility relationship will be altered relates to moving away from being low-cost commodity providers to being high-value service providers and helping customers to understand the change. That’s a fundamental alteration to the electric concept.
I also believe the physical system will change because of the growing impact of distributed storage devices. Certainly within a 10-year range, we will see plug-in hybrids deployed to an unknown, but significant extent. The general cost of batteries and other potential storage devices decreases to a point where we can consider distributed storage on our system, which will then cause us to think differently about how we plan and operate the system.
If you think about one of the largest elements of inefficiency in the electric grid, it is the fact that we must plan for the largest single hazard. The N-minus-1 criteria of ensuring that we can withstand the largest single hazard creates an enormous amount of unused capacity within our system. And that situation won’t be resolved in 10 years, it will take longer than that, but I believe we will start to make significant moves toward changing how we think about that criteria.
Will a “disruptive” technology have emerged?
My personal belief is that the most disruptive technology we will face will be storage and decentralized storage. Whether it’s linked to new generation technologies or not, it’s the fundamental concept of significant quantities of storage that will change the way we must think about our electric system.
How will global economics impact our course?
They are having a dramatic impact today and I think this is something that a lot of our constituencies do not understand. The impact on the prices of aluminum, copper, steel, cement and gasoline are clear to those of us in the industry, but are not as clear to many of our customers.
When we look at the costs of new power plants going up 50 percent to 60 percent in the last couple of years, that’s a dramatic increase that is difficult to explain to customers. This increase is being caused by the extensive development occurring in other parts of the world. Plus, the interlinkage of financial markets can either contribute to or help balance out the kinds of credit perturbations we’re seeing today. So credit issues in other parts of the country can magnify the impact of the challenges that our financial markets face. Yes, global economics are affecting us in dramatic ways today, and frankly, I believe that will only continue as we all recognize what it means to operate within a global economy.
Pessimist or optimist: Are we up to the challenge?
I am an optimist. This industry is up for the challenge. We will not approach it using one single strategy, but rather through the diversity of thought that our industry represents, by working with our key constituencies, our owners, our regulators and our consumers.
We will see a number of different approaches tried. Some will work, some will fail, but as a result, if we invest appropriately in a new business model and concept for the future in which we use both supply and demand management to meet our customer’s needs, I see a very bright future for our industry and one of critical importance as we move from an era of cheap energy to an era of increasing-cost energy.