Pass the buck

Robert W. Smock
Vice President
Global Energy Group – PennWell

It’s time for electric utilities to increase investment significantly in generation, transmission, and distribution facilities.

The federal government is showing signs of taking energy policy seriously. Many states have awakened to the need to improve electric industry infrastructure. Consumers are demanding an improvement.

But the electric supply situation will not materially improve unless regulated electric utilities increase their capital investment in their infrastructure. The truth is that utilities have pulled in their horns. Investment in electrical transmission, for example, is half what it was 10 years ago.

What about the boom in investment in new power plants? Very little is from regulated electric utilities. Non-utility merchant power plant developers dominate that boom. It’s true that many of those companies are owned by holding companies that also own regulated utilities-some of which have the same name as their utility sister companies. They are not utilities. They do not have an obligation to serve the electricity consumer. I’m talking about regulated electric utilities. It’s time they step up to the plate. Utility management has been strangely silent on this subject and it’s time to start talking about it.

Utilities have no money to spend? Oh yes they do. Between 1999 and 2000 total utility revenues increased by 32 percent and earnings per share increased 11 percent to $2.35. One good year? Utility average return on equity is the highest it’s been in 10 years. Utility dividend yield is three times greater than S&P 500 average.

It is very easy to point a finger outside the utility industry and blame others, chiefly government officials, for placing obstacles in the way of investing in new and upgraded facilities. It is easy to blame the lack of capital investment on the uncertainty caused by deregulation.

In my opinion, a good share of the blame for the dangerously low generating reserve margins currently plaguing the U.S., for the inadequate transmission capacity, and for the reliability collapses of our distribution systems lies with electric utility management and their refusal to spend money on their own electrical systems.

The U.S. Department of Energy says we’ll have to build 393,000 MW of new generating capacity over the next 20 years to meet demand growth. That’s based on DOE assumptions about demand growth that have been consistently too low for the past 10 years, at least. Several hundred thousand megawatts of new generating projects have been announced to meet this demand. Most of those announcements will fall by the wayside if past form holds true. The remaining 100,000 MW is dominated by natural gas fueled combined cycle power plants to be built and operated by independent, merchant power companies. Natural gas production will have to increase by about 50 percent to serve this and other growth in gas demand. Natural gas production in this country has been flat for decades. It is going to take a Herculean effort to make this new, gas-fired generating program a reality. Gas-fired combined cycle generation is a wonderful option, but it will only take us so far.

Beyond gas, we must turn to coal and possibly nuclear power as energy sources for new power plants. That means some serious investment by electric utilities. We cannot meet electric power demand without participation by the regulated, vertically integrated electric utilities, which still dominate the electric supply industry in the U.S.

The investment needed in new and upgraded transmission and distribution facilities can only come from regulated utilities. There are no independent power delivery companies to take up the slack. There probably never will be. Even under the ISO structure the owners of transmission assets and the parties responsible for capital investment are electric utilities.

There’s no avoiding this responsibility. The national spotlight is on energy supply in general and electricity supply in particular. Electric utilities must increase capital investment in electrical facilities.

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