Power regulators need new thinking for historic investment, report says

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By Jon Hurdle

AOL Energy

 

U.S. electricity regulators face historic challenges over the next 20 years in helping to guide an estimated $2 trillion in investment to renew or replace aging infrastructure, ensure industry compliance with increasingly stringent environmental regulations, and adopt smart-grid technologies, according to a new report from the sustainability think-tank Ceres.

 

With the enormous investment by both investor-owned and public utilities, regulators should take a new approach to managing the risks of both the costs of new infrastructure and the time it takes to install it, the report said.

It warns that the industry faces risks from seven broad sources that reflect the new operating environment. They include the costs of construction, fuel and operation; emerging regulation including air and water quality and waste disposal; government limits on greenhouse gas emissions; the availability of water; the cost of capital, and the risk that load forecasts will be inaccurate because of changes in consumer demand or competitive pressures.

"To navigate these difficult times, it is essential that regulators understand the risks involved in resource selection, correct for biases inherent in utility regulation, and keep in mind the long-term impact that their decisions will have on consumers and society," the report said.

Abundant risks require new approach
Lead author Ron Binz, former chairman of the Colorado Public Utility Commission, and now a consultant to the industry, said the report is intended to convey the "immensity" of the challenge facing regulators; the risks inherent in decisions about utility resource acquisition, and the need for regulators to take a more "legislative" rather than "judicial" approach to decision making that involves all stakeholders.

Among the participants should be air-quality boards - which will provide valuable input on the siting and operation of power plants – and financial analysts, both on the fixed-income and equity sides, Binz told AOL Energy.

"We need openness to make sure we are fully informed," he said.

Binz urged regulators to move away from established modes of decision making that were designed for "a different set of circumstances that are going away" and to adopt risk-analysis tools "that we think are under-used.

The report accepts the $2 trillion estimate put forward by the Brattle Group in its 2008 report on transforming America's power industry, and is the first since then to examine the implications for regulators

The huge outlays – which are expected to double the net invested capital in the U.S. electricity system by 2030 – will mean sharply higher retail electricity prices but that's likely to run into resistance from consumers who are accustomed to cheap power and will be reluctant to cut into their disposable incomes.

To read about an electrical grid upgrade project in Canada that addresses some of these issues, click here.

Customers' reluctance to pay more may create financial difficulties for utilities that have invested heavily, hurting their credit ratings, and hindering their ability to make further investments, the report said.

It therefore falls to state regulators to ensure that the needed investment is made wisely.

"Poor decisions could harm the U.S. economy and its global competitiveness; cost ratepayers, investors and taxpayers hundreds of billions of dollars; and have costly impacts on the environment and public health," the report warned.

"This is no time for backward-looking decision making," said Susan Tierney, managing principal of the Boston consulting firm Analysis Group, in a foreword to the report. "It is vital – for electricity consumers and utilities' own economic viability – that their investment decisions reflect the needs of tomorrow's cleaner and smarter 21st century infrastructure, and avoid investing in yesterday's technologies."

 

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