By Michael T. Burr

President Barack Obama on Oct. 1, 2009, asked the Environmental Protection Agency (EPA) to draft new rules for regulating greenhouse gas (GHG) emissions.

The announcement represents a challenge to Congress to push climate legislation forward quickly—in advance of the United Nations Climate Change Conference in Copenhagen, Denmark, scheduled for December 2009. The House passed the Waxman-Markey American Clean Energy and Security Act in June, which would create a carbon cap-and-trade program and would impose a federal renewable energy standard. The Senate is considering similar legislation, but whether it will reach a floor vote this year remains uncertain.

Of course, these developments are huge news for the U.S. utility industry, but they aren’t happening in a vacuum. U.S. climate policy has evolved during the past several years through a series of lawsuits and state and federal policy initiatives. Here’s how we got here:

2003-Present, RGGI Forms: Then-Gov. George Pataki of New York proposed creating the Regional Greenhouse Gas Initiative (RGGI). During the next several years, RGGI evolved into a coalition of 10 states that have committed to implementing a CO2 cap-and-trade program. RGGI started auctioning emissions credits last year.

2003-2007, Massachusetts v. EPA: The EPA denied a petition by several states asking the agency to regulate GHG emissions from new motor vehicles as a pollutant under the Clean Air Act. Petitioners appealed the EPA decision all the way to the U.S. Supreme Court, which in April 2007 ruled the states had standing as injured parties to bring the lawsuit, and clarified EPA’s authority to regulate GHGs under the Clean Air Act.

2005-Present, California Kyoto Pledge: California Governor Arnold Schwarzenegger signed an executive order in 2005 committing his state to reduce its GHG emissions to 1990 levels by 2020. “I say the debate is over,” he told delegates at the United Nations World Environment Day Conference on June 1, 2005. “We know the science, we see the threat and the time for action is now.” Of course Schwarzenegger was wrong; the debate wasn’t over. The Bush administration EPA blocked the state’s GHG rules, but this summer the Obama EPA reversed that ruling and allowed California’s standards constraining auto GHG emissions to go into effect. More California rules are expected next year, and more than a dozen other states are using California’s regulations as a template for enacting their own GHG constraints.

2003-Present, Connecticut v. AEP: In 2004, another group of state attorneys general filed suit against several electric utilities. In that case, the plaintiffs alleged the utilities’ CO2 emissions contribute significantly to global warming, a “public nuisance” under common law. And last month, on Sept. 21, 2009, the 2^nd Circuit Court of Appeals agreed the states have standing to sue under common law, and that the case should go to trial to determine whether the defendants’ emissions constitute a public nuisance.

2009, EPA Reporting Rule: One day after the 2^nd Circuit’s decision in Connecticut v. AEP, EPA Administrator Lisa Jackson signed a final rule that will require GHG emitters to start measuring and reporting their GHG emissions beginning in January 2010. Although the rule doesn’t establish limits or require reductions, it sets the stage for federal GHG regulations—whatever form they might take.-MTB

Posted: October 2nd, 2009 under Current News, Uncategorized, carbon regulation, climate change, energy policy, regulation, renewables.
Comments: none

Fortnightly subscribers: access full report here

Not a subscriber yet? Sign up here for a free trial subscription, and we’ll provide access to the full report.

Sept. 1, 2009

FOR IMMEDIATE RELEASE

Contact:
Michael Burr
burr@pur.com
320-632-5342
Public Utilities Reports Inc.

Fortnightly 40 Survey: Utility Balance Sheets Strained by Growing Expenses, Declining Sales

 Cost pressures portend contentious rate cases.

Vienna, Va.: Share values among America’s utility, gas and power companies have outperformed the broader market since the financial crisis began one year ago. Maintaining this performance, however, might become more difficult in the months ahead, according to a report published in the September issue of Public Utilities Fortnightly magazine (www.fortnightly.com).

The fifth-annual Fortnightly 40 study, sponsored by Accenture, ranked the four-year shareholder value performance of U.S. investor-owned utilities (IOUs) and other companies active in electric power and gas industries. The C Three Group of Atlanta, which along with Public Utilities Fortnightly developed the F40 financial model, analyzed the annual reports of 85 companies to compare a series of shareholder-value metrics — such as profit margin, dividend yield, return on equity (ROE), return on assets (ROA) and sustainable growth.

Companies leading the F40 ranking this year included DPL, Energen and PPL. Ranked among the top 40 for the first time was NRG (32), and returning to the ranking after a year’s absence were Mirant (21) and AES (37) — three companies with heavy exposure in wholesale power markets. Conversely, Alliant and Northwest Natural Gas slipped to the bottom of the F40 after ranking in the high 20s last year.

The F40 metrics — combined with supplementary 2009 data — showed the industry remains financially robust despite a substantial decline in stock prices. Cap-ex spending among the Fortnightly 40 companies grew by nearly 30 percent in 2008, topping $49 billion, and the entire industry’s cap-ex increased 17 percent to nearly $94 billion. At the same time, equity returns among the top 40 companies declined only slightly, from 15.4 percent in FY2007 to 14.6 percent in 2008.

Notwithstanding these strong figures, economic forces are putting pressure on balance sheets. Kilowatt-hour deliveries have declined rapidly in many parts of the country — with residential consumption falling by as much as 8 percent in the second quarter of 2009, and industrial sales dropping at double-digit rates. These trends, combined with the costs of ongoing cap-ex programs, pushed the industry’s total net cash flow deeper into negative territory, from -$10.2 billion in FY2007 to -$19 billion in FY2008. Yet, despite this decline in free cash, utilities have continued growing their dividend payouts — albeit at a slower pace in the first half of 2009.

To protect dividends, companies are delaying spending projects and tightening operating budgets. “We’ve consolidated spending decisions among our plants,” said Paul Barbas, CEO of number-one ranked DPL Inc., parent of Dayton Power & Light in Ohio. “We have an engineering team for our entire business that stacks up investments on a fleet-wide basis.”

Additionally, some utilities have cut their payroll, and a few have been forced to slash dividends — a move applauded by rating agencies but abhorred by shareholders. The Fortnightly 40 study concludes that future financial performance — including the sector’s generous dividends — will depend as much on regulatory relationships as it does financial management.

“Utilities need regulators to make them whole for lost revenues, and also to finance the industry’s transition to a greener operating model,” said Michael T. Burr, Fortnightly’s editor-in-chief and the F40 study’s author. “The result will be rising rates — an unpopular move in any economy, and a political nightmare during a recession. Continued strong performance will depend on balancing customers’ need for clean and affordable energy supplies against utilities’ need for low-cost capital.”

The 2009 Fortnightly 40 Ranking
Copyright 2009, PUR Inc., Vienna, VA, All Rights Reserved. Permission to cite the F40 table in whole or in part is granted to publications that acknowledge the source as follows:

Public Utilities Fortnightly magazine, September 2009 (www.fortnightly.com). Sponsored by Accenture, with methodology and analysis provided by the C Three Group.

1  DPL
2  Energen
3  PPL
4  National Fuel Gas
5  Exelon
6  FirstEnergy
7  Entergy
8  New Jersey Resources
9  Southern Company
10  Questar
11* CLECO
11* Equitable Resources
13  Edison International
14* MDU Resources
14* TECO Energy
16  Dominion Resources
17  Public Service Enterprise Group
18* Allegheny Energy
18* Sempra Energy
20  AGL Resources
21  Mirant
22  Nicor
23  OGE Energy
24  UGI
25  NStar
26  South Jersey Industries
27  Delta Natural Gas
28  Centerpoint Energy
29* DTE Energy
29* PG&E
31  El Paso Electric
32* NRG
32* SCANA
34  WGL Holdings
35  MGE Energy
36  Vectren
37  AES
38  Northwest Natural Gas
39* Alliant
39* Ameren

* Indicates statistical tie among category ranks. Because the 39th position was a tie, the 2009 Fortnightly 40 contains no 40th rank.

PUBLIC UTILITIES FORTNIGHTLY (www.fortnightly.com), published by Public Utilities Reports Inc., in Vienna, Va., is the journal of record for the U.S. utility industry, providing authoritative, in-depth analysis of trends in generation, transmission and distribution of electricity and natural gas. For more than 70 years, Public Utilities Fortnightly has delivered exclusive interviews and expert analysis to help utility-industry executives and regulators decide where to invest, how the industry will be regulated and what the future holds. Subscription Rate: $169/year.

Posted: September 2nd, 2009 under Current News, Uncategorized, bear market, credit crunch, finance crisis, investment banks, recession, utility stocks.
Comments: none

By John H. Herbert

Traditionally, when Wall Street is stuck in a bear market, utility stocks enjoy relatively strong performance. But will utilities maintain their defensive posture when talk of a recession turns into reality? The answer may be no, because the most pressing current economic problems—specifically a declining housing market, cratering credit markets and rising commodity prices—all create special problems for maintaining utility profits.

Utility companies’ current and future net income increases roughly in proportion with floor space. In other words, new homes and additions to existing homes create more demand for electricity and natural gas—not just this year but in future years.

Annualized sales of new single family houses fell to only 604,000 units in December 2007. Compare this to the record level of nearly 1.4 million homes in July 2005. During that same period, large additions were being built onto existing homes across the country. Accordingly, the Dow Jones Utilities Index during this period was posting gains 16 times greater than the Dow Jones Industrial Average.

In December 2007 floor space additions from new homes were so low that they probably didn’t cover the decline in floor space from physical depreciation of existing homes. This declining trend is not likely to reverse anytime soon, based on the large and growing stock of unsold homes.

Furthermore, much of the recent decline in housing activity is associated with credit problems in the mortgage market, and these problems have spread to other credit markets. For example, credit card interest rates and fees for many utility customers have increased. These costs have risen along with inflation in prices for gasoline and other basic commodities that utility customers purchase.

These pressures may affect utilities’ collection rates and bad-debt expenses, as utility customers put off the timely payment of utility bills. They know they can do this because most will continue receiving service even if their payments are overdue. Others will not pay their utility bills at all, because they will abandon houses they can no longer afford. Increasingly late payments and uncollectible bills will reduce utility cash flow, increase short term borrowing requirements and trim income.

The Federal Reserve has lowered the federal funds rate over the last six months primarily to shore up financial markets. Yet utility costs of capital have remained relatively steady, as financial institutions have built a larger spread into loans to balance perceived market risks and offset mortgage-market losses. Moreover, the Fed may need to increase rates in the second half of the year if prices for energy and other basic commodities remain elevated, and if core inflation stays above the Fed’s target level. This could boost utility borrowing costs and reduce utility income. Interest rate hikes appear increasingly likely as economists at the Fed and elsewhere focus more on stagflation, which has re-emerged as an economic bugaboo.

Thus until credit markets, housing markets and inflation stabilize, investors should not count on utility stocks remaining defensive.

Editor’s note: Certainly rising interest rates would put pressure on the utility industry’s cost structure. By itself, that wouldn’t end utilities’ role as a defensive investment. Rather, capital costs are only one factor in a complex set of forces driving up overall costs and complicating utility rate cases—and therefore utilities’ value proposition. To the degree the U.S. economy contracts, regulators will be increasingly reluctant to grant favorable rate treatment for expected capital expenditure plans. Shareholders may need to wait several months longer to ride the wave of a growing rate base. -MTB

Posted: March 11th, 2008 under Current News, utility stocks.
Comments: none

By Courtney Barry

Environmental advocates in Texas are crying “bird kill!” over potential damage to a fragile ecosystem caused by proposed wind turbines. But is that really the issue driving opposition?

Aligned as “Coastal Habitat Alliance,” environmentalists, Audubon Societies, and the 825,000 acre King Ranch in South Texas seek to halt progress on two planned wind projects. The wind farms would put more than 600 turbines on 60,000 acres of land located near Corpus Christi. Last December the Alliance filed suit in both federal and state court, naming several defendants, including the PUC, the Texas General Land Office (which oversees wind farm development), and the projects’ developers and investors. David Newstead, of the Coastal Audubon Society, a member of the Alliance, says the projects could affect as many as two to three hundred bird species. Now ranchers and landowners are showing up at hearings, challenging the wind facilities on environmental grounds.

Jack Hunt, CEO of King Ranch, claims the sited area is “full of wetlands, endangered species, threatened species, migrating birds, and over wintering birds…We recognize the value of wildlife.” But reviewing the case history, before the talk of an environmental assessment, and before a public relations firm started fronting media questions for the Alliance, a long economic thread becomes evident. Early challenges to the wind projects raised concerns about hunting revenue loss, and tax abatements. Environmental concerns were raised too, but Hunt also acknowledged biodiversity is why King Ranch is world renowned as a hunting destination favored by presidents, foreign dignitaries, and CEOs. Indeed, hunting at the ranch bring in five times as much revenue per acre as cattle-raising does. That ability to command a hunting premium will be affected by the turbines, Hunt said. He also opposes hefty tax abatements for project developer PPM, claiming they will cost the county millions in tax revenue.

And from the King Ranch’s point of view, it doesn’t help that the neighboring Kenedy Ranch, where the turbines will be situated, stands to garner all the profits—between $1,200 and $5,000 per turbine each year, according to sources.

Still, ecology is the binding factor for the Alliance, and many people say the siting is just plain wrong. Ned Ross of FPL, which has scouted regions for wind, and has significant wind development in Texas (Panhandle region), says FPL was not interested in developing the area around the Gulf Coast, for various reasons including avian activity. Ross, aware of all the dissention created by the lawsuits, says “The courts are going to have to make a call on that.”

A hearing on the merits in the state case is set for March 5, focusing on the original transmission line order handed down from the PUC, and whether the Alliance can intervene, says Doug Fraser, assistant attorney general handling the case for defendant PUC. In the federal case defendants have filed a motion to dismiss, but the court has not yet scheduled a hearing date.

In related news …
Hunting & Fishing Groups Call for GHG Regulation

Posted: February 18th, 2008 under Current News.
Comments: none

A recent consumer backlash against demand-response programs in California seems to have caught the industry off guard. The blogosphere (and some traditional media) erupted in a rhetorical bacchanalia after the California Energy Commission proposed including programmable thermostats in the state’s new building codes.

This episode shows just how badly informed consumers are about electricity — and more specifically, about the value of smart meters, time-of-use rates and demand-response programs. It should serve as a wake-up call to the utility industry and its policy makers, who have given almost no attention to public-perception questions in the effort to advance the smart grid.

The fact this occurred in California is all the more revealing. One of the country’s greenest-thinking and most tech-savvy states — the state that commercialized windpower and gave us Menlo Park and Silicon Valley — rightfully should welcome smart meters with open arms. Instead, an inherent distrust of public institutions — and probably a lingering hangover from the California energy crisis — set the state’s demand-management proponents back on their heels.

It seems many California consumers don’t accept anything the industry says at face value — particularly when higher electricity rates are at stake. Claims of environmental benefit seemed only to raise the level of suspicion — invoking images from George Orwell’s 1984, and the more obscure (and much funnier) Brazil, a film directed by Terry Gilliam.

The backlash also might have been fueled by the concerns of civil libertarians and medical marijuana advocates in California, who fear utilities will give time-of-use metering data to drug-enforcement agencies seeking marijuana growing operations. Some Canadian jurisdictions already do this as a matter of course, while others focus on power theft rather than metered use of electricity related to clandestine activities.

Few consumers would argue with using the smart grid to detect power theft. But the industry must walk a fine line. If consumers perceive the smart grid as a truncheon in the hands of the green police — whether that green is the color of cannabis or the environment — they’ll disregard the technology’s conservation and efficiency benefits faster than you can say “doubleplus ungood.”

If the industry finds itself playing defense like the California Energy Commission did in January, then the smart grid revolution could be over before it even begins.

Posted: February 1st, 2008 under Current News.
Comments: none