The U.S. utility industry in its annual presentation to investment bankers and analysts last week laid its cards on the table, albeit in cynical fashion.
A “Wall Street Briefing” presented and published by the industry’s main public-relations association portrays electric companies of course as fair-minded, free-market purveyors of energy. The reality—as seen in the briefing itself—is that the industry is angling hard to rig the game to its enormous advantage.
Utilities, as outlined in the document from the Edison Energy Institute, is following two core strategies to guarantee its profits and stifle competition.
First, it is moving more aggressively into regulated markets in a bald-faced ploy to make sure its profits remain intact. The story behind this shift toward regulation is rooted in the wave of deregulation that swept the utility industry in the late 1990s and early 2000s. In states that deregulated, utilities were split up into unregulated generation companies that owned power plants and regulated distribution utilities that owned the distribution network and sold power to homes and businesses.
It’s become apparent in the past few years that the unregulated generation companies are facing a much more volatile and riskier business environment than the traditional regulated utility, whose power plants are all but guaranteed to recover their costs through electric rates established by state public service commissions. Since 2003, many major unregulated generation companies have gone through bankruptcy restructuring, including NRG Energy, Mirant Corp., Calpine Corp., Dynegy Inc., AES Eastern Energy, Edison Mission Energy, and Energy Futures Holdings.
Some companies have run for cover by shifting their footprints into regulated markets. I have written in previous commentaries here about recent paradigms of this model: FirstEnergy Corp. and Exelon Corp, two utility holding companies that own unregulated generation businesses and that have been hurt by low wholesale electricity market prices over the past several years. Exelon has invested heavily in growing their regulated operations. FirstEnergy has moved to transfer power plants from unregulated to regulated subsidiaries.
The Edison report fesses up in black and white: “Between 2002 and 2013, the industry has moved from a balance sheet that was roughly 60 percent regulated to one that’s closer to 75 percent regulated.”
It notes also that this shift toward regulated operations has been a major driver of credit-rating upgrades across the industry, ratings that increased on average in 2014 for the first time in more than a decade.
The second dark strategy Edison’s “Wall Street Briefing” openly acknowledges is the industry’s deep opposition to policies that support distributed solar generation, aka rooftop solar. Every utility that owns conventional power plants—whether regulated or deregulated — has a financial incentive to oppose competition from rooftop solar. In the case of regulated utilities, rooftop solar reduces their sales, thereby reducing the amount collected through electric rates and cutting into profit margins. For unregulated utilities, rooftop solar reduces demand for electricity and thereby pushes down wholesale market prices.
A few forward-thinking utilities, such as the reconstructed NRG, which owns almost no coal or nuclear plants, have gotten into the rooftop solar business in a serious way and found ways to profit from it. Such utilities are the exception rather than the rule, however.
In “Wall Street Briefing,” the industry reiterates its opposition to net-metering policies, which compensate rooftop solar producers at the retail rate for the electricity they produce. The document argues that rooftop solar customers should have to pay more than retail for their use of the grid, although—as noted in many pieces of research including in a recent study conducted by Synapse Energy Economics for the Mississippi Public Service Commission—the benefits to the grid of solar generation outweigh the costs.
What should the utility industry be doing—for investors and ratepayers alike—instead of what it is doing? It should be embracing the new energy economy in all its diversity instead of playing regulatory games that prop up a dying business model.
The Edison Energy Institute on its website says it stands for “a significant and positive contribution to the long-term success of the electric power industry in its vital mission to provide electricity to foster economic progress and improve the quality of life.”
The question is whose economic progress and whose quality of life.
Cathy Kunkel is an IEEFA fellow.