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Major Utilities Continue to Look to Government-Regulated Operations for Profits

November 17, 2014
Cathy Kunkel

By Cathy Kunkel

Utility companies continue to look for ways to grow their regulated operations as a way to shift financial risks to customers.

The strategy was on stark display in Dallas last week at Edison Electric Institute’s 49th annual financial conference, where one of the recurring themes—in this new era of low wholesale power prices, uncertainty about natural gas prices, and a risky future for coal— was how many utilities are emphasizing to investors their renewed focus on regulated operations.

When a utility company sells more energy in regulated markets, it reduces its financial risks because regulatory commissions allow them to charge customers for the cost of owning and operating power plants and transmission lines, regardless of the performance of those assets.

FirstEnergy Corp.’s pitch in Dallas was classic. The company, which has been hammered by low natural gas and wholesale electricity prices, announced that 2015 will be a “transformational year” as it continues shifting its operations toward regulated holdings.

Speaking in Code

Of course, the industry does not openly say it is moving its risk from investors to ratepayers. Much of what utility executives say is spoken in a code that obfuscates what’s happening. FirstEnergy executives last week cited moves aimed at “strengthening our utilities,” for instance, code for increasing rates at regulated utilities. Likewise, “growing our transmission business” means building transmission lines to take advantage of the high customer-financed rates of return allowed by the Federal Energy Regulatory Commission. “Repositioning competitive operations” is code for FirstEnergy shrinking its non-regulated business.

Whether these strategies will really help the bottom line of FirstEnergy is questionable. As we discussed in a report IEEFA published last month, “FirstEnergy Seeks a Subsidize Turnaround,” the company’s tack is probably not going to do enough for FirstEnergy to recover from its poor financial condition in the medium term.

Exelon Corp., another company that has focused historically on competitive, unregulated electricity generation, reminded investors in Dallas that it is taking a new approach with in its pending merger with Pepco Holdings (a company that owns regulated utilities), a move that would increase its investment in regulated operations by 50 percent.

American Electric Power, Duke, Xcel and NextEra

American Electric Power announced that it won’t be building any new power plants in Ohio, where the market is deregulated. Its new power generation, if it builds any, will come in regulated states, where—again—the company is guaranteed that ratepayers will cover the cost of plant operations, regardless of performance. Worth noting:  American Electric Power earlier this year completed the transfer of its Mitchell Power Plant in West Virginia from the folds of its deregulated subsidiary to its regulated subsidiaries.

And Duke Energy, which divested itself of its competitive generation company earlier this year to focus on its regulated operations, announced in Dallas that it is considering seeking approval from regulators to add its ownership stake in shale gas reserves to its regulated operations. That would give Duke the green light to earn a safe rate of return off ratepayers for its investments in natural gas reserves. Two other companies, Xcel Energy and NextEra Energy,  are seeking approval from regulators on similar proposals.

What utilities were saying last week in Dallas, and what the industry continues to say in general, is that an array of factors—expanded shale gas production, the increasing market penetration of renewables and energy efficiency, and uncertainty about the future of coal generation—have combined in recent years to increase the risks of investments in power generation.

What they’re also saying—in language coded in a way that shields its intent—is that by making such moves, they’re off the hook for potential losses.

Cathy Kunkel is a fellow at IEEFA

Cathy Kunkel

Former Energy Finance Analyst Cathy Kunkel has written reports and given expert testimony on the finances of Appalachian natural gas pipelines and drilling; electric utility mergers, rates and resource planning; energy efficiency; and Puerto Rico’s electrical system. She has degrees in physics from Princeton and Cambridge.

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