Over the past 100 years of US utility regulation, we’ve witnessed a great inversion of power: a once muscular administrative state has been severely weakened. In boxing terms, the utilities have won this round decisively vs big government. The financial implications are that state utility commissions and risk taking equity investors have become unnecessary. Why? Because if regulators uncritically approve every major utility capital initiative while authorizing generous returns on capital, then those jurisdictions already operate in a regime of self regulation by utility corporations. Utility commissioners are unnecessary middlemen. State acquiescence to utility self regulation may further de-risk an already low risk monopoly business. The new low risk level supports a sharp increase in leverage, eliminating the need for high priced equity investors. Maybe the capital structure for a leveraged leasing company becomes a model. But what happens with the idea of the public interest? Remember that utilities used to call themselves “public service companies” and the regulators were “public service commissions?’ How quaint that sounds. The concept of public service seems like an orphan.
We think the existing concept of the energy triad—affordability, security (of supply), and sustainability helps define the public’s interest vis a vis formerly regulated utilities. In terms of affordability, Americans spend about 3% of average household budget on electricity. This percentage will rise due to the proliferation of EVs and heat pumps and the need for more air conditioning, but it still will remain in single digits. If we think of the energy triad as boxes to be checked off, we would say that affordability and universal service have been achieved. Related: Electric Rate Hike in Virginia Makes Headlines Internationally
As for the security of supply, this also gets a check. Almost all our natural gas and coal are domestically produced. And we export both. Since US demand for power is rising, with natural gas the fuel of choice for a generation, the main risk to long-term affordability is the eventual depletion of our principal gas fields. Also, the US sits atop a roughly three-hundred-year supply of coal if the industry chooses to heed the latest admonitions from the Trump administration with respect to “clean, beautiful coal.” In short, the US, unlike many nations, can remain energy self-reliant for the foreseeable future.
And lastly, sustainability gets a check, right? Well, in all truth, not really. This is where the public’s interest is most clearly represented. At its most crude formulation, the citizens ask the corporation one thing: please don’t harm us with your product or its pollutants. And if you must at a societal level harm us, please do so to a minimum degree. That’s the basic argument for minimizing pollution. And if the product also exacerbates climate change (which is also hurting us) please mitigate that aspect as well. In the utility industry’s case that would be to remedy CO2 emissions, which at present is not even remotely happening. If we are correct in believing that the government will do less to regulate corporate goals to encourage sustainability (meaning to allow more pollution of all sorts), this is where the desires of many consumers clash more with utilities’ corporate goals. For investors, conflict of this sort creates the potential for financial adversity, asset write offs, or perhaps a customer migration to “greener” alternatives.
So to recap, is the public’s interest served by current electric utilities? Well, as far as affordability and security of supply, the answer is yes. But to the extent that sustainability is in the public interest, we would withhold that check. Of course, sustainability is out of style, for the moment. But, leaving aside the political and ideological aspects of the word, do you really want to work in, or invest in, or depend on an unsustainable business?
By Leonard Hyman and William Tilles for Oilprice.com
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