Edison Electric Institute (EEI) President Tom Kuhn and other EEI officers today briefed Wall Street analysts on the U.S. power sector’s top priorities in the coming year, noting the sector’s strong financial performance in 2011 and setting out an ambitious agenda for 2012.
“Utilities delivered a very strong performance last year, and we’re investing heavily to bring customers a more modern, cleaner and reliable electric grid and give customers more choices about how they use electricity in the future,” Kuhn said.
Kuhn noted that, from a bottom line point of view, 2011 was outstanding. The EEI index of utility stocks produced a total return of 20 percent for the year—compared with the Dow’s return of only 8 percent and the S&P’s return of slightly more than 2 percent. “There were a number of factors that continued to support utility share prices – and I think that we can credit the extension of the lower tax rate on dividends at the end of 2010 as a key factor, and this will be a major priority for us again in 2012.”
“Higher federal taxes on dividends would very likely compromise utilities’ ability to raise capital needed for investments in new clean energy infrastructure, “Kuhn said. “It also would force utilities to rely more on debt financing than equity capital, which could weaken utility balance sheets and raise the cost of capital.”
Kuhn also noted that strong dividend yields continued to help support utility stocks. The industry’s dividend yield at year-end 2011 stood at 4 percent, and 32 utilities increased their dividend last year, extending the industry’s eight-year trend of widespread increases. All 55 EEI Index companies paid a dividend in 2011, the first time on record that this has occurred.
Making Investments, Managing Risk
EEI Vice President of Finance and Energy Supply Richard McMahon said the industry’s broader long-term outlook remained strong, as well. “We face enormous capital requirements to fund the initiatives to build a cleaner generation fleet; transform the grid; construct transmission; meet new environmental requirements; and create infrastructure for electric transportation,” he said.
“Investments today by our industry total approximately $80 billion per year on infrastructure—about twice the amount that we spent in 2004,” McMahon said. He added that the power sector’s capital investment programs also were a source of high-quality jobs and often produced the largest employers in a given state.
Given the industry’s projected capex, maintaining access to capital on reasonable terms was vital, McMahon said. Among the factors that will have a major influence on this goal in 2012 and beyond is the implementation of the Dodd-Frank Act. EEI has led the fight to maintain utilities’ ability to use over-the-counter (OTC) derivatives
contracts to manage commodity risk on behalf of their customers.
“We’ve been working with our member companies and with Congress to preserve our ability to use OTC derivatives and ensure that energy end-users are not miscast as ‘swaps dealers’ in rules that are being written to implement Dodd-Frank,” he said. “The House Agriculture Committee recently approved bipartisan legislation that would accomplish these goals, and we’ll keep working with House and Senate lawmakers in hopes of enactment this year.”
Also factoring into the capex equation, McMahon said, were persistently low natural gas prices that have helped to mitigate the rise in customer rates needed to finance elevated capital spending. “While most analysts now predict that natural gas prices will remain low over the next few years, we clearly recognize that any significant increase has the potential to boost the fuel cost component of rates and renew the more confrontational regulatory politics seen in some jurisdictions several years ago when power prices were forced upward by surging natural gas prices,” he said. For these reasons, in addition to the recent upsurge in natural gas and renewable energy investments, the industry is working to maintain a diverse fuel mix that includes new nuclear and clean coal.
“EEI will continue to work closely with the gas industry to address issues such as hydraulic fracturing, price volatility, and transporta¬tion in order to help ensure the long-term viability of natural gas supply to our industry,” McMahon said.
Retooling For The Future
EEI Executive Vice President David Owens gave an overview of some of the huge capital investments underway and the regulatory issues facing utilities at the state and federal levels.
“Utilities are retooling their generation fleets for the next 40-plus years, and as an industry we will continue to rely on a balanced, diverse energy portfolio that includes all fuels in order to ensure a reliable and affordable electricity supply,” Owens said. “In his State of the Union address, the President himself called for an ‘all of the above’ energy strategy—an approach the power sector has advocated for years.”
In the near-term, Owens said that energy efficiency remained the most readily-available, cost-effective and powerful resource to meet new electricity demand. He cited a recent report by the Institute for Electric Efficiency, which found that utility energy efficiency and demand response programs saved enough electricity to power almost 10 million homes in 2010.
Owens then turned to the topic of grid modernization, which he said already was providing benefits to utilities and their customers. “To date, about 27 million smart meters have been installed, representing roughly 23 percent of U.S. households,” he said. “For many electric companies, smart meters will be system-wide by mid-decade.”
To enable the smart grid to meet its potential, Owens said EEI would focus on the need for smart grid operability standards, data privacy issues, cyber security, and enhanced consumer education. The nation’s transportation fleet also was getting smarter, Owens said. “Electric vehicles are far cheaper to operate than conventional gasoline-powered cars, they reduce our dependence on foreign oil and, in doing so, increase our national security.”
Turning to the regulatory landscape, Owens underscored the need for timely cost recovery for capital investments. “EEI is advocating for new state regulatory frameworks that promote financial health, accelerate cost recovery, and mitigate regulatory lag.” At the federal level, Owens said the industry was working with the Federal Energy Regulatory Commission on a variety of issues, including the need to maintain reasonable rates of return on investment.
Issues And Outreach
EEI Senior Vice President Brian Wolff discussed some of EEI’s key outreach initiatives and strategies for 2012. “It is going to be very difficult getting legislation through Congress,” Wolff said. “Even so, we will be very busy working to shape legislation dealing with critical issues that eventually will have to be addressed.”
One of EEI’s biggest outreach initiatives, Wolff said, will be to maintain the lower dividend tax rates. “We are gearing up to educate lawmakers about the benefits of lower dividend tax rates and to ensure a low rate and continued parity between tax rates for dividends and capital gains.”
Wolff said the industry would reach out to utility employees, shareholders, retirees, and the millions of Americans who have invested in utility stocks. “We will be encouraging direct contact with their members of Congress to stress how important these lower tax rates are to them personally,” he said.
On smart grid, Wolff said that grid modernization efforts for the most part were going smoothly, but that there were “pockets of resistance” to smart meters due to a variety of concerns. “We have been working closely with our members to put together tools to help them address customer concerns and to communicate the benefits of grid modernization more clearly. Wolff described EEI’s newest Web site, SmartGrid.eei.org, the central component of EEI’s campaign to help utilities effectively communicate about the smart grid to their customers, the media, regulators, and policymakers.
At the core of all of EEI’s communications efforts, Wolff said, was the need to highlight the value of electricity—an effort that would comprise one of the association’s biggest communications campaigns in 2012. “Around the country, utilities are facing rising cost environments – for many of the reasons that we have outlined today. It is important for us as an industry to reinforce the value proposition that electricity and electric utilities are offering their customers,” he said.
Wolff indicated that EEI would expand its outreach efforts to every possible audience, including EEI members, industry allies and stakeholders, elected officials, the media and consumers. “We will convey the message that electricity delivers the quality of life that we have come to expect and will enhance our lives even more in the future.”
Wolff also highlighted the return this year of a major industry event designed to give Washington policymakers and regulators a better picture of the potential of innovative electric technologies and to showcase how electric power industry partnerships with technology companies are leading the nation toward a smart energy future. Powering the People 2.0, sponsored by the Edison Foundation and the Institute for Electric Efficiency, will take place March 22, at the Newseum, in Washington.
“Last year’s event was very successful in imparting information, excitement and a “buzz” around innovation in electricity. We think that this year’s session will add to that buzz,” Wolff said.
The Environmental Landscape
Turning to utility environmental issues, EEI Vice President, Environment, Quin Shea discussed the complex array of environmental policy issues facing the industry—all of which carry substantial compliance costs and will help define what the sector’s generation portfolio looks like in the years ahead.
“We are addressing a wide variety of regulations that will impact our industry’s operations with respect to the air, water, and land—nearly our entire environmental footprint,” Shea said. “This may sound daunting—and I won’t kid you, these are some major challenges—but we made considerable progress on these issues last year, and we already are building on these positive steps in 2012.”
Shea stressed that the industry’s goal was to meet each of these challenges head on—not avoid them—and to seek flexible and cost-effective pathways to compliance that keep rates as low as possible for customers. “With the continued fragile economy, we believe the need to avoid or mitigate price spikes for consumers is essential.”
The Environmental Protection Agency’s (EPA’s) most ambitious rulemaking in 2011—finalization of the Mercury and Air Toxics Standards (MATS) or “Utility MACT” rule—would continue to be front and center in 2012, Shea said. EEI’s members identified 11 priority issues in the proposed rule around which the industry came together, leading to many important changes in the final rule. “These changes will play a critical role in improving compliance flexibility, minimizing cost impacts to our customers, and helping to protect system reliability,” Shea said.
“Nevertheless, we believe the Administration is still underestimating the complexity of implementing this rule in the short time frame allowed in the rule,” he said, adding that EEI would continue to work with its members and the Administration to establish a more workable glide path for implementation.
With respect to water issues, one of the biggest regulations on the horizon deals with section 316(b) of the Clean Water Act. This rule proposes new cooling water intake structure regulations that will affect the vast majority of the nation’s existing power plants. EEI’s members were successful in making some helpful changes to the proposal, and are seeking additional improvements in the final rule, expected in July.
Another major issue, Shea said, was a decision expected late this year as to whether coal ash would be regulated at the federal level as a hazardous or non-hazardous waste. “A ‘hazardous’ designation would be devastating for coal-based generation, by dramatically increasing ash management compliance costs even though it would provide no greater protection for public health and the environment than a ‘non-hazardous’ designation,” Shea said. “And labeling coal ash as a hazardous material would virtually kill the reuse and recycling of ash in a wide variety of applications which in turn, would mean lost jobs.”
Shea noted that EEI has done significant outreach to Congress, generating broad bipartisan support for legislation that was passed by the House in mid-October. The legislation would direct EPA to establish federal, non-hazardous regulations that would be implemented by the states. A bipartisan Senate companion bill (S.1751) was introduced in late October.
Shea also flagged the climate change issue as one that “may be headed for a comeback.” EPA already has issued guidance requiring new power plants to obtain permits for greenhouse gas (GHG) emissions. In addition, EPA likely will propose GHG performance standards for new and modified sources by the end of the month, to be followed by proposed performance standards for existing sources at some future date. Regulation by EPA of stationary source GHG emissions has been challenged in court, with several consolidated cases scheduled for oral argument in the D.C. Circuit at the end of the month.
A Smart Future
Looking ahead, Kuhn highlighted what he believed to be a truly transformational trend in which utilities would continue to play a larger and larger role—the confluence of electric and information technologies. “As the power sector undergoes the transformation to a cleaner, smarter and more efficient electricity grid, we will be the backbone of the technology revolution that is sweeping the country,” he said.
Kuhn noted that appliance manufacturers such as Whirlpool, GE, Samsung and LG announced recently that they were building “smart” washers, dryers and refrigerators and other appliances that can communicate directly with the smart meter. He also cited the emergence of smart phone and tablet apps that allow customers to control their thermostats from their computers and handheld devices.
“Manufacturers and retailers realize the power of smart applications, and they are coming together to enable a smart future,” Kuhn said. “The auto industry also has embraced the technology revolution by laying the groundwork for the future of electric transportation.”
“Electricity literally is powering this transformation,” Kuhn said. “We are energized and committed to being a cleaner, more efficient and truly innovative industry that will be central to the technology revolution of this century, just as we transformed the last one.”