By Warren Causey and Ken Silverstein
Financial crises are never welcome. That’s particularly true at the critical junction that the utility sector now finds itself: In dire need of expanding its generation, transmission and distribution infrastructure so as to meet the expected future demand for power.
It’s also scary to be squeezed for capital at a time when regulators want the utility industry to invest in modern pollution controls. With capital and liquidity scarce, where is the money going to come from?
From a traditional economic standpoint, there are two possible scenarios: The first is to hunker down and just wait for the storm to pass. When the coast is clear, use recovering resources to get the job done. The second is that the strongest ones will go out and find good assets right now and at bargain prices – the Warren Buffett model.
Unfortunately, utilities have just emerged from the post-Enron deregulation financial morass and, with a few exceptions, generally are not strong enough to follow the Buffett model. Already, in rapid fire, two (Constellation and Reliant Retail) are near collapse and a host of others are cutting back sharply. Being regulated entities, utilities operate on relatively narrow margins tightly controlled by regulators. They are not cash cows in the Buffett model.
Regardless, it’s going to be a mammoth effort just to keep the lights on, as noted by the North American Electric Reliability Corp. (NERC). NERC says that by 2015 the country will need an additional 141,000 megawatts to accommodate an expected 19 percent increase in electricity usage. Only 57,000 megawatts are on the drawing board, including renewables. And while transmission miles are expected to increase by 8.8 percent over the next 10 years, NERC says that is not enough.
In addition to the projected generation shortfall, utilities face a myriad of other problems, including aging infrastructure (all the way from generation plants to transmission and distribution circuits) and an aging workforce with few replacements readily available. Fuel prices have escalated sharply. It’s never been easy to build/rebuild large-scale, expensive infrastructure. But add a financial crisis to the equation and the process is even more complicated.
Finally, utilities are being pressured from many sides to embrace expensive new, and sometimes questionable, technologies to mitigate real and/or imagined environmental threats and concerns.
The “hunker down” option seems the only one readily available to utilities and one they already are beginning to embrace. JEA in Jacksonville, FL, one of the leaders in advanced technology, announced Thursday that it is slashing its capital budget from $700 million to about $183 million, primarily because difficulty in financing municipal bonds in the current credit crunch. Others are likely to follow suit. Credit is drying up for everyone, including utilities. JEA’s announced plans are likely to be reflected at a number of other utilities. Those plans include:
• Reduce/freeze capital spending
• Reduce/freeze hiring, including replacements for the next 12 months
• Reduce the temporary and contract work force
• Reduce or redeploy staff where possible
• Freeze consulting contracts, evaluate and reduce or eliminate where possible
• Cut non-mission-critical expenses
• Defer non-mission-critical repair and maintenance expenses
It is true that the U.S. utility industry is the second largest in the nation with more than $300 billion in annual revenue. However, with the numbers being thrown around in Washington being counted in trillions rather than billions, it puts a different perspective on utility revenue. The so-called “bail-out” bill is more than twice the annual revenue of all U.S. utilities, and that was just one of the major “bail-outs.”
A “hunker down” model for utilities is also going to require that other businesses hunker down as well, if they want to keep the lights on. Until the worldwide economy recovers, it just isn’t going to be possible to shift to a “carbonless” generation model. The costs would be very high in a good economy. In a failing one, they are prohibitive.
The idea of redirecting our energy resources in such a way is a noble one in many corners. So is the idea that the nation needs to prepare for better times by expanding its infrastructure and by developing a new generation of energy workers. But those missions now will have to downshift until we get through the current financial turmoil.
It’s time for everyone, including environmentalists, to take a deep breath, step back and wait until economic conditions improve before anyone embarks on a pathway that will be extraordinarily expensive—carbon free in 10 years just isn’t going to happen and isn’t realistic. Utilities can’t afford it, nor can the rest of us who ultimately pay utility bills, taxes and everything else. It’s time everyone hunker down and pray the lights stay on.
NOTE: This blog was written jointly by Ken Silverstein and Warren Causey. However, it is not possible to post it jointly and have both our photographs and bylines to be included. Therefore Ken and I both are posting it separately. However, the versions are identical, as agreed.
Thanks for the input. I disagree with your conclusion, as can be found on the EWPC article "U.S. Presidential Elections and the Need for a Global Energy Deal (please hit the link http://www.energyblogs.com/ewpc/index.cfm/2008/10/... )," whose summary reads "The new president of the United States needs an Energy Secretary of high caliber that knows what he is talking about."