The NARUC Winter Committee meetings wrapped up last week, in Washington, DC.  I had the opportunity to sit in on meetings of both the Electricity Committee and the Natural Gas Committee.  I found both meetings instructive and troubling.

For those of you who have never been to a NARUC gathering (there are three of these each year), these are conferences attended by public utility commissioners and their senior staffs.  Various invitees from the utility industry, and occasionally someone from the financial community, appear to address the attendees on subjects of current interest.  A commissioner or two from the Federal Energy Regulatory Commission (FERC) also appears from time-to-time to try to fend off the specter of federal pre-emption and to talk about cooperation with the states.  Various breakfasts and lunches take place, and the evenings are a time of keen competition to attract commissioners to dinners and receptions.

And “hall talk” is, of course, abundant.

Some downplay the significance of NARUC.  I do not.  It is surprising just how much is either out in the open or is easily readable “between the lines.”

The Electricity Committee Meeting

The meeting of the Electricity Committee I attended was nominally concerned with nuclear energy issues.  And it is truly shocking to hear that despite $20.5 billion sunk into the Nuclear Waste Fund, it is unlikely that the Yucca Mountain high-level nuclear waste storage facility will open by 2018.  In fact, one speaker (Edward Sproat from DOE), stated that unless and until federal poaching (my word) on the NWF ends, it is impossible to project any opening date.

Until then, each nuclear reactor site in the U.S. is its own high-level nuclear waste dump, because the used materials are stored on-site.

Inevitably, the discussion of nuclear generation led to comments about electric generation, generally.  Distilled down, here is the “take away:”

• Any kind of base-load generation, regardless of fuel-type, is becoming increasingly difficult (read that “nearly impossible”) to site and finance let alone construct.

• State and federal environmental restrictions already on the books, proposed and anticipated, only aggravate the difficulty of generation siting and fuel procurement. 

• Coal is too “dirty.”  The areas where natural gas can be found are increasingly zoned off from drilling by the feds.  Oil is simply cost-prohibitive and needed for other areas of the economy.

• Nor is nuclear energy likely to be our salvation, because the capital costs (assuming you can find a lender) are so high as to be prohibitive.

• Likely federal legislation on carbon and particulate emission standards will place significant upward pressure on the cost of fossil-fuel based generation.

This is not to say that utilities are not planning new generation.  Many are quietly conducting site surveys and engaging in initial environmental and cost-feasibility studies.  Some have even gone so far as to put projects into the “development queue” with regional transmission organizations.  But this is a long way from building plants or bringing them on-line.

If you look at the projections of PJM here in the mid-Atlantic, electricity supply adequacy starts to get problematic in the next 5-10 years.  If you factor in high-voltage transmission line constraints, the picture becomes bleaker and the time-line more compressed.  It is not outside the realm of possibility that we could see “reliability events,” after 2011.  That is three years from now.

The Natural Gas Committee Meeting

The Natural Gas Committee Meeting dealt, of course, with production and supply issues, specifically with the future of Liquefied Natural Gas (LNG) and the Domestic Natural Gas Supply Outlook.

Unlike the presenters at the Electricity Committee, the natural gas panelists were a bit more circumspect in their predictions.  Obtaining a reliable estimate of the amount of domestic and Canadian natural gas available is difficult because a great deal of gas is effectively fenced off from exploration and development by the federal government.  However, all of the panelists pronounced on varying degrees of difficulty in obtaining adequate supplies of natural gas to meet domestic (U.S.) demand in coming years.  The supply of natural gas is, after all, finite, though no one has yet convincingly pronounced a “Hubbert’s Peak” equivalent for gas production.

Imported LNG is not and cannot be the answer.  Assuming that all of the necessary facilities for the receipt and processing of LNG take place (by no means a “given”), by 2025 LNG would make up only 17% of the required supply of natural gas for the United States.

One of the more interesting moments with the Natural Gas Committee came when a commissioner went off on a bit of a tirade about the industry not having provided notice of the constriction/inaccessibility of supply before this—only to be told by a fellow commissioner that the industry has been carrying this message to NARUC for at least five years, now.

And this brings us to our final topic.

Regulatory Response

In fairness, there is only a limited amount that state regulators can do in the face of the serious energy challenges that are now immediately before us.  Unfortunately, even those initiatives seem to falter in the face of being the one to carry bad news to “constituents,” such as Governors who make appointments and state legislatures that approve appointments.  No regulator has forgotten the wholesale sacking of the Maryland Public Service Commission after that body passed through a market-based electricity rate increase to Maryland consumers in 2004.

One would think that state regulators would be stimulated to be more proactive in the face of these looming challenges.  For example, state regulators could open “investigation proceedings,” now, to get all of the key players before them and on the record to frame-out the challenges, the options, and maybe even to come up with some creative approaches before prices spike, commodities are exhausted, or the grid cannot supply sufficient power.  But I do not see that happening at the state or the federal level.  It almost appears that having enjoyed constant and reliable energy for decades, there is an assumption that “somehow” that situation will continue, and that “someone” will figure this all out and “keep the lights on.”  But there is no guarantee that this will happen.

It may be that sooner or later, the political will to confront these issues will have to develop from the bottom, up.   That, or through a crisis or series of crises grave enough to compel a solution regardless of cost.

Finally, we often speak to clients about the importance of taking the steps necessary to exert some control over their energy strategy.  Listening to those responsible for “keeping the lights on,” at an event like NARUC only serves to reinforce this advice.  The warning signals are inescapable, and anyone who has any degree of responsibility or accountability to a board of directors had best heed the message: difficult days lie ahead, and the time is now to take what steps you can to weather the storm.