Resource Planners’ Forum CREPC/SPSC

Risk-aware Regulation and the Modern Utility

Ron Binz, Public Policy Consulting

October 4, 2012 • San Diego

Ron Binz•Public Policy Consulting•Center for the New Energy Economy, Colorado State University•Former Chairman Colorado PUC•Former Colorado Consumer Counsel•M.A. (Mathematics) University of Colorado; B.A. (Philosophy) St. Louis University•Makes wine, beer, cheese and pickles

rbinz@rbinz.com

• Authors– Ron Binz– Richard Sedano– Denise Furey– Dan Mullen

Available at www.ceres.org

High Stakes• The US electric industry is entering a “build cycle” with much higher

investment than in recent history– Brattle Group estimates $2 trillion by 2030

• Causes– Aging infrastructure– New transmission requirements– Demand side and smart grid – Much stronger air and water regulation, including GHGs– Fuel economics

• Challenges to utilities– Flat load growth– Distributed generation– Uncertain economy– Financial metrics less forgiving than in 1980s

The US generation fleet is aging

US Electric IOUs Rating History1970 – 2010

4%

22%

46%

27%

1%

Source: Standard & Poor’s, Macquarie Capital

AA

AA AAAA

A

AA

AA

BBBBBB BBB

BBB

BBB-

The Key Question for Utilities and Their Regulators

How do we ensure that $2 trillion is spent wisely?

With incentives

No incentives

CO2 costs

Notes

•Unadjusted 2010 cost estimates were used for consistency

•Costs for wind and photovoltaics have fallen sharply in last two years (faster than these 2010 estimates)

•Cost of nuclear power has risen post-Fukushima (more than these 2010 estimates)

A Catalog of Investment Risk• Cost-related

– Construction cost overruns– Capital availability– Operational surprises– Fuel cost escalation– “Bet the company” investments– Management imprudence– Resources limited– Consumer reaction to rates

• Time-related– Construction delays– Changing markets– Environmental regulations– Changes in load– Technology advancement– Catastrophe– Contingent projects – Government policies

Seven categories of risk used in scoring…• Construction cost• Fuel and Operating cost• New Regulations• Carbon Price• Water Constraints• Capital Shock• Planning

Cost Risk

Risk Aware Planning at the Tennessee Valley Authority

Seven Essential Strategies for Risk-Aware Regulation

• Diversify utility supply• Utilize robust planning processes• Employ transparent ratemaking practice• Use financial and physical hedges• Hold utilities accountable• Practice active, “legislative” regulation• Reform, re-invent ratemaking policies

Rewards for Sound Decision-making

• For consumers: keep more $$, quality• For utilities: corporate health, predictability• For investors: safety, value, expectations• For employees: safety and welfare, pride• For the regulatory process: public confidence• For society: spending precious capital wisely

• Foundation funded• Run by two former Colorado regulators

named Ron

• Advised by board of experts• Goal: to explore new business models

and advocate new regulatory models to enable new utility business models to evolve.

Utilities 2020

• Methods:– Interviews with utility CEOs and leading

states regulators– Evaluations of other systems here and

abroad– Dialogues with utility execs and

commissioners

• CEOs want a clearer, more consistent direction from state energy policies

• Utilities have little incentive for innovation, firm level efficiency

• Commissions need a better understanding of the utility business and its needs

• Utilities want certainty on climate policy• Utilities want healthier working relationships with

commissioners and staff

What we’ve heard from utility CEOs:

• A primary concern is with increasing utility rates• Regulators are open to modifying the regulatory

model; looking for ideas• Some commissioners are dissatisfied with the

adversarial process• Many commissioners face severe barriers to

communications with stakeholders, and even fellow commissioners

• Commissions have inadequate resources

What we’ve heard from commissioners:

Conclusions• Operating and regulating utilities will get more challenging.• Affirmative risk management can help avoid expensive mistakes.• The utility business model is changing; regulation must also change.• Investors are more vulnerable in this build cycle.• Risk shifting is not risk minimization; not all “credit positive” cost

recovery mechanisms are sustainable policies.• Energy efficiency performs well in risk-aware regulation.• Regulators should be more than judges; they must also operate in

“legislative mode.”• Regulators should strive to be informed, active, consistent, curious

and courageous.

I look forward to your questions.

Thanks for the invitation