the future of the electric & gas industry bob bellemare, p.e. ceo energy insurance mutual’s...
TRANSCRIPT
The Future of the Electric & Gas Industry
Bob Bellemare, P.E.
CEO
Energy Insurance Mutual’s
Risk Managers Information MeetingFebruary 24, 2004
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Rate of Change is Accelerating
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Agenda
The Basics Generation/Fuels Wires Corporate & Regulatory New Technologies
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Characteristics
Real-time product Lack of substitute products Long construction times - over 2 years The laws of physics can not be changed –
electrons are no respecters of political, state, or regulatory boundaries
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Natural Gas Consumption
IL
OH
IN
WI
GA
MN
AL
KS
MO
IA CO
VA
TN
AR
WA
NC
KY
MD
MS
SC
OR
AK
NE
CT
UT
WV
AZ
NV
NM
WY
RI
DE ID MT
DC
SD
ND
NH
VT
ME
HI
FL
OK
MA
NJ
LA
CA
TX
PA
NJ
MI
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
State
Mill
ion
Cu
bic
Fee
t (M
cf)
Electric Utility
Industrial
Commercial
Residential
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Electricity Consumption
AKVTRI
SD
ND
NHHI
DEDC
WYMEMTNMUTIDNENVW
VCTKSIAA
RCOMSOKO
R
MAA
ZMNMDW
IMONJ
SCA
LLA
WA
KYV
ATNIN
MIG
AN
C
PAN
YO
HF
L
TX
IL
CA
0
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
300,000,000
MW
h
Other
Industrial
Commercial
Residential
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Capital Intensive
•Big 4 long-distance carriers: AT&T, Sprint, MCI and World Com
$200,000,000,000
$400,000,000,000
$600,000,000,000
Electricity Airlines$0
IOU Electric
Domestic
Airlines
$585 B
Long
Distance
Big 4Telecom
$360 B
NaturalGas
IOU Gas$138
B $95 B
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Highly Fragmented Industry Largest player is less than 6 % of the total Variety of ownership types and jurisdictions
Type Number % of SalesInvestor Owned 250
Municipals 2,005
Cooperatives 939
Federal 10
Total 3,204
76.2
14.4
7.8
1.6
100.0
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Rate Changes
Company % IncreasePG&E, CA 46 %
SCE, CA 42 %
LADWP, CA 0 %
Sacramento, CA 22 %
BPA 61 %
Puget Sound, WA 5 %
Snohomish County 50 %
Tacoma Power, WA 33 %
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Risk Myth
“This is not a risky business”
GENERATION
History
Fuel
The Future
“After Nearly $5 Billion Loss, TXU Corp. to Concentrate
on Core Texas Business”
“Rising cost of power gives customers a jolt Bonneville”
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-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
19
49
19
52
19
55
19
58
19
61
19
64
19
67
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
Year
Ca
pa
cit
y (M
W)
Coal Gas Uranium
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
19
49
19
52
19
55
19
58
19
61
19
64
19
67
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
Year
Ca
pa
cit
y (M
W)
Coal Gas Uranium
Electric Generation
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Reserve Margins
Implications
Next major build cycle 5+ years away
High correlation with NG prices
“Perfect Storm” vulnerabilities do exist
Depressed earnings
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The Debt Problem
Sector has lost $100 B in market capitalization in the past 2 years
Energy merchants face nearly $65 billion of loans coming due by the end of 2010, says S&P. That’s out of a total debt burden of $125 billion
Divestitures and write-downs likely to continue
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The Challenge
U.S. peak demand exceeds 760,000 MW
Could increase more than 370,000 MW in next 20 years (2 percent per year increase)
Natural gas has been the fuel of choice, but….
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History – February Gas Futures
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History – A Teacher
0
1
2
3
4
5
6
7
8
Year
Av
era
ge
We
llhe
ad
Pri
ce
($
/MM
btu
)
Long-TermTOP
Contracts
Spot MarketElectric
Deregulation
?
Price Forecast
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Causes of Volatility
Weather Storage Little incentive to hedge Production boom/bust New supplies more costly Market manipulation
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Market Manipulation
Round-Trip Trades Withholding Production Serious Financial Impacts
BPA, Sierra-Pacific, Seattle, PG&E
Regardless: High prices will occur during
times of constraints
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1970 1980 1990 2000 2010 20250
5
10
15
20
25
30
35 History Projections
Production
NetImports
Consumption
Pipeline Liquefied Natural Gas0
1
2
3
4
5
6
2001
2025
Natural Gas Net Imports, 2001, 2025(trillion cubic feet)
Source: AEO 2003
1970 1980 1990 2000 2010 20250
5
10
15
20
25
30
35 History Projections
Production
NetImports
Consumption
Pipeline Liquefied Natural Gas0
1
2
3
4
5
6
2001
2025
Natural Gas Net Imports, 2001, 2025(trillion cubic feet)
Source: AEO 2003
Consumption (Tcf per year)
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World Supply
Russia and Iran account for about 45 percent of the world’s natural gas reserves
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Gas Production vs. Rig Count
0
5,000
10,000
15,000
20,000
25,000
30,000
1949 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
Year
An
nu
al P
rod
uct
ion
(MM
CF
)
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Av
erag
e R
ig C
ou
nt
Annual US Production Avg Weekly Rig count
0
5,000
10,000
15,000
20,000
25,000
30,000
1949 1955 1960 1965 1970 1975 1980
0
5,000
10,000
15,000
20,000
25,000
30,000
1949 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
Year
An
nu
al P
rod
uct
ion
(MM
CF
)
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Av
erag
e R
ig C
ou
nt
Annual US Production Avg Weekly Rig count
Source: Dept of Energy Energy Information Agency Baker Hughes
Ziff Energy Group recently reported the cost of exploiting natural gas jumped 34 percent from 1999 to 2002
30% per year depletion rate!
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Forecast
“An Unsustainable Trend is Exactly That”
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The Coming “Train Wreck” New electric generation additions = Gas
Coal and Nuclear produce over 70% of electricity currently
By 2010, 77% of coal units >30 years old and <300MW
New Coal takes 5 to 7 years to complete
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LNG/Imports To The Rescue? To avoid shortages – Yes!
Price Stability - Means prices will likely exceed $4 per MMBtu
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Renewables
Renewable programs on the increase Many utilities have implemented green
pricing programs States with portfolio requirements
AZ, CA, CT, HI, IL, IA, ME, MA, MN, NV, NJ, NM, PA, TX, WI
CA: September 12, 2002. Established the most aggressive renewable portfolio standard in the country by requiring utilities to purchase 20 percent of their electricity from renewable sources by 2017.
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Wind To The Rescue?
If only we lived in the Dakotas!
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Coal To The Rescue? US has 10 times more BTU’s
in the form of coal than oil and gas combined
Over 80 coal plants representing over 40 GW of power under consideration
Takes years to construct plant once permitted
Increasing emission regulations
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Hydrogen To The Rescue? Made from Water, Methane,
Natural Gas Net Energy Loss Therefore effectively a
battery Decades away
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Risk Myth
“We are not trading.”
Wires
Siting & Investment
Standard Market Design
“AEP receives final approval for Wyoming-Jacksons Ferry 765-kV project”
“Senate energy panel head criticizes FERC rules”
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Reliability Standards
Blackout demonstrates potential liability exposure
Several entities violated NERC operating policies and planning standards
When it comes to reliability you cannot afford “reactionary” quality
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Siting Issues
Lack of investment incentive
Multi-state, jurisdiction
Not In My Backyard!!
!
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Standard Market Design
Common tariff Independent control Locational marginal pricing License Plate/Postage Stamp Market monitoring Minimize seam issues
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Impacts
Litigation likely Completely independent transmission
companies emerging Divestitures already occurring:
IL Power $239 M sale to Trans-Elect DTE Energy $610 M sale to KKR and Trimaran
Capital Partners L.L.C.
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Risk Myth
“We can milk the wires business.”
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Acquisitions
National Grid purchase of NIMO, NEES, and Eastern Utility Associates
Powergen/E.ON purchase of LG&E Scottish Power purchase of PacifiCorp Dynegy purchase of Illinois Power AES purchase of IPALCo Pepco purchase of Conectiv
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Public Power Initiatives
California, Florida, Iowa, Oregon, Nevada, South Dakota
Motivations: Market uncertainty/deregulation Reliability/undergrounding Bankruptcies Franchise expirations Lack of tax revenues
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Privatization Initiatives Warren Buffet/Berkshire Hathaway –
MidAmerican, natural gas assets
Texas Pacific Group – Portland General
William J. Catacosinos/Laurel Hill Capital Partners LLC/CIBC World Markets – TNP
Saguaro Utility Group, L.P. (J.P. Morgan, Kohlberg Kravis Roberts & Co, Wachovia) – Unisource
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Does this look like an Energy Policy?
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Does this look like an Energy Policy?
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Venture Capital
R&D expenditures for 20 leading utilities have decreased by 62% from 1995 to 2000
Same utilities increased their subsidiary investments from $4.5 B (1995) to $15 B (2000)
Venture capital in the industry increased from near zero 6 years ago to over $1 billion in 2001
Venture capitalists in 2002 curtailed their fund raising for future investments to a 21-year low. While 108 venture capital funds raised a total of $6.9 billion during 2002, another 26 funds refunded $5 billion to investors.
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Energy Storage
The most needed technology!
Would greatly improve overall system efficiency and performance
Several forms: Flywheels
Superconductivity
Electrochemical
Advanced Battery
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Fuel Cells
Hydrogen…and now coal
Hydrogen < 40 %
Coal > 60%
Reality: Long way to go
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Makes Industry Better
Coal Gasification Clean Coal Pebble Bed Nuclear Reactor FACTS devices Advance metering and data
acquisition/management Power line carrier
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Risk Myth
“This technology will revolutionize the business in 2 years”
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Things we now know not to be true… $50+ billion in total assets, 5 million or
more customers to survive Deregulation means lower rates Asset-lite in trading Diversification is required We rely primarily on the spot market
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Things we must commit to: Reliability is job one Doing what’s in the public and customer
interest is ultimately in the best interest of the company
Avoid speculation and diversifying into non-core areas
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Contact Information
Bob Bellemare
505.244.7612