Friday, July 10, 2015

Power to the People

I blanched when I read this quote from journalist David Roberts, which appeared in Bill McKibben's Power to the People: Why the Rise of Green Energy Makes Utility Companies Nervous (The New Yorker, June 29, 2015). Referring to the electric utility industry, Roberts states:
“If you’re in a business where the customer is the public-utility commission, and after that your profits are locked in by law, it’s the sleepiest business sector there is, if you could even call it a business sector. They build power plants, sit back, and the money comes in....”

This article contains several regrettable misconceptions which I'd like to correct.  

First: electric utilities' profits are not locked in by law. True, regulators set the rates customers pay. But it's up to management to control costs and deliver the returns required by investors. Costs can and do skyrocket and erode profits if the utility isn't well-managed. 

Roberts also believes that "the entire [electric utility] realm is protected  by a huge force field of boringness." That is a shockingly naive statement. The risks associated with doing business in this industry increased dramatically when merchant power producers were first allowed to build and own power plants, competitive energy markets such as PJM were formed and retail customers gained the right to shop around for their energy provider.  In the wake of that industry restructuring, we saw bankruptcies at TXU/Energy Futures Holdings and Pacific Gas & Electric. Other utilities, such as Reliant Resources, narrowly avoided bankruptcy. Still others had to cut their dividends. 

These gut-wrenching events happened decades ago, but the story doesn't end there. More recently, natural gas fracking has transformed the economics of generating electricity.  Together with climate change-driven environmental regulations, this has forced utility executives to shut down large coal-fired power plants which used to be among the most efficient in the country. 

Meanwhile, rooftop solar generation panels are popping up like mushrooms in residential communities in sunny states such as Arizona, California and Nevada.   

I don't call that "boring," as Roberts and McKibben would have it. Utility executives have had to grapple with these challenges while trying to balance the competing desires of environmentalists, consumer advocates, elected officials, regulators, investors.. and customers, who rightly expect electricity to be available on demand at the touch of a button. 

It takes quite a few years to learn how to effectively run a large, publicly traded business that bears these risks. Perhaps that is why there are no 30-year-old CEOs in the utility business, as McKibben's article delights in pointing out. 

I urge readers of McKibben's article to skim through the articles listed below. They may change your mind, or at least bring a better perspective to the challenges faced by the utility industry.