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TWST: Tell us about your coverage of the utilities group.
Ms. Tezak: I follow the electric utility business and natural gas pipelines for
how they are impacted by federal regulation, legislation, and politics coming
out of Washington, DC. So I don't cover the companies fundamentally and I don't
carry any buy, sell, or hold recommendations. TWST: Let's do it then from a regulatory point of view since that is a key to
the industry. What's gone on so far this year?
Ms. Tezak: I think that one of the most important things that we've seen develop
is the concern at the federal level about the adequacy of generation resources
and the transmission infrastructure. We've seen two trends develop this year:
one of them in the regulation of generation markets on the East Coast, the other
in regulatory and political sentiment around transmission.
This summer the Federal Energy Regulatory Commission (FERC) approved a
settlement in a contentious capacity market proceeding in New England. Capacity
markets are designed to help entice new generation into the restructured
electricity markets.
Last fall, an Administrative Law Judge at the FERC endorsed a proposal that was
perceived as being entirely too expensive for New England consumers (it was
estimated to cost about $3 billion a year for at least the next five years). The
beginning of 2006 saw a settlement initiated by the state utility commissions,
governors and members of the U.S. Congress. The FERC granted a settlement
opportunity, and the parties wound up doing something considerably different. So
a political train wreck has been substantively (not unanimously) resolved and a
capacity market system is being implemented in New England. That program is
intended to make it more feasible for generators to enter that market ahead of
the price increases and volatility that are normally associated with market
entry signals.
A similar program for the Mid-Atlantic has been proposed at the FERC. That too
is now in settlement proceedings. If settlement is successful at the end of
September, investors could gain better visibility of the financial and
regulatory climate for generation needs in that part of the country as well.
Again, the hope is that these capacity programs will support entry by providing
a forward procurement requirement and associated cash flows. The programs to
support entry of peaking facilities in particular (plant construction, uprating
or installation of pollution control equipment) before the price spikes and
volatility that would otherwise normally take place is a market entry signal in
standard commodity markets.
This is an important movement on the power generation side in the parts of the
country where power plants are owned outside of the ratebase structure of a
classical utility. Owners of unregulated generation in New England and the Mid-
Atlantic include: Mirant (MIR), Reliant (RRI), PPL Corp. (PPL), Exelon (EXC),
and NRG Energy (NRG) among others.
The second significant thing that has been going on this year is the big "to do
list" that Congress gave to the Federal Energy Regulatory Commission in the
Energy Policy Act of 2005 (EPAct 2005). Specifically, there were a lot of things
that the Commission had to do in that bill, and a good number of them pertain to
improving the investment climate for transmission infrastructure.
The FERC issued a final rule on transmission pricing incentives in July that is
intended to facilitate existing and new generation investments by improving
transmission infrastructure. I think that it's important for investors to see
how fast this implementation is moving forward. This rulemaking is the final
step in a process for transmission projects that begins with the EPAct 2005
requiring the Department of Energy to identify congestion areas in the country.
These are areas where the grid is operating at its maximum and where investment
could provide significant economic benefit.
Next, the DOE will use these congestion areas to designate National Interest
Electric Transmission Corridors over the next year. If a project is sited to
resolve issues in one of those areas, then enhanced siting authority will be
available at the federal level if needed, and project sponsors can apply to the
FERC for transmission incentive rate treatment. These EPAct 2005 initiatives are
part of what has been driving project announcements such as American Electric
Power's (AEP) effort to build a $3 billion transmission project from West
Virginia to New Jersey. Allegheny Energy (AYE) has proposed a $1.5 billion line
from West Virginia down toward the Baltimore-Washington area, and Pepco Holdings
(POM) has also proposed another $1 billion or so worth of upgrades to the
transmission grid here in the Mid-Atlantic.
So we are seeing these regulatory requirements materialize as fast as Congress
requests them and we are seeing project announcements in response to that
starting to move forward. It's going to take some time for those projects to
move from announcement to construction, but definitely we are seeing an industry
response to this initiative.
Tickers included in this excerpt:
For more information call (212) 952 7433. The
Wall Street Transcript does not endorse any of the comments made by interviewees, and does
not make stock recommendations.
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