2015-10-14
425
Fellow-students.
Text 1
What we call "electric utilities" today are actually a wide variety ___ generators, transmitters, distributors, and
billing companies. This is due ___ large part ___ the history ___ the electricity industry. Historically, as a
result ___ their natural monopoly, electric utilities have either been public-owned or heavily regulated. More
recently, ___ an effort to bring down electricity costs ___ end users, a wave ___ energy deregulation swept
electricity markets in the 1990's, starting ___ the Margaret Thatcher-led deregulation ___ the UK. Typically,
deregulation has involved separating generation ___ transmission and distribution and creating wholesale
power markets, where electric utilities (who continue to own the transmission and distribution assets)
purchase energy ___ competing generators.
Deregulation ___ the U.S. occurred ___ a state-by-state basis, but has been largely rolled back ___ several
crises, including the 2000 California power crises and a series ___ brown-outs ___ the North East ___ 2003,
highlighted the challenges ___ a deregulated market. Deregulation increased price volatility and supply
disruptions, and proved prone ___ fraud ___ energy traders such as Enron. As a result, deregulation has
stalled ___ many states, both ___ the wholesale markets, where only 16% of U.S. electricity generation is
sold ___ unregulated utilities, and ___ the retail markets, where Texas is the only state ___ the U.S. ___
entirely deregulated pricing.
What remains ___ electric utilities (and investors) is a spiderweb ___ regulations and assets. Retail prices
are typically regulated ___ state electricity commissions, which routinely refuse rate increase requests ___
electric utilities, and prices vary widely, ranging ___ 18.3 cents per kwh in Hawaii ___ 5 cents per kwh ___
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Kentucky. Regulators also often target an "allowable Return on Equity" for electric utilities, meaning that
electric utilities are not necessarily, like other companies, encouraged ___ their investors to make more ___
___ less.
Text 2
The first significant moves ___ diversified businesses ___ electric utilities began ___ the early eighties. This
situation is well described ___ Debbie Galant in the Institutional Investor:
“After watching the dream ___ cheap nuclear energy turn ___ a nightmare ___ protest and cost overruns,
electric utilities are finally emerging ___ two decades ___ Sisyphean construction projects. And theyʼre
breathing the sweet air ___ opportunity. ___ cash burning ___ their pockets and projected growth ___
electricity demand practically flat, a whole generation ___ utility management suddenly finds itself ___ the
first time unburdened ___ construction needs. They could buy ___ their stock and put the money back ___
their shareholdersʼ pockets, or they could lower their customersʼ rates – and some utilities are doing both.
But the prevailing strategy ___ the industry these days is to take the money and invest it ___ unregulated
businesses where there is no cap ___ return ___ equity. As investor relations people are fond ___ saying,
they want to grow their companies.”
___ only a few cases, the “free” cash was returned ___ investors ___ either raising dividends, stock
repurchases, or paying down debt. However, most electric utilities began to transform themselves, as they
prepared to invest ___ new lines of business. They began to change their names ___ an attempt to signal
Wall Street that they were no longer just no-growth utility enterprises. Indeed, some utilities entered
businesses that were far removed ___ the electricity business. Potomac Electric Power leased Boeing 747s
to KLM and Singapore Airlines. FPL Group acquired Colonial Penn Group, an insurance company. Pacific
Lighting Corp bought a chain ___ drug stores. These diversification activities obviously stirred ___
controversy. ___ reaction ___ Pacific Gas and Electricʼs bid to acquire G.D. Searleʼs pharmaceutical
subsidiary that makes Nutrasweet, regulators asked, “What do electricity- makers know ___ coffee and cola
sweeteners?”
In some cases, ratepayers found the financial viability ___ the utility business threatened ___ the losses
racked up ___ the non-utility businesses. But, apart ___ a few famous large failures, the overall opinion as
voiced ___ the industry expert, Douglas Hawes, was that, “While there have been varying degrees ___
success ___ the area ___ diversification ____ exempt utility holding companies, there are no instances ___
which diversification has seriously threatened the financial soundness ___ utility companies. Such
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companies are protected both ___ the holding company structure and ___ the regulatory power ___ the
state commissions ___ the utilities.”
Text 3
The electric utility industry is mammoth ___ size. ___ 2009, the U.S. electricity industry supplied 4.0 million
gigawatt hours (GWh), ___ which 70.2% was ___ combustible fuels. The International Energy Agency
predicts that electricity demand will double over the next 25 years. Not only will that require a lot ___
electricity generation ___ nuclear and coal, but it will also require a significant investment ___ the
transmission lines, substations, meters, and other equipment and services that bring electricity ___ the
homes and businesses that depend ___ it. The transmission and distribution ___ electricity is the core
business ___ electric utilities.
The electricity industry value chain consists ___ four elements. First, there is energy generation, requiring
both a fuel source (e.g., coal, nuclear, natural gas, Wind Energy) and a power plant to convert that fuel
source ___ electricity. Second, electricity transmission involves both transforming generated electricity into
electricity that can be transmitted over power lines and matching end user requirements (demand) ___
energy availability (supply). After transmission, electricity must be distributed ___ individual end users via a
vast network ___ power lines and substations. Electric utilities often own miles ___ power and transmission
lines - PG&E, the nation's 2nd largest utility, owns over 100,000 miles ___ distribution lines alone. Lastly,
there is delivery, where electricity is transformed again and delivered directly ___ an end user. Delivery also
involves metering and billing.
