NARUC Joint Session, Committees on Electricity and Gas

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NARUC Joint Session, Committees on Electricity
and Gas

• Ellen Lapson, CFA
• February 19, 2008

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U.S. Capacity Additions
Source Global Energy Decisions
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Baseload Capacity Additions Delayed or Cancelled

• New baseload coal units denied approval or
  cancelled by sponsors
• New nuclear plants unlikely to enter service
  before 2016 - 20
• Investment in wind and renewable capacity is
  rising, but reliable capacity credit is limited
  for intermittent supply without gas turbines or
  storage
• Only option is more natural gas-fired generation
  in the next 5 -7 years

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Gas Price Outlook An Upward Trend
------ Forecast ----------
Future prices are likely to be volatile, NOT
smooth.
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From Fitchs 2008 Outlook for Electric Gas

• Despite an easy near-term supply situation in the
  2007-08 heating season, the longer-term outlook
  for natural gas is for tight supply.
• Fitch expects demand for gas for power generation
  to continue to rise for at least the next five
  years
• Deliverability of conventional gas sources is
  dwindling, with new supply likely to come from
  unconventional sources at higher cost.
• Fitch expects a resumption of volatility
  associated with periods of supply interruption or
  extreme weather.
• High and volatile gas prices create an adverse
  environment for any power or gas utilities
  lacking efficient and timely commodity cost
  recovery mechanisms.

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Fitchs 2008 Utility Credit Outlook by Sector
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Sector Credit Drivers for Electric Utlities

• NEAR-TERM
• Economic slowdown or recession downturn in
  housing
• Interest rates remain relatively low
• Reasonable access to capital and bank markets
  sector is viewed as a safe harbor for money
• Adequate financial condition as a starting point
• 
  
  

• LONGER-TERM
• Declining power reserve margins
• Sustained high capex for next decade
• External financing need for equity as well as
  debt
• Higher construction costs completion risks
• Federal or state carbon rules unknown regulatory
  framework.
• Public opposition to rising tariffs political
  push-back
• Potential demand elasticity

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Sector Credit Drivers for Gas Distribution
Utlities

• NEAR-TERM
• Economic slowdown or recession
• Reasonable access to capital and bank markets
  sector is viewed as a safe harbor
• Good 2008 gas storage and supply
• Most companies have timely and effective
  purchased gas adjustment mechanisms.
• Declining consumption, but offset by minimum
  demand / volumetric billing structures.

• LONGER-TERM
• Concerns about adequacy of longer-term supply
  increased consumption for power generation
• Shrinking consumption with higher prices
• Strong regulatory support helps to support credit

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What Policies Can States Adopt to Mitigate Risks?

• Implement Integrated Resource Planning
• Encourage a balanced portfolio of generation
  resources and energy efficiency programs.
• Preserve the financial viability of utilities so
  they can fund nedded capex.
• Implement more timely and more effective
  commodity cost recovery mechanisms.
• Adopt mechanisms that provide a cash return on
  construction work in progress avoid rate shock
  at completion.
• Encourage funding of research, development, and
  demonstration projects.

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