Utility customers face a “perfect storm” of sharply higher bills for electricity and natural gas because trillions of dollars in capital expenditure will be needed to upgrade aging US infrastructure and comply with environmental rules, according to the new head of America’s utility regulators’ association.
David Wright, incoming president of the National Association of Regulatory Utility Commissioners, predicted ratepayers will bear the brunt of huge expenditure needs for such improvements as installing smart grid technology, controlling power station emissions, and replacing old pipelines over coming decades.
There’s a perfect storm out there for the ratepayers if we are not careful
“There’s a perfect storm out there for the ratepayers if we are not careful,” Wright told Breaking Energy in the first media interview of his presidency.
The cost of improving the electric grid, replacing local gas-distribution lines, and extending the interstate gas pipeline system to cope with the new surge in shale gas production could exceed $2.2 trillion, NARUC believes.
Adding an estimated $1 trillion for water infrastructure improvements and $900 billion for telecoms work takes the total bill for utility upgrades above $4 trillion, the association reckons, on the basis of forecasts from industry leaders at a conference last summer.
The numbers are consistent with projections from the Edison Electric Institute, whose latest cost estimate for improving distribution, transmission and generation is $1.83 trillion by 2030. Adding an average 30% a year for the industry to comply with new environmental regulations, such as the controversial new mercury-emissions rule for power plants, brings the total to more than $2 trillion between 2010 and 2030, the EEI believes.
Shareholder-owned electric utilities are already spending around $80 billion a year in capital improvements, according to EEI data. After spending $74.2 billion in 2010, investment is expected to rise to $85 billion in 2012 and $82.1 billion in 2013.
The higher spending led to 17 rate cases before utility regulators in the third quarter of 2011, continuing a rising trend since 2000. Those were driven largely by the need for capital investment and operating and maintenance expenses, EEI said. In 2010, shareholder-owned utilities filed 55 rate cases, the second highest level in two decades after 2009.
Food Or Electricity?
As a result, ratepayers’ bills could rise as much as 30% over the next 20 years, Wright warned, and that will cause real hardship in some cases.
“It’s going to put pressure on the ratepayer that we’ve never seen before,” Wright said, adding that some may be forced to choose between paying for food and paying for power.
But Richard McMahon, EEI Vice President for Finance and Energy Supply, argued that the impact on consumers will be cushioned by lower fuel prices, particularly for shale gas, and energy-saving advances such as smart grid technology. Those factors, coupled with the low cost of capital that’s available to the power industry, make it hard to forecast specific rate rises for utility customers, he said.
“The good news is that utilities and commissions are coming together, looking at what the needs of the customer base will be,” McMahon said.
For regulators, one response to the expected rate surge will be to step up public-education programs that emphasize energy conservation and efficiency, and for utilities to promote the use of demand-response technology.
The challenges facing the power industry also top the agenda of Erin O’Connell-Diaz, the new head of NARUC’s Committee on Electricity. O’Connell-Diaz, a member of the Illinois Commerce Commission, said she aims to be responsive to association members seeking to tackle difficult circumstances.
All utilities are faced with enormous bills to shore up or replace crumbling infrastructure, O’Connell-Diaz said.
“It’s here and it’s now,” she said. “It’s a very large number and it’s just a really scary picture.”