Restructuring US Public Electric Utilities: Using the General Motors Bailout Paradigm

Dec. 17, 2013
Are public electric utilities heading for a federal bailout like General Motors? A report by Deutsche Bank Securities sees accelerated penetration of distributed resources creating acute, permanent erosion of utility revenues. Lee Peterson of CohnReznick explores the question.

Lee Peterson, CohnReznick

Could the United States public electric utility industry be gradually heading toward a federal bailout, or a series of state bailouts?

Helping to drive this debate is the September 3rd, 2013 Markets Research Report, authored by Vishal Shah and issued by Deutsche Bank Securities, titled, “Distributed Generation to Herald New US Growth Era.” The report describes a scenario of accelerated penetration of distributed resources. specifically solar PV – where public utilities face acute, permanent erosion of revenues, caused by at least two growing trends.

The first trend is the increasing consumer adoption of distributed generation of electricity and energy efficiency policies. The second trend is the growing requirement for fossil-based utilities to incorporate external costs into their business. This includes a utility’s requirement to reduce emissions of toxics and carbon, or assume the financial responsibility for economic damages their generation methods create.

These trends, combined with state policies accelerating adoption of demand-side resources and efficiency programs, means utilities face a serious “market share” challenge—a scenario wherein utilities attempt to raise electric rates to maintain the status quo of the historical utility business model, thereby covering historical fixed costs. This, in turn, makes customer-provided distributed generation comparatively cheaper, further driving revenues away. Without substantive rate structure overhauls and other policy changes, a utility revenue meltdown looks inevitable.

A shrinking US market

Deutsche Bank Securities reports that the equivalent of a solar energy takeover by public utility customers’ privately owning solar PV systems is imminent. This report, along with utility industry watch dogs, predicts that US public electric utilities (with thermoelectric physical infrastructure) could face a situation similar to General Motors prior to its restructuring. That means the utility is still functioning, but operating inefficiently while producing and selling inventory to an ever-shrinking customer demand base.

Most of the US public electric utilities, particular those that are investor-owned, now see the proverbial train coming. But, they can’t get off tle tracks. They have already expressed concern as confirmed b y a 26-page report releasedìn January 2013 by the Edison Electric Institute, authored by Peter Kind, and titled “Disruptive Challenges, Financial Implications, and Strategic Responses to a Changing Retail Electric Business.”

Taken together, the two reports beg these questions: Will there be an electric utility industry heart-attack event, or will regulators intervene and work with all stakeholders to re-invent the industry?

No free passes

According to the EPA Mercury Air Toxics Standards and the separate EPA Cross State Air Pollution Rule, the annual upper estimate for public health care costs associated with coal-fired electric power plant toxic emissions in the US is $470 billion annually. Separate studies by the National Institute of Environmental Health Sciences, the Center for Health and Global Government, and economists Muller, Mendelsohn, and Nordhaus, have all validated the economic harm caused by polluting electric power.

This nearly half-trillion-dollar annual economic drag on the US economy is only the cost of the toxic pollution, and doesn’t include additional estimates of the costs associated with CO2 emissions. Add CO2 emission expenses to the toxic damage costs, plus the overall damage done to the US economy, and studies now demonstrate that power plant pollution is staggering.

Facilitating a transition

Given these challenges, utilities face a critical test – just when they need investment capital to facilitate a transition away from pollution, their customer base is eroding. The federal government may need to step in and help the public electric utility industry restructure, providing either direct financing, financial guarantees, or both, to ensure a smooth, safe, and reliable transition to renewable energy. This may be necessary, at least to the extent that states cannot cover some, or all of the restructuring burden.

So, what exactly would this look like? The individual states, the administration, and Congress should craft an Electric Public Utility Transition  policy with legislation that enables US public electric utilities to better utilize renewable energy and engage in the new “distributed world.” Otherwise, we might just see a repeat of the General Motors
situation, with a sector too essential to the economy and employment to fail. But, at the same time, left with no one other than the government to enable an orderly reorganization.

Policy options

Policy goal #1

Hold electric utilities accountable for their externalities. Legally recognize the magnitude of the systemic economic damage caused by the thermoelectric utility sector, through toxic, greenhouse gas pollution and water resource impacts. Legally require an accounting of carbon, toxics, and water into the cost of all electrical energy. Note that the policy of fossil fuel accounting does not require, nor even imply, any form of actual carbon tax.

Mandating regular public disclosure of carbon-based externality damages will help make clean energy cost competitive. Mandatory externality accounting data provided to every electrical energy purchaser should enable free market economics to operate on externality reductions and/or avoidance. Federal tax policy in support of this effort should favor renewable energy investments and usage, even though no federal carbon tax is imposed.

Policy goal #2

Level the playing field using historically cognizant/weighted metrics. Merely leveling incentives for clean energy and fossil fuels going forward won’t create a level playing field when the fossil fuel sector still inherently benefits from structural incentives after over 100-plus years. The first policy goal can be attained by offering direct investment of incentives; plus, non-fossil fuels and related technology can be engineered, used, and paid for with the cost savings from pollution reduction.

Policy goal #3

Congress can empower the US Treasury and/or the Department of.Energy, as well as other agencies, to implement a series of financial assistance vehicles for utilities in their transition with the aim of a dean, low-carbon, and increasingly decentralized electric power business model.

Examples include special Renewable Energy Transition Bonds, federal loan guarantees, bond-payment guarantees, and other flnancial instruments or programs backed by the federal government, which would reduce near-term financial burdens of such a transition on ratepayers. Each state would be expected to contribute to this cost to the extent that each state’s utility is responsible for its own percentage of economic damage.

The US Treasury ultimately, profited from the General Motors bailout and much of the financial bailout. In much the same way US taxpayers will proflt from an electric utility restructure.

Lee J. Peterson is a licensed attorney and senior tax manager for CohnReznick’s National Renewable Energy Practice. To date, he’s been a critical tax advisor in over four billion dollars of renewable energy projects within the US and its’ territories.

This article originally appeared in North American Clean Energy and was reprinted here with permission from the author.

About the Author

Kevin Normandeau | Publisher

Kevin is a veteran of the publishing industry having worked for brands like PC World, AOL, Network World, Data Center Knowledge and other business to business sites. He focuses on industry trends in the energy efficiency industry.