Electricity:

Public Policy Consulting's Binz suggests risk-aware regulation for state commissioners

How should state regulatory commissioners tailor their regulations to avoid risk in utilities' investments? During today's OnPoint, Ron Binz, a principal with Public Policy Consulting and a former chairman of the Colorado Public Utilities Commission, discusses a new Ceres report focusing on what state regulators need to know about electric utility risk. He explains how changing market dynamics will affect the future of transmission and weighs in on the renewable energy tax incentive debate.

Transcript

Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Ron Binz, principal with Public Policy Consulting and a former chairman of the Colorado Public Utilities Commission. Ron is author of a new report focusing on what state regulators need to know about electric utility risk. Ron, thanks for coming on the show.

Ron Binz: Thanks a lot, Monica, nice to be here.

Monica Trauzzi: Ron, you're targeting state regulatory utility commissioners with this report and you're suggesting risk-aware regulation. I mean that seems obvious for any business, that they would approach any type of investment by looking at what the risks are. Why hasn't it quite worked that way in this industry though?

Ron Binz: Well, historically, state regulators have focused very well and almost exclusively on the cost of new resources and that's important, but we think there's another dimension to the issue. And that is what kind of risk are you taking on when you make decisions about certain kinds of resources. So, we are asking regulators to be more risk aware. The term we mean by both -- not only in kind of their attitude, but in the processes they use at the commission.

Monica Trauzzi: So, then how great of a role do state regulatory policies play then in the future of electric transmission in the United States?

Ron Binz: Well, if you look at the predictions for utility investment over the next 20 years, between now and 2030, the Brattle Group predicts that 2 trillion, that's a T, $2 trillion of investment will be made in the energy sector. It's kind of interesting, if you think about the next 20 years, there will be about 700 state regulators in those 20 years. We don't know who they are yet, but, well, some of them may still be there..

Monica Trauzzi: Right.

Ron Binz: But 700 people serve in that role. If you do the arithmetic, that means that every one of these regulators is going to approve about $6 1/2 billion worth of utility investment during his or her term. The average term of a state regulator is only 3.7 years right now at the current time. So, these regulators need to be quickly attuned to the significance of this investment. And, for a lot of reasons, we think that this is more important now than it ever has been before. There is really little room for mistakes. We think that customers will be much less tolerant and therefore, the regulators will be much less tolerant for mistakes on behalf, are made by the utilities. And so we want to see those mistakes avoided at the front end by a risk assessment.

Monica Trauzzi: But there are so many dynamics of the market that are changing or that could change, so how do you take into account all those changes?

Ron Binz: Well, one of the things that you do when you're a regulator and I'm, now let's just talk about generation for a moment and that applies to about half the country where the regulators still decide on generation resources, the Southeast and the Midwest mostly. In those states, regulators need to have a very careful process that prices out different sensitivities. What would happen if the price of natural gas goes up? What will happen if new rules come in applying to nuclear facilities? What will happen if the U.S. begins to price carbon at 10 or 20 or 30 or $50 a ton? When you do those kinds of analysis, you find that some resources are much better at accommodating unknown changes in the future than others are. And that's what we mean by risk aware.

Monica Trauzzi: You talk about, in the report, the cost associated with various technologies, which you just mentioned, and you note incentives. And right now the future of the incentives for renewable energy is really in flux here in the United States. So, taking that into account, what if these incentives are not extended? What does that mean then for their future role in electric transmission and does that change your assessment at all?

Ron Binz: We actually examined the case with and without incentives for renewables for example or, for that matter, for nuclear as well. And one of the things we did was we used research that was done, it was accumulated research by the Union of Concerned Scientists. And they looked at the levelized cost of energy across various technologies, for generation again, with and without incentives. That certainly changes the picture, but in many cases the decision is going to be made on how risky are these investments? And I'll give some examples of that, but many times that decision will swamp the cost difference between subsidized and unsubsidized. For example, wind power, when it's subsidized, is just about the lowest cost, sort of, I'll call it traditional resource. Without subsidy, it is less attractive, but still more attractive than a lot of other resources. So we have a graph in the paper, for those of you who are reading along with this interview, on page 37 of the report we talk about the relative risk and cost of different resources. So ...

Monica Trauzzi: How can anything be more attractive than two dollar natural gas though?

Ron Binz: Well, actually wind, at current prices with subsidies, competes. And I'm from Colorado where we just approved 200 megawatts of wind in the face of two dollar gas. We know what the price of that wind is going to be for the next 25 years. It gets a fixed price contract. We don't know what the cost of natural gas is going to be over 25 years. So the exact question you just asked me is the one that I want regulators to look at. Wind is two bucks, excuse me, if gas is two bucks and wind is, you know, $35 a megawatt hour, which makes more sense? Well, I think wind should play a very large part in portfolios, certainly a part that leavens or that diversifies the portfolios.

Monica Trauzzi: But is this the conversation that's actually happening around the country, where there's such an emphasis being placed on renewables and maybe not so much on natural gas? I mean it seems like natural gas is that go-to energy source right now.

Ron Binz: It absolutely is for baseload capacity and, to some extent, for peaking capacity as well. That's also being added in. I think that's good. I mean I think switching to natural gas in lieu of coal, at this point, for baseload makes a lot of sense. I think natural gas, in the long run, is going to have to deal with its own carbon impact before it's a feature of the long-term capacity needs of the country. Colorado is an interesting state. I was the chair, pleasure of being the chairman of the Colorado PC for four years, during which time we added almost 2 gigawatts of wind capacity in our state for one utility, for Xcel Energy. That requires you to at least think differently about how they balance your system, of course, and Xcel Energy has turned out to be a real expert at doing that. So it can be worked into it and, again, while I think that the current price of natural gas is very attractive and argues for its use more broadly and EPA regulations that are coming down supplement that, today's prices aren't really the only focus. We need to be looking at the longer term.

Monica Trauzzi: How steep of an increase could consumers see in their electricity prices if investments are not handled in the way that you're suggesting?

Ron Binz: Well, $2 trillion of investment during the period where low growth is expected to be fairly stagnant to slow means increases in prices. Now, we've not tried to quantify those, but when we look back at the experience in the 1980s when a lot of cost overruns afflicted nuclear plants and some coal plants and regulators disallowed about 6 percent of the investment in those years, that's a lot of money in today's dollars if anywhere near that percentage is disallowed of the new push for investment. So, the bottom line is we think that regulators are going to have to get a lot smarter about this and companies are going to have to agree that unlike the 1980s where they were the only experts in the room bringing forward plans that utility commissions may have changed, but eventually approved, it's going to take a bigger audience now, a larger set of players in this to come up with portfolios which are actually very resistant to kind of changes. And I think consumer dollars are at a premium. The economy is tough right now and I think they're going to be a lot less forgiving about mistakes made on investment by utilities.

Monica Trauzzi: All right, Ron, we're going to end it right there. Thank you for coming on the show.

Ron Binz: Thank you very much, Monica. I appreciate being invited.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

[End of Audio]

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