Market Pressures Impact Public Utilities’ Bottom Line

Historically, electric utilities have been masters at managing their cost structures while keeping pace with the nation’s demand for electricity. This competency emanates from decades of scrutiny by the Public Utilities Commission (PUC) and the attendant caps on pricing and rates of return. Today’s market forces create new pressures that call for a fresh look at their operations.

Regulators and environmental advocates call for increased deployment of clean energy sources. Some utilities are subject to minimum standards of green power output. Others may face sanctions should their hydroelectric power generation impact wildlife adversely. Most face growing customer demand for green power. These influences affect the supply as well as the cost of power.

Solar power has gained momentum as commercial parks, educational institutions, governmental agencies, consumers and others reap tax benefits while sourcing their own electricity. Battery packs may be poised to realize a similar boost in consumer and commercial interest. While these competitive incursions represent a relatively small percentage of the nation’s power generation, they still affect the cost of the electric grid. And in both cases, customers look to the electric grid to serve as a back-up should their self-generation capacity fall short of their needs.

Many utilities have responded to the “green movement” by participating actively in the solar power market. This engagement allows them to meet customer demand while satisfying regulatory requirements. Some establish their own solar farms; others support community solar projects, primarily with business customers. Aldrich provides advice on structuring these initiatives. We help clients gain the maximum tax benefit given prevailing federal and state energy saving incentives. We are attuned to the institutions that are receptive to financing solar power projects. And, of course, we bring the analytical skills to assess the attractiveness of the deal in terms of cash flow, payback, and profitability.

We have also worked with clients as they move from usage-based to flat-rate-plus pricing for customers who look to them for back-up or surge capacity. Such customers pay a minimum fee monthly to ensure that the electric grid receives appropriate financial support to provision the capacity on which they are reliant.

Public utilities nationwide are making substantive investments in advanced metering and communications infrastructures to support the “smart grid.” With site-specific intra-day power usage information, they can institute incentive-based rate structures to decrease consumption during peak periods. It also supports remote diagnostics to address power quality issues.

When companies deploy their own fiber to serve the smart grid, it opens up the possibility of providing other services on the excess bandwidth – e.g., phone service, high-speed Internet, streaming video. While such opportunities could provide revenue streams to offset their communications costs, they represent new lines of business for which utilities may lack the expertise. A joint venture with a telco could serve both parties. Telcos have the technical and market expertise; public utilities have the “right of way” for land used to lay the fiber. Our team has the experience to help conduct these types of ventures in whatever form they may take.

As with smart grid investment, green power projects open the door to joint ventures. Many of our clients have been approached by others to pursue business ventures. We work with them to evaluate the relative merits of partnership versus pursuing opportunities independently. These assessments consider the strategic, operational, organizational, and financial aspects of the alternatives. In instances where partnership makes sense, we consider the best options for structuring the relationship and provide due diligence support, as needed.

The rules of the game are changing, and these changes challenge traditional ways of doing business. We welcome the opportunity to enter into dialog about the possibilities and support management’s decision making as they plan for the future.