US energy regulators in a green state of mind

Deloitte Centre for Energy Solutions

A majority of energy regulators agree that reducing greenhouse gas emissions will increase the costs of electricity, but that the public is willing to pay as much as 5 percent more for green energy, according to a survey from the Deloitte Center for Energy Solutions. The survey, which was completed by 60 state regulators in March and April 2009, found that 70 percent of surveyed regulators believe that the cost of electricity is likely to increase next year ¯ with 50 percent identifying environmental compliance as the strongest contributing factor to these increased electricity costs.

In addition, more than 80 percent of surveyed regulators believe that the Obama administration’s proposed cap and trade system for carbon dioxide emissions will result in higher electricity costs in their states.

“For the second year in a row, our survey demonstrates that state utility regulators, while concerned about climate change, also understand the cost implications and viabilities of the various policy options,” said Branko Terzic, Energy & Resources regulatory policy leader for Deloitte. Terzic is a former state regulator, a former commissioner with the Federal Energy Regulatory Commission (FERC) and a former utility executive.

He went on to point out that surveyed regulators showed a continued belief in the green benefits of nuclear power: 55.2 percent of them claimed that nuclear power is “extremely effective” in reducing greenhouse gases associated with power generation in their state.

The survey also revealed that more than two-thirds (71.7 percent) of responding state regulators believe that the U.S. should continue to develop Yucca Mountain, despite recent decisions by the administration to look for alternatives

Regulators Believe Public Willing to Pay More for Greener Energy
So who will pay the increased green energy costs? Regulators who responded to Deloitte’s survey indicate that the public, for one, is willing to pay more for greener energy. The survey finds that more than half of the respondents (53.3 percent) believe the public would pay as much as 5 percent more in electricity rates to mitigate greenhouse gas emissions. Although only 16.7 percent of regulators believed their consumers would accept a 10-percent increase in rates, compared to 29 percent of regulators who felt the same way last year ¯ a phenomenon that likely reflects regulators’ sensitivity to the economic difficulties facing their rate payers.

“Regulators seem to believe that the rate-paying public supports a cleaner energy direction,” commented Terzic, who also pointed out that in 2009, fewer commissioners (23.3 percent compared to 32 percent in 2008), believe that consumers would not support “any increase” in rates for cleaner energy. This, he said, may indicate that commissioners see higher public acceptance of the tie between power plant emissions and climate change. “Consumers understand that some increase in electric rates tied to cleaner energy may be inevitable,” concluded Terzic.

Energy Efficiency and Renewable Power Popular, While Clean Coal Dubious
Terzic indicates that regulatory belief in the public’s support for cleaner energy is in synch with the Obama administration’s focus on energy efficiency at the individual homeowner level. “Almost 55 percent of surveyed regulators believe end-user efficiency and conservation would be ‘extremely effective’ in addressing the reduction of greenhouses gases associated with power generation in their states — compared to a much lower 42.3 percent in 2008,” he said.

To this end, the vast majority of regulators (68.3 percent) who responded to the survey believe that regulated electric utilities should have the ability to earn income on investments in end-user efficiency just as they do on generation, transmission and distribution assets.

Regulators also showed growing support for renewable power sources, with 42.4 percent ranking them as “extremely effective.” Clean coal, in contrast, seems to be the most polarizing source of power generation among regulators in 2009: only 25.4 percent felt it was “extremely effective,” while an almost identical amount (23.7 percent) view it as “not effective at all.”

Regulators and Power Companies Differ on Business Risks
The survey also looked at the frequency with which U.S. power and utility companies cited business risk factors in their SEC filings — juxtaposing these findings against regulators’ opinions on the same risk factors.

Companies and regulators both seem to agree that carbon regulation is the single leading risk factor for power and utility companies. After that, though, power and utility companies often assess their risk factors differently from the regulators who oversee them. Most glaringly, power and utility companies see “regulator recovery” as a risk factor in their business performance far more frequently than regulators do. In fact, regulated companies see it as the second most mentioned risk factor affecting their credit and debt levels, just behind carbon regulation. Regulators, in contrast, see it as the ninth most cited risk factor, with most of them viewing their cumulative authority as having little influence on credit rankings and debt levels for the companies they regulate.

“The results of our survey are very insightful in identifying perception difference between regulators and the companies that they regulate,” said Greg Aliff, Deloitte’s U.S. Energy & Resources leader. “It will be interesting to see if regulators view their impact on company performance differently in coming years, as they face an increasingly inevitable volume of rate cases.”

View a presentation with the main findings of Deloitte's study here