1. The US Electricity Industry Status, Issues & Trends Valid at 27 November 1998

2. This presentation is confidential to the intended recipient and may not be divulged to any other parties without the explicit written permission of Utility Consultants.

3. Utility Consultants accepts no liability for any action or inaction arising from the use of this presentation for any other purpose than it was specifically commissioned for.

4. This presentation is copyright, and may not be reproduced in whole or in part without explicit written authority from Utility Consultants Ltd.

5. Industry Structure Predominantly investor owned. Generally vertically integrated. Regulated at both Federal & State level. Industrial & domestic competition impending in most states. Annual revenue of US$312 billion.

6. Utility Ownership Investor owned (predominant). Cooperative. Municipally owned. People’s Utility District. Federal power marketing administrations.

7. Key Drivers Of Change Deregulation on state-by-state basis. Increasing stock-holder expectations. Excess generating capacity & access to primary energy. Emergence of new risks. National & global opportunities. Technology advances.

8. Regulation Federal Energy Regulatory Commission regulates inter-state electricity transmission & trading. State Public Utility Commissions regulate trading in each state. Nuclear Regulatory Commission regulates safety & operations of nuclear plant.

9. Federal Regulation FERC approves rates for interstate wholesale sales & transmission. FERC oversees issuance of certain stocks and debt securities. FERC oversees merger activities.

10. State Regulation Individual utilities subject to PUC jurisdiction in each state of operation. PUC regulate utility rates on a cost-plus basis. PUC generally responsible for other network utilities such as water, gas, phones etc. Extensive recourse to courts and state legislature.

11. Deregulation Occurring on a state-by-state basis as each Governor signs legislation. Generally allowing competition for industrial customers first. Focuses on remaining monopoly ie. lines business. Potential for PUC to disallow recovery of imprudently invested funds.

12. Key Issues With Deregulation Allocation of stranded costs between customers & stock-holders. Decreasing margins in retailing business Increasing separation between regulated (lines) and unregulated (retailing) businesses. Legal challenges to PUC rate rulings.

13. Progress With Deregulation As of February 1998 17 states have approved customer choice. 12 states have commissions that are recommending customer choice. 20 states are studying the issue. 1 state (South Dakota) has taken no action on the issue of customer choice.

14. Increasing stock-holder expectations Most utility stocks out-perform the Dow-Jones average. Pressure on management to seek efficiency improvements and economies of scale. Leading to formation of Holding Companies, as utilities abandon mergers because PUC’s require merger benefits to be equally allocated to stock-holders and customers.

15. Increasing stock-holder expectations Earnings growth of regulated business generally limited by PUC rulings, forcing attention to unregulated national and global opportunities.

16. Excess generating capacity Excess capacity has depressed wholesale prices in some areas. Some utilities investing in areas where earnings will be higher eg. PG&E. Some utilities divesting generation assets altogether due to low margins.

17. Excess generating capacity Forward integration into generation by owners of primary energy, especially gas. Rationalisation of utility primary energy holdings, especially divesting of non-strategic gas and coal reserves. Acquisition of gas fields to match projected customer demand.

18. Emergence of new risks Price volatility associated with energy trading is beyond many smaller utilities agreed risk profiles. Requires different competencies from operating regulated business. Smaller utilities don’t have the resources to sustainably operate when wholesale prices are below the cost of generation.

19. National opportunities Partially driven by limited opportunities within US, particularly regulated businesses. Diversification into telecommunications and related information products eg banking, security, entertainment Diversification into complete energy solutions ie. gas, steam, electricity.

20. Global opportunities Partially driven by limited opportunities within US, particularly regulated businesses. Tends to be restricted to the larger utilities eg. GPU, TU, Entergy, UtiliCorp, PG&E etc. Clear distinction between investment in lines (eg. UtiliCorp, Entergy) and generation (eg. PG&E,).

21. Global opportunities Being used to gain experience in deregulated markets - UK, NZ, Victoria Foreign utilities routinely acquired and divested as host regulatory and investment climates change.

22. Technology advances Generation technologies Clean coal combustion. Low NOx burners. Combined cycle technologies. Underground coal gasification. Improved nuclear fuel reprocessing. Improved environmental rehabilitation methods

23. Technology advances Communication technologies Faster computer technologies. Databases linked to call centers. Improved mobile field communication. Convergence of voice, data & image. Development of smart metering.

24. Technology advances Distribution technologies Pole repair techniques. Improved control & automation. Improved transformer core materials. Improved insulation materials. Live-line methods

25. Future Directions Lines Generation Retailing Diversified services

26. Lines Regulated business will provide steady returns, but not the increasing earnings promised by many utility Chairmen. Increased formation of holding companies to achieve economies of scale (note previous comment about mergers). Improved performance efficiencies due to process improvements.

27. Lines Continued surveillance by PUC’s. Increased community accountability for environmental performance. Larger utilities will increase lines business earnings by acquiring utilities in less regulated jurisdictions.

28. Lines Smaller utilities may divest risky activities such as generation & retailing in order to focus on their low-risk lines business.

29. Retailing Likely to see new communications technology linking in-bound customer calls to extensive databases. Remote meter reading, possibly bundled with other utility metering. Increased competition for industrial customers.

30. Retailing Competition for domestic customers is likely to be less extreme until metering technology significantly lowers customer switching costs.

31. Generation Excess capacity will limit construction of new plant, except by owners of primary energy who have significant cost advantages. Some utilities will divest generation assets due to their low risk position or inability to survive price cutting.

32. Generation Larger utilities may acquire generation assets due to their more aggressive risk positions and their ability to survive price discounting. Larger utilities will continue to invest off-shore while high returns can be made, and in order to gain experience in wholesale markets.

33. Diversified services Many utilities entering telecommunications services, and associated information services eg. banking, security etc. Obvious moves into gas distribution & retailing. No obvious moves into water or waste water.

34. For more information... Visit Utility Consultants Web Site Email with a specific question Subscribe to our free newsletter