After enduring its worst financial crisis in decades, the nation’s electric power sector now appears to be righting itself and looking forward to the challenges ahead. At mid-year, the Standard & Poor’s (S&P) Electric Utility Index produced a 15.03 percent year-to-date return. This exceeded the 10.76 percent increase in the S&P’s 500 Index as a whole.
The industry has faced major challenges: The Enron implosion; a boom-and-bust cycle in merchant generation; the general economic slowdown. Each played a part in shaking the confidence of industry shareholders, investors, and the public. In looking back over the past two years, the following statistics will help to put in perspective just how far the power sector’s fortunes had fallen:
Much of the bad news from the electric sector could be attributed to the overall economic downturn and the inappropriate actions of a few companies. Nonetheless, the financial outlook for the industry was certainly negative at the beginning of 2003. Since then, however, the outlook has begun to brighten. The majority of electric companies have maintained a steady course. The industry is now building on the solid businesses they have run for many years.
Today, the power sector is optimistic. This is not to say that the electric industry does not continue to face challenges, including the economy’s continued malaise, shrinking supplies of natural gas, pending federal energy and environmental legislation, and an aging and increasingly stressed infrastructure. But shareholder-owned electric companies are re-evaluating their business approaches and making improvements that will leave them in a stronger position for the future.
Actions By Power Companies
Electric power companies are refocusing on their core strengths—generating, transmitting, and distributing electricity. Companies are making improvements that will leave them in a stronger position for the future. Among the actions individual companies are taking, include:
These efforts have already begun to return dividends. A number of companies have turned in impressive earnings to date this year. Among the outstanding company examples are:
Actions by the Industry
Through EEI, the electric power industry is also leading an unprecedented action plan to restore confidence among investors. The goals are to embrace greater transparency in financial information disclosure and accounting, and best practices in corporate governance and market oversight. The strategies are to work with key regulatory agencies on public policies, conduct aggressive outreach to Wall Street, and lay the foundation for a variety of industry initiatives.
Among the accomplishments of the past year:
Challenges Ahead
Even with the progress the industry has made, definite challenges remain. Background on each is listed below. Although the outcome of these issues is far from definite at this time, EEI will be working to help shape policies that provide incentives to expand and improve our nation’s electricity infrastructure and to provide greater regulatory certainty about environmental costs. The result should be a vastly improved investment climate and a stronger electric power industry.
Congress:
Support for moving an energy bill remains strong. President Bush remains committed to ensuring the passage of a Bill. The House has passed legislation, as has the Senate. Both measures will now be debated in a House--Senate conference this fall, where a final Bill is expected to emerge.
One of EEI’s top priorities for an energy bill is to maintain the nation’s fuel diversity. Fuel diversity gives stability to the industry and acts as a hedge against unanticipated events, which could limit access to any fuel, or push its price to unacceptably high levels.
EEI encourages Congress to pass a comprehensive energy bill that addresses challenges to all fuel sources: clean coal technologies; natural gas production and pipeline infrastructure; nuclear decommissioning and next generation nuclear technologies; hydroelectric relicensing; and the development of competitive renewables.
The question regarding renewables is not whether they will be a part of our energy future—they will—but rather how best to move forward. A market-based approach, in which renewables thrive because customers want them and investors believe in them, is preferable to government mandates. This allows a more effective integration of renewables into our fuel mix, and, therefore, into our future.
EEI is also working for repeal of the Public Utility Holding Company Act (PUHCA). Both the House and Senate Bills include repealing PUHCA. PUHCA restricts the flow of capital into U.S. energy markets, inhibiting much needed transmission capacity in the states. PUHCA also limits investment and growth opportunities in U.S. energy markets by imposing outmoded restrictions on the business activities of electric and gas utility holding companies.
In addition to supporting generation and structural issues, a comprehensive bill should provide incentives to build the transmission infrastructure. These incentives include tax provisions for the sale or spin-off of transmission facilities; accelerated depreciation; streamlining the transmission siting process; encouraging the use of pricing incentives to stimulate infrastructure investment; and providing flexibility in the way Regional Transmission Organizations operate. It is also imperative that government-owned utilities and co-ops are subject to the same laws and regulations that apply to shareholder-owned utilities. It is difficult to encourage robustly competitive electricity markets when the rules of the market do not pertain to all the players.
FERC:
In April 2003, FERC issued a white paper on its proposed Wholesale Market Platforms (WMP) as an intermediate step before issuance of a final rule in their Standard Market Design rulemaking. The Commission has also acknowledged the reality of regional differences and agrees with EEI’s recommendation for a flexible, regional WMP implementation schedule.
Chairman Wood has gone on record to say that it is more important to do it right than do it fast. From the beginning, EEI has advocated the importance of “getting it right” and has been vocal in its concerns that FERC was proceeding at a pace too fast to fully take into account important operational, geographic and other significant differences in the various regions of the country.
The industry is moving forward on the development of a wholesale market platform with much greater clarity in terms of the process and the issues, and at a more deliberate pace that will yield more effective and lasting results. FERC has also responded to EEI’s concerns that it needs to provide incentives to encourage transmission investment. In a press release dated January 15, 2003, FERC proposed to allow additional percentage points on a utility’s return-on-equity when it participates in a regional transmission organization, divests its RTO-operated transmission assets, or pursues additional measures that promote efficient operation and expansion of the grid. This type of incentive is a good start, but concerns have been expressed that the policy statement shows a clear bias toward utility divestiture of transmission assets. The statement appears to penalize vertically integrated utilities that are transferring operational control – but not ownership – to regional transmission organizations.
Natural Gas:
During the past decade, natural gas has become an important fuel for making electricity. It is a highly efficient generating source with low emissions, and it now comprises 18 percent of U.S. electricity generation. However, gas has become, in some ways, a victim of its own success and the country now faces higher prices and potential supply constraints.
To address the long-term challenge, EEI encourages federal policymakers to ensure that an adequate and diverse fuel supply is available for the generation of electricity. Fuel diversity means that coal, nuclear, hydro, wind, solar, natural gas—and other fuel sources as they become available—can continue to be used by generators of electricity to mitigate price or supply risk in any one source.
In particular, the country must avoid policies that punish one particular fuel source or reward another. In the same vein, EEI encourages members of Congress, who are now weighing national comprehensive energy proposals, to enact legislation that will enhance the nation’s ability to explore, produce, and transport natural gas to customers who need it.
The Environment:
EEI welcomes the Bush Administration’s multi-emissions plan—the Clear Skies Initiative. The industry has long advocated a comprehensive, flexible, and cost-effective approach for reducing air emissions that would harmonize the current piecemeal and inefficient regulatory system. EEI will be encouraging Congress to move forward with legislation to meet the nation’s clean air goals more efficiently and cost effectively.
On the issue of greenhouse gas emissions, President Bush is committed to voluntary actions, rather than mandated targets and timetables. This is far more cost-effective and less disruptive to the economy. Businesses in every sector are challenged to further reduce emissions through robust voluntary programs that can be measured and documented.
In January 2003, EEI’s member companies joined the Department of Energy on the electric power sector’s initiatives to reduce greenhouse gas emissions. This new collaboration is called “Power Partners.” Already, 40 electric companies—representing 87 percent of EEI member companies’ generation—have made the commitment as Power Partners to expand on the proven success of the existing Climate Challenge, an electric industry program that eliminated 237 million metric tons of carbon dioxide in 2000 alone. Industry and company initiatives include demand side management, reforestation, investments in renewables, and research and development of new technologies. These contributions to a cleaner environment must be counted and encouraged.
Electricity is vital to the nation. Even in the sluggish economy of 2002, total U.S. demand for electricity surged by 4.1 percent over 2001. As the nation’s economic recovery gains momentum, so too will the demand for electricity. To continue to meet this demand, much work will need to be done. The electric power industry knows that restoring confidence among shareholders, investors, and the public is among the most important jobs ahead. But the industry is proceeding with the faith that its expertise, commitment, and leadership—traits that have built the world’s finest electricity system—will enable it to reach its goals.
Edison Electric Institute (EEI) is the association of United States shareholderowned electric companies, international affiliates and industry associates worldwide. Our U.S. members serve approximately 90 percent of the ultimate customers in the shareholder-owned segment of the industry, and nearly 70 percent of all electric utility ultimate customers in the nation. They generated almost 70 percent of the electricity generated by U.S. electric utilities.
The industry has faced major challenges: The Enron implosion; a boom-and-bust cycle in merchant generation; the general economic slowdown. Each played a part in shaking the confidence of industry shareholders, investors, and the public. In looking back over the past two years, the following statistics will help to put in perspective just how far the power sector’s fortunes had fallen:
- Between December 2000 and December 2002, the shareholder-owned electric utility sector lost $78.3 billion in market capitalization —a 23.9 percent drop.
- In 2002, the EEI Index, a measure of the over all stock performance of shareholder-owned electric utilities, was down 14.7 percent.
- Throughout 2002, according to S&P, credit rating changes in the shareholder-owned electric utility sector were overwhelmingly negative, as downgrades outnumbered upgrades by a monstrous 120 to 10.
Much of the bad news from the electric sector could be attributed to the overall economic downturn and the inappropriate actions of a few companies. Nonetheless, the financial outlook for the industry was certainly negative at the beginning of 2003. Since then, however, the outlook has begun to brighten. The majority of electric companies have maintained a steady course. The industry is now building on the solid businesses they have run for many years.
Today, the power sector is optimistic. This is not to say that the electric industry does not continue to face challenges, including the economy’s continued malaise, shrinking supplies of natural gas, pending federal energy and environmental legislation, and an aging and increasingly stressed infrastructure. But shareholder-owned electric companies are re-evaluating their business approaches and making improvements that will leave them in a stronger position for the future.
Actions By Power Companies
Electric power companies are refocusing on their core strengths—generating, transmitting, and distributing electricity. Companies are making improvements that will leave them in a stronger position for the future. Among the actions individual companies are taking, include:
- Improving financial information disclosure practices
- Renewing focus on the core businesses--selling non-core assets, canceling turbine acquisitions/new construction to shore up balance sheets
- Issuing new equity, and paying off debt
- Realigning trading around their own generation assets and customer obligations and accelerating debt repayment
These efforts have already begun to return dividends. A number of companies have turned in impressive earnings to date this year. Among the outstanding company examples are:
- Constellation Energy Group (NYSE: CEG)—Second-quarter earnings of $0.58 per share exceeded the company's earlier earnings guidance (which excludes special items) of $0.33 to $0.43 per share, and represent the seventh consecutive quarter in which they’ve either met or exceeded earnings guidance.
- Exelon Corporation (NYSE: EXC)—Announced an 8 percent improvement in operating earnings for the second quarter of 2003 versus the same period in 2002.
- PPL Corporation (NYSE: PPL)—Declared an increase in reported earnings of $116 million, or $0.67 per share, for the second quarter of 2003 compared to a net loss of $27 million, or $0.18 per share, in the second quarter of 2002. For the first half of 2003, PPL reported earnings of $355 million, or $2.09 per share, compared to a loss of $30 million, or $0.20 per share, in the first half of 2002.
- Entergy Corporation (NYSE:ETR) has announced second quarter 2003 operational earnings of $270.1 million, or $1.17 per share, which equaled the company record for second quarter operational earnings per share set in 2002.
Actions by the Industry
Through EEI, the electric power industry is also leading an unprecedented action plan to restore confidence among investors. The goals are to embrace greater transparency in financial information disclosure and accounting, and best practices in corporate governance and market oversight. The strategies are to work with key regulatory agencies on public policies, conduct aggressive outreach to Wall Street, and lay the foundation for a variety of industry initiatives.
Among the accomplishments of the past year:
- EEI worked with the Federal Energy Regulatory Commission (FERC) to hold technical conferences on capital finance and credit in energy markets. FERC plans to use the sessions to clarify the state of financial investments in energy and clear up contradictory anecdotal reports on the availability of financial backing. These conferences also served as the basis for FERC to consider initiatives such as its proposed policy statement to spur investment in transmission and the formation of regional transmission organizations.
- EEI vigorously led the charge for elimination of the double taxation on dividends, a centerpiece of the President’s economic stimulus package. This included a reduction in the top rate on dividend taxes to 15 percent, down from the current top rate of 38.6 percent. This is vital, since the power industry pays out more in dividends than any other industry. This Bill also included an increase in bonus depreciation from 30 to 50 per cent through 2004. These changes would free up needed capital, put more money into the hands of investors to invest, and boost shareholder confidence—all good signals to Wall Street.
- EEI has worked with member company CEOs and company executives to survey implementation issues surrounding Sarbanes-Oxley to determine industry best practices.
- EEI continues to seek clarity and definition of proposed financial disclosure and corporate governance rules with key agencies, such as the Securities and Exchange Commission, and will continue to respond to proposed rulemakings, as well as advocate the shareholderowned industry’s positions.
- EEI has an extremely comprehensive outreach and educational initiative for Wall Street and the media. For example, EEI held a series of seminars regarding improved financial disclosure, merchant energy best practices, and corporate governance issues.
- Working with Deloitte & Touche, EEI developed a comprehensive study of suggested guidelines for financial information disclosures that are responsive to the Sarbanes-Oxley Act. The study integrates the work of EEI member companies along with insights from industry experts, SEC recommendations, proposed rulemakings and meetings with regulators.
- EEI is working in close cooperation with the industry’s Committee of Chief Risk Officers to assist in formulating recommendations on governance and controls, valuation and risk metrics, credit risk management, and risk management disclosures. These recommendations provide more transparency and comparable financial information about the risk management practices of physical and financial energy trading and marketing companies.
- EEI has developed guidelines for a Model Audit Committee Charter.
- EEI created a Master Netting Agreement designed to enable companies to better manage their risks and improve liquidity by netting electric, gas, and financial contracts. These in turn help promote a liquid, wellfunctioning marketplace.
- EEI is leading the development of voluntary initiatives for market oversight and is strongly advocating timely resolution of problems.
Challenges Ahead
Even with the progress the industry has made, definite challenges remain. Background on each is listed below. Although the outcome of these issues is far from definite at this time, EEI will be working to help shape policies that provide incentives to expand and improve our nation’s electricity infrastructure and to provide greater regulatory certainty about environmental costs. The result should be a vastly improved investment climate and a stronger electric power industry.
Congress:
Support for moving an energy bill remains strong. President Bush remains committed to ensuring the passage of a Bill. The House has passed legislation, as has the Senate. Both measures will now be debated in a House--Senate conference this fall, where a final Bill is expected to emerge.
One of EEI’s top priorities for an energy bill is to maintain the nation’s fuel diversity. Fuel diversity gives stability to the industry and acts as a hedge against unanticipated events, which could limit access to any fuel, or push its price to unacceptably high levels.
EEI encourages Congress to pass a comprehensive energy bill that addresses challenges to all fuel sources: clean coal technologies; natural gas production and pipeline infrastructure; nuclear decommissioning and next generation nuclear technologies; hydroelectric relicensing; and the development of competitive renewables.
The question regarding renewables is not whether they will be a part of our energy future—they will—but rather how best to move forward. A market-based approach, in which renewables thrive because customers want them and investors believe in them, is preferable to government mandates. This allows a more effective integration of renewables into our fuel mix, and, therefore, into our future.
EEI is also working for repeal of the Public Utility Holding Company Act (PUHCA). Both the House and Senate Bills include repealing PUHCA. PUHCA restricts the flow of capital into U.S. energy markets, inhibiting much needed transmission capacity in the states. PUHCA also limits investment and growth opportunities in U.S. energy markets by imposing outmoded restrictions on the business activities of electric and gas utility holding companies.
In addition to supporting generation and structural issues, a comprehensive bill should provide incentives to build the transmission infrastructure. These incentives include tax provisions for the sale or spin-off of transmission facilities; accelerated depreciation; streamlining the transmission siting process; encouraging the use of pricing incentives to stimulate infrastructure investment; and providing flexibility in the way Regional Transmission Organizations operate. It is also imperative that government-owned utilities and co-ops are subject to the same laws and regulations that apply to shareholder-owned utilities. It is difficult to encourage robustly competitive electricity markets when the rules of the market do not pertain to all the players.
FERC:
In April 2003, FERC issued a white paper on its proposed Wholesale Market Platforms (WMP) as an intermediate step before issuance of a final rule in their Standard Market Design rulemaking. The Commission has also acknowledged the reality of regional differences and agrees with EEI’s recommendation for a flexible, regional WMP implementation schedule.
Chairman Wood has gone on record to say that it is more important to do it right than do it fast. From the beginning, EEI has advocated the importance of “getting it right” and has been vocal in its concerns that FERC was proceeding at a pace too fast to fully take into account important operational, geographic and other significant differences in the various regions of the country.
The industry is moving forward on the development of a wholesale market platform with much greater clarity in terms of the process and the issues, and at a more deliberate pace that will yield more effective and lasting results. FERC has also responded to EEI’s concerns that it needs to provide incentives to encourage transmission investment. In a press release dated January 15, 2003, FERC proposed to allow additional percentage points on a utility’s return-on-equity when it participates in a regional transmission organization, divests its RTO-operated transmission assets, or pursues additional measures that promote efficient operation and expansion of the grid. This type of incentive is a good start, but concerns have been expressed that the policy statement shows a clear bias toward utility divestiture of transmission assets. The statement appears to penalize vertically integrated utilities that are transferring operational control – but not ownership – to regional transmission organizations.
Natural Gas:
During the past decade, natural gas has become an important fuel for making electricity. It is a highly efficient generating source with low emissions, and it now comprises 18 percent of U.S. electricity generation. However, gas has become, in some ways, a victim of its own success and the country now faces higher prices and potential supply constraints.
To address the long-term challenge, EEI encourages federal policymakers to ensure that an adequate and diverse fuel supply is available for the generation of electricity. Fuel diversity means that coal, nuclear, hydro, wind, solar, natural gas—and other fuel sources as they become available—can continue to be used by generators of electricity to mitigate price or supply risk in any one source.
In particular, the country must avoid policies that punish one particular fuel source or reward another. In the same vein, EEI encourages members of Congress, who are now weighing national comprehensive energy proposals, to enact legislation that will enhance the nation’s ability to explore, produce, and transport natural gas to customers who need it.
The Environment:
EEI welcomes the Bush Administration’s multi-emissions plan—the Clear Skies Initiative. The industry has long advocated a comprehensive, flexible, and cost-effective approach for reducing air emissions that would harmonize the current piecemeal and inefficient regulatory system. EEI will be encouraging Congress to move forward with legislation to meet the nation’s clean air goals more efficiently and cost effectively.
On the issue of greenhouse gas emissions, President Bush is committed to voluntary actions, rather than mandated targets and timetables. This is far more cost-effective and less disruptive to the economy. Businesses in every sector are challenged to further reduce emissions through robust voluntary programs that can be measured and documented.
In January 2003, EEI’s member companies joined the Department of Energy on the electric power sector’s initiatives to reduce greenhouse gas emissions. This new collaboration is called “Power Partners.” Already, 40 electric companies—representing 87 percent of EEI member companies’ generation—have made the commitment as Power Partners to expand on the proven success of the existing Climate Challenge, an electric industry program that eliminated 237 million metric tons of carbon dioxide in 2000 alone. Industry and company initiatives include demand side management, reforestation, investments in renewables, and research and development of new technologies. These contributions to a cleaner environment must be counted and encouraged.
Electricity is vital to the nation. Even in the sluggish economy of 2002, total U.S. demand for electricity surged by 4.1 percent over 2001. As the nation’s economic recovery gains momentum, so too will the demand for electricity. To continue to meet this demand, much work will need to be done. The electric power industry knows that restoring confidence among shareholders, investors, and the public is among the most important jobs ahead. But the industry is proceeding with the faith that its expertise, commitment, and leadership—traits that have built the world’s finest electricity system—will enable it to reach its goals.
Edison Electric Institute (EEI) is the association of United States shareholderowned electric companies, international affiliates and industry associates worldwide. Our U.S. members serve approximately 90 percent of the ultimate customers in the shareholder-owned segment of the industry, and nearly 70 percent of all electric utility ultimate customers in the nation. They generated almost 70 percent of the electricity generated by U.S. electric utilities.
