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Coming soon from a utility near you: More power to the people

For the past 10 years, the electric utility industry has focused on competition and restructuring. According to Bill Post, chairman of the board and chief executive officer of Arizona Public Service (APS), Arizona's largest electric utility, the end result of competition is an increased emphasis on consumers — one that defines the new era utilities are entering. Post, a W. P. Carey graduate who is a 2006 inductee into the school's Alumni Hall of Fame, discusses the future of his industry.

2006-10-11

Arizona is the second-fastest growing state in the U.S., and Arizona Public Service — the state's largest electric utility — saw peak demand jump 9.3 percent last year. At that rate of growth, the 120-year-old company would double in size over the next decade. Heading up APS as the company's chairman of the board is Bill Post, a 1973 graduate of the W. P. Carey School of Business and one of three inducted into the school's Alumni Hall of Fame this fall.

Post, who also serves as chairman and chief executive officer of the utility's parent company, Pinnacle West Capital Corporation, has spent his entire 35-year career making sure lights come on when a customer flicks a switch. "Factually, we provide electrons to our customers, but I don't see our business that way," he said in a recent interview.

Instead, he sees himself running a service company that "cools your home, runs your computer, heats your stove," and literally powers modern-day life. Electric utilities in the U.S. are facing growing demand from consumers, congested transmission grids, environmental regulations and more. If you're hoping prices will drop, Post says that probably won't happen in today's world.

Prices are more likely to rise because the electric industry is moving into an era of high capital requirements to meet rising demand and the new infrastructure needs it creates. Still, he thinks consumers can look forward to utilities that are increasingly efficient and customer-focused, which should translate into fewer outages, better service and more energy options.

New age dawning

Over the years, Post has seen the electric utility industry transition through a number of "eras." According to him, one trend dominated the business until just recently, and although it is now ending, "it will have impact as the industry goes forward." Recognizing that the edges of this timeframe are a little fuzzy, he says, "the entire focus of the 10-year period from approximately 1995 through 2005 was on competition and the restructuring of the electric industry."

Ten years ago, Post maintains, the industry was pretty homogeneous coast-to-coast. Utilities were regulated monopolies. Competition wasn't part of their world, and he still remembers when California pioneered competition plans in 1994. That year, the California Public Utilities Commission produced an analysis of potential benefits that might result from restructuring the electric industry. A year later, the CPUC refined the analysis and scheduled a public hearing to introduce it.

"It was originally scheduled to be presented in one of the meeting rooms at the PUC in Sacramento," Post recalls. "Over a 45-day period, it went from a meeting room in Sacramento to the convention center in Los Angeles because of all the interest from all kinds of parties."

This event, Post says, was the initial step that ended with the California energy crisis of 2000 and 2001, "a debacle where competition failed." Nevertheless, competition has succeeded in some states, and California's efforts ushered in a competition-oriented era. "When the idea of competition went through the industry, many CEOs said, 'We're going to have to prepare for this,'" Post explains.

It made the industry as a whole more efficient, aggressive, creative and market-driven. And, it pushed down prices. "If you look at the early part of the competitive era — from '95 to 2000 — you actually saw declines in electric prices in the United States. Prices went down about 2 percent." A nominal price cut, but still a price cut. According to Post, the end result of competition is emphasis on consumers, and that defines the new era utilities are entering. "We, as an industry, are focused on meeting the energy needs of the customer, starting with resources of generation, for example."

Heavy load

For the near future in the U.S., Post says, "We're probably going to add 7,000 to 8,000 megawatts of new generating capacity per year." He says this "enormous financial commitment" is necessary to meet future energy growth. Partly, that's because the last decade saw little investment in new generation capacity.

"We were consuming, for the most part, generation from plants that had already been built," he continues. The country enjoyed a large reserve. Over the last 10 years, though, the reserve margin has diminished. "Now, in the next decade, we'll need to build new base-load plants," he adds. Base-load plants, the workhorse power plants that serve everyday load, are more expensive than peaking plants.

The latter only go into service when demand requires extra power, so utilities put less into their construction. "Base-load plants cost four times more than peaking plants," Post says. Still, they must be built — and paid for — first by utilities, then by ratepayers.

Wired, wired world

The utility shopping list Post sees doesn't stop with new generation. "We'll need to build about 2,000 or so miles per year of transmission lines," he continues. That's a significant increase considering that the U.S. electric transmission grid consists of around 181,000 miles of high-voltage transmission lines, according to the researchers at the Edison Electric Institute, an industry trade association. Post likens transmission lines to highways used to deliver energy. Some industry watchers claim the electric industry hasn't adequately bankrolled this part of the grid over recent decades.

He maintains, "Recently, we've seen an increase in investment in transmission, but we need to do even more." According to EEI's web site, "During 2004, shareholder-owned electric utilities spent $4.6 billion on transmission investment, as opposed to $2.6 billion in 1995." Transmission investments increase the reliability of the electric grid by easing congestion over the lines and supplying alternate pathways for energy providers to use when troubles arise.

But, money isn't the only problem utilities face when they seek to build the massive, humming towers that hold transmission lines above the treetops. Who'd want the colossal structures in their back yard? Where can utilities place such equipment without public outcry? "The only thing I know for sure is that when you build a transmission line you're going to offend everybody," Post says with a laugh. His humor actually points out the difficulty with which utilities seek placement for such equipment.

Breath of fresh air

Another dollar drain ahead for the electric industry is new environmental equipment. Utilities face limits on the amount of sulfur dioxide new generating plants can produce. Carbon dioxide emissions are gaining more regulatory attention, too. "There are differing estimates," Post says, "but if you look at the next 10 years, we're probably going to put $40 billion or $50 billion into environmental equipment." Still, he maintains that such expenditures are important to electric industry players, and industry statistics confirm his belief.

According to the EEI, the electric power industry has already cut sulfur dioxide emissions by 40 percent from the industry high. And, in 2001 alone, the industry eliminated 275 million metric tons of carbon dioxide through a voluntary partnership with the U.S. Department of Energy. This accounted for 78 percent of the carbon dioxide reductions made that year through the entire DOE program.

Go nukes

On the generation front, Post anticipates "significant movement toward nuclear power." He explains that, today, about 20 percent of U.S. capacity comes from nuclear power plants. In recent years, the U.S. has been decommissioning such plants, but he notes, "The rest of the world has been out there building them." Given environmental concerns, he sees the U.S. playing catch-up soon. "Nuclear power is one of the ways to meet demand and meet the challenges of air emissions. There are no greenhouse gas emissions from a nuclear plant."

Renewable energy sources such as solar and wind power are on Post's list of solutions, too. In fact, he sees no "useful debate" over which type of generation facility is best: coal, natural gas, oil or renewables. "We're going to need all of them," he says. Another solution: demand-side load management. That's what utilities call the act of inducing customers to reduce energy demand during peak-load days or hours. Demand-side management can occur two ways: Either the utility hikes prices during peaks, then waits for customers to voluntarily reduce their energy use.

Or, the utility can put devices into the home, allowing the energy provider to remotely control appliances such as air conditioners or pool pumps. Customers earn better prices for participation in such programs. Meanwhile, the utility saves money on the avoidance of investments in generation capacity. "If I can take a kilowatt out of the peak load, that's the same to me as building a power plant to satisfy demand," Post says.

Like any new technology, demand-side management tools take money for things like load-control devices that turn off the pool pump or metering that captures more than monthly consumption so utilities can charge time-of-use rates. Post calls this "instantaneous tele-metering," and it is meter reading that occurs automatically, transferring data on customer energy consumption to the utility very quickly via high-speed computer-driven communications networks.

Utilities can now invest in metering systems that will gather meter data in 15-minute increments. That amount and quality of information offers utilities the chance to improve operational efficiency. Instead of waiting for customers to call in reporting outages, the utility can spot trouble with such meter data. Instead of sending out service personnel to read a meter when the customer moves, the meter data could suffice.

It's quicker than sending a technician out to the scene, and it's cheaper, too. "Technology in our industry will be very significant in improving overall efficiency, effectiveness and value," Post concludes. "Keeping prices down and having electricity available 100 percent of the time — at the end of the day, that's what matters to customers."

Bottom Line

• The electric utility industry is moving from an age of focusing on competition to a customer-oriented era.
• Serving the energy needs of customers will require increased investment in infrastructure.
• In the near future, utilities will need to add around 8,000 megawatts of new generating capacity each year, as well as about 2,000 miles of new transmission lines annually.
• Regulating power plant emissions such as sulfur dioxide and carbon dioxide will require utilities to invest $40 billion to $50 billion over the next 10 years.
• Nuclear power, renewable energy sources and demand-cutting programs are some of the ways utilities will meet future resource needs.

Management Strategy Faculty