Beleaguered Electric Utilities

The popular pastime of knocking the folks who send your monthly electric bill may deserve an agonizing reappraisal. for the utility industry has some big problems of its own. Some companies are more troubled than others, but certain trends and conditions exist nationwide.

An underlying reality is that electricity use in the United States is drastically below levels expected a decade ago. Electricity generation between 1973 and 1981 went up at the average annual rate of 2.7 percent, in contrast to the preexisting, long-term historic rate of around 7 percent. Prior to the sharp increase in electricity prices—dating from the early seventies—projections of electric power demand continued to reflect judgments of growth near historic rates. For example, the Federal Power Commission (FPC's) 1970 National Power Survey projected 1970-80 generation growth at 7.2 percent yearly, a rate that assumes a doubling of demand within ten years.

Overcapacity

Compare that strikingly poor, if understandable, projection, with corresponding estimates of growth for installed capacity. The FPC's 1970-80 growth estimate was 6.7 percent annually, only modestly higher than the 6 percent actually recorded. In this case, of course, accuracy was no virtue. Capacity additions had to be premised on expected needs; those needs failed to materialize, and the result is reflected in a steadily diminishing degree of capacity utilization. The average "plant capacity factor" in the early 1970s stood at about 54 percent; toward the end of the decade, it had dropped to about 47 percent. A related indicator tracks the same basic course of events: the "gross peak margin"—the spare generating capacity available at highest-demand periods—rose from 19 percent in 1970 to 31 percent in 1980.

To be sure, some portions of both the decline in the rate of demand growth and the reduction in capacity utilization were brought about by dampened economic growth. But a good part of it seems unmistakably related to more efficient use of electricity in both the residential and business sectors of the economy, a tendency spurred by higher prices.

These developments have affected electricity planning. A recent Department of Energy (DOE) report, bringing together generation and capacity projections of the country's Regional Reliability Council areas, shows 1981-90 capacity growth of 3 percent per year and generation growth of 3.6 percent. For the time being, however, the abnormal surplus in plant investment imposes on the utilities costs whose recovery is impaired because of lagging rate relief. (Between 1976 and 1980, according to the Edison Electric Institute—the industry's trade association—the average authorized return on common equity rose from 12.8 to 14.2 percent; yet the return actually earned fell from 11.5 to 11 percent. This at a time when rates of return of industry in general were rising steeply.) Enlargement of the rate base against which utilities are allowed to earn their rate of return is itself impeded by construction delays on nuclear and other projects subject to rapidly escalating capital costs. High interest rates have further compounded the utility liquidity situation: they have contributed to erosion of (quasi-fixed income) stock prices and, in cases of new common stock offerings at market prices substantially below book values, diluted the equity of existing stockholders. Many utility systems have seen their bond ratings deteriorate. The January 4 issue of Forbes magazine describes electric utilities as ranking "near the bottom of American industry in profitability . . . ." Only recently has there been some scattered evidence of improvement.

Regional, company differences

This nationwide profile masks differences among regions and companies. For example, a recent DOE report shows "adjusted reserve estimates" (which allow for such factors as probable outages and power exchanges) for the twenty-three electric regions making up nine Regional Reliability Council areas ranging from a margin of 53 percent (Oklahoma) to a deficiency of 3 percent (for the Virginia-Carolinas group). Not surprisingly, utilities with strained capacity margins have shown a greater disposition to encourage conservation by customers than those with ample actual or prospective reserves. Thus, Jersey Central Power and Light, its own capacity tight and its former power supply from the damaged Three Mile Island nuclear installation halted, is participating in an interesting experiment. The company "buys" substantiated residential energy savings from a third-party management concern (which arranges improvements such as weatherization) at a cost no higher than that of the additional electricity supply otherwise required. The program is not without its complications, but it does illustrate an innovative departure.

In the years ahead, some areas can anticipate substantially faster electricity demand growth than others. And, irrespective of growth, many systems must give serious attention to replacing aging facilities. But even aside from those perennial planning dilemmas, the country may have reached a juncture at which some fundamental questions might be raised about the role and operation of utilities. For example:

• Does sluggish electricity demand growth mean that the more modest increments to generating capacity in prospect can be economically accommodated by "innovative" resources and technologies (for example, power from municipal solid-waste combustion) rather than traditional central power stations?
• Do changes in electricity economics and technology raise doubts about the continuing "natural monopoly" rationale for regulation of power generation?
• Should utilities routinely be obliged to evaluate the economically optimal means of meeting customers' future needs—through conservation, conventional expansion of capacity, decentralized generating modes, renewable resources?
• Should utilities be allowed to engage in—and can they be expected to perform efficiently—the marketing of energy conservation services?
• Do state public utility commission decisions adequately balance the interest of ratepayers, investors, and the public at large, or do political constraints render such a balancing act hopeless?
• What broad legal and institutional changes might be needed at the federal, state, and local levels?

The issues raised by these and other questions are not all clear-cut. For example, a particular outcome—say, trash-generated power that may save more in landfill costs than it adds to electricity costs—may confer a distribution of costs and benefits not easily dealt with within the traditional regulatory framework. That is, by what means does one motivate the individual utility when the payoff is to the community as a whole?

Imaginative ideas for addressing the problems and opportunities confronting utilities and the nation in the years ahead are badly needed, and right now questions outnumber answers. That is far from discouraging, however. Ten years ago, most interested observers did not even grasp the outlines of the questions that now seem so urgent. Of course, present analysts might be mistaking the current situation for long-term reality, but it would seem that the kinds of questions being raised will serve the nation—and the industry—well regardless of now-unforeseen shifts in supply and demand.