Resource Planners’ Forum CREPC/SPSC

1. Resource Planners’ Forum CREPC/SPSC Risk-aware Regulation and the Modern Utility Ron Binz, Public Policy Consulting October 4, 2012 • San Diego

2. Ron Binz • Public Policy Consulting • Center for the New Energy Economy, Colorado State University • Former Chairman Colorado PUC • Former Colorado Consumer Counsel • M.A. (Mathematics) University of Colorado; B.A. (Philosophy) St. Louis University • Makes wine, beer, cheese and pickles rbinz@rbinz.com

3. Authors • Ron Binz • Richard Sedano • Denise Furey • Dan Mullen • Available at www.ceres.org

4. High Stakes • The US electric industry is entering a “build cycle” with much higher investment than in recent history • Brattle Group estimates $2 trillion by 2030 • Causes • Aging infrastructure • New transmission requirements • Demand side and smart grid • Much stronger air and water regulation, including GHGs • Fuel economics • Challenges to utilities • Flat load growth • Distributed generation • Uncertain economy • Financial metrics less forgiving than in 1980s

6. The US generation fleet is aging

8. US Electric IOUs Rating History1970 – 2010 4% AA A AA AA 22% A AA A A BBB 46% BBB A BBB BBB 27% BBB- 1% Source: Standard & Poor’s, Macquarie Capital

9. The Key Question for Utilities and Their Regulators How do we ensure that $2 trillion is spent wisely?

11. Notes • Unadjusted 2010 cost estimates were used for consistency • Costs for wind and photovoltaics have fallen sharply in last two years (faster than these 2010 estimates) • Cost of nuclear power has risen post-Fukushima (more than these 2010 estimates) CO2 costs With incentives No incentives

13. A Catalog of Investment Risk Seven categories of risk used in scoring… • Construction cost • Fuel and Operating cost • New Regulations • Carbon Price • Water Constraints • Capital Shock • Planning • Cost-related • Construction cost overruns • Capital availability • Operational surprises • Fuel cost escalation • “Bet the company” investments • Management imprudence • Resources limited • Consumer reaction to rates • Time-related • Construction delays • Changing markets • Environmental regulations • Changes in load • Technology advancement • Catastrophe • Contingent projects • Government policies

15. Cost Risk

17. Risk Aware Planning at the Tennessee Valley Authority

18. Seven Essential Strategies for Risk-Aware Regulation • Diversify utility supply • Utilize robust planning processes • Employ transparent ratemaking practice • Use financial and physical hedges • Hold utilities accountable • Practice active, “legislative” regulation • Reform, re-invent ratemaking policies

19. Rewards for Sound Decision-making • For consumers: keep more $$, quality • For utilities: corporate health, predictability • For investors: safety, value, expectations • For employees: safety and welfare, pride • For the regulatory process: public confidence • For society: spending precious capital wisely

21. Utilities 2020 • Foundation funded • Run by two former Colorado regulators named Ron • Advised by board of experts • Goal: to explore new business models and advocate new regulatory models to enable new utility business models to evolve.

22. Methods: • Interviews with utility CEOs and leading states regulators • Evaluations of other systems here and abroad • Dialogues with utility execs and commissioners

23. CEOs want a clearer, more consistent direction from state energy policies Utilities have little incentive for innovation, firm level efficiency Commissions need a better understanding of the utility business and its needs Utilities want certainty on climate policy Utilities want healthier working relationships with commissioners and staff utility CEOs: What we’ve heard from

24. A primary concern is with increasing utility rates Regulators are open to modifying the regulatory model; looking for ideas Some commissioners are dissatisfied with the adversarial process Many commissioners face severe barriers to communications with stakeholders, and even fellow commissioners Commissions have inadequate resources What we’ve heard from commissioners:

25. Conclusions • Operating and regulating utilities will get more challenging. • Affirmative risk management can help avoid expensive mistakes. • The utility business model is changing; regulation must also change. • Investors are more vulnerable in this build cycle. • Risk shifting is not risk minimization; not all “credit positive” cost recovery mechanisms are sustainable policies. • Energy efficiency performs well in risk-aware regulation. • Regulators should be more than judges; they must also operate in “legislative mode.” • Regulators should strive to be informed, active, consistent, curious and courageous.

26. Thanks for the invitation I look forward to your questions.