Energy & Power Generation

When I first started getting into the utility business I remember that I was on an airplane traveling to a client in another city when I started talking with a woman yesterday who had a young son. She asked what I did for a living and I said that I worked with utilities. Her son piped up “Are you the man who turns off the power?” and that killed the conversation (mom was embarrassed and I learned to be careful about too much information).

One of the different elements about utilities is that they serve all customers. Since utilities are a “natural monopoly” (meaning that it doesn’t make sense to have two companies stringing up electric poles side by side) the flip side of giving them monopoly rights is that they must provide for all the customers in their “service territory”. While most of the readers of this blog probably never interact with the utility company unless they move or have an outage, utilities spend a significant amount of time and money on collections and turn-on, turn-off activities for poorer customers. Each of these events is preceded by multiple calls, collection attempts, and then physical visits, none of which make money for the utility.

While a lot of this made sense when utilities were regulated monopolies, now many regions have significantly “de-regulated”, which mainly means that the generators of power are free to charge what they want and the local utility makes its money by passing on power costs and charging more for their profits. In the case of Illinois, where Exelon provides (most of) the power and then their fully-owned subsidiary Commonwealth Edison provides power to residents (and complains about the high cost of power that it passes on), no one is shedding tears for Exelon. However, in other areas where the generation and distribution companies are actually separate, you need to start thinking harder about the cost of poorer residents in your service territory.

This article describes the (sad) case of a disabled resident in Bronzeville (a less affluent area in Chicago) who is complaining to the Chicago Tribune that the local gas utility won’t turn on the fuel in an article titled “Gas Shut-off Leaves Disabled Man in the Cold“. In the article, the man hasn’t paid his bill, so the utility comes and turns off his service in April, and the man is angry and complains to the newspaper.

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The Los Angeles Department of Water and Power (LADWP is the most common acronym) is a publicly-owned utility that serves the city of Los Angeles with water and power. LADWP is in the news right now because of a dispute with the city over a transfer that LADWP usually makes in the amount of 8% or so of its revenues. Since the city of Los Angeles is essentially broke (per the article, their reserve fund that should be in the $220M range will be down to $25M or $30M) this delay in transferring funds is putting the city close to the edge. This article is titled “Los Angeles Faces Threat of Insolvency” from the 4/9/10 WSJ.

Background on LADWP:

LADWP is the largest municipal utility in the country. According to their annual report for the year ended June 30, 2009 which can be found here(most municipal entities end their year in June, not December like publicly traded companies), the power entity (not water) had the following key facts:

– annual revenues of $2.8B / year
– $6.6 billion in utility plant assets (net of depreciation)
– approximately 7200 MW of useful capacity, of which the vast majority is coal, hydro, nuclear power, or natural gas (renewables are 270 MW, or about 4% of the total
– in 2009 they transferred $223M to the City of Los Angeles, or 8% of revenues (of $2.8B)
– their pension plan for employees is 70% funded when unrealized investment losses are taken into account (not great, but better than Illinois)
– LADWP acquired natural gas assets in Wyoming in 2005. After the collapse of the California power market (where LADWP performed relatively better than their investor owned peers) they decided to go and get their OWN gas supply – the article from 2005 is here. I find it interesting that a non-profit electrical utility owns their own natural gas supply, but it probably seemed to be a good idea when the cost of natural gas was spiking up to $14 / unit (it is now down nearer to $4 / unit with innovative new exploration techniques)
– LADWP has been “hedging” against the price of natural gas, to ensure that the utility has adequate funds available if there is a price rise. As of June 2008, the value of these hedges was $213M (favorable), and as of June 2009 the value of these hedges is ($168M) unfavorable. This is likely due LADWP “locking in” at the price of gas somewhere above its current price near $4 / unit… this method will result in continuing (unrealized) losses as long as the price of natural gas stays low, which it appears to be on track to do for some time

LADWP is in dispute with the city because LADWP wanted to raise rates. LADWP said it needed to raise electric rates to pay for the new renewable energy commitment for the city of Los Angeles. The city wants to have 20% of electricity from “renewable” resources (this must include hydro, because their “true” renewable level is much lower, although no one can site new hydro plants anywhere due to environmental rules) which will require a massive increase in investment in generation and transmission assets because 1) renewables have a high cost / MW to install 2) most of the renewable generation sites (geo-thermal, solar) are not where the grid goes to today, so costly enhancements to the transmission grid are needed.

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Wind power, like nuclear power, has incorrectly been described as a key part of the solution to electric generation in the USA. T Boone Pickens, the famous wildcatter, had a plan to develop large wind generating plans across the central US. Back in mid-2009 he folded his tent, noting that there wasn’t any prospect of building transmission lines to bring wind power from where the wind is best to the cities where the demand resides, as I noted here. Anyone remotely familiar with the actual capabilities of financing transmission nowadays knew it was a fools errand, since routing a transmission line literally takes over a decade of permitting and routing is often very inefficient, such as in this case.

The Chicago Tribune finally awoke to this situation in a decent article in the Sunday paper, titled “Putting Wind Generated Power Where It Is Needed“.

In the near term, companies are opting to harness wind power closer to existing transmission lines, usually near urban areas, to avoid the lengthy and costly process of building new lines. Aside from pockets of strong winds in the midsection of Illinois, however, some of the most powerful wind in the U.S. stretches from the upper Midwest, south, into Texas.

In order to integrate and move that alternative power east through Illinois, the grid would have to be expanded and upgraded, say transmission experts and utility companies.

The estimated cost to move that wind power east could range from $64 billion to $93 billion in 2009 dollars and would require 17,000 to 22,000 miles of transmission lines to be built in the eastern half of the country alone, according to the Eastern Wind Integration and Transmission Study (EWITS) published in January and prepared for the National Renewable Energy Laboratory.

The Chicago Tribune even included a nice graphic that is in the post above; it clearly shows where the prime wind territory resides (west of the population centers in the Midwest) and the lack of transmission to bring this power to market.

“In many instances, interconnection studies indicate that adding a new power plant would overload transformers and transmission lines hundreds of miles away,” the American Wind Energy Association and the Solar Energy Industries Association concluded in a white paper published last year. “…Its owners must pay to upgrade all of the transmission equipment, often at a cost approaching or exceeding the cost of the power plant itself.”

While the journalist at the Chicago Tribune has finally stumbled upon the truth, which is that the best territory for wind generation is not located near population centers AND the cost and time of setting up the transmission grid far surpasses any reasonable possibility that this would reasonably occur, the writer fails to reach the logical conclusion of the situation, which is:

WIND GENERATION IS NOT A VIABLE SOLUTION IN THE MIDWEST BECAUSE THERE IS NO TRANSMISSION GRID TO DELIVER THE POWER, AND THERE IS NO REASONABLE POSSIBILITY THAT WE WILL DEVELOP THE GRID OVER THE NEXT FEW DECADES.

Thus, the reasonable conclusion is, we ought to stop talking about wind power in the Midwest and move on to more practical options.

Too bad that isn’t going to happen and journalists are going to keep talking about wind power like it is viable, because they don’t know any better, and most readers will keep reading it as if it’s true.

Cross posted at LITGM

Energy Futures Holdings (EFH) is a large utility based in Texas that used to be TXU. They were taken over by private equity in one of the largest buyouts during the “peak year” of 2007. I wrote about them here as they began to have problems repaying their monstrous pile of debt which mainly comes due in 2014. If you go to this file on EFH’s web site and go to page 12 you can see the $20B in debt coming due on that date (EFH is privately held and thus does not have a stock ticker but since their debt is publicly held they do have analyst presentations).

The New York Times wrote an article on the EFH buy out titled “Power Players, Unplugged” on February 28, 2010. While we may take the NY Times to task from time to time on politics in general I find their business writing to be of high quality.

They sum up the deal as so:

The buyout was, in effect, a gargantuan bet that natural gas prices would keep climbing; instead, plunging prices coupled with a hobbled national economy have cut into the cash the company generates.

Investors who bought $40B of TXU’s bonds and loands – including legendary wise men like Warren Buffett – have seen huge losses as most of the bonds trade between 70 and 80 cents on the dollars. The other $8B used to finance the buyout came from the private equity investors themselves… analysts say that this latter stake currently has little value.

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