Heavy Capital Spending Crunches Utility Companies: A Look Ahead to 2016

In an April 2015 article, the Wall Street Journal points out that families in New York are paying nearly double (40% more) in electricity costs compared to prices just ten years ago. While it’s certainly true that the price of many goods and services has risen substantially in the past decade or two, what’s interesting about the trend in utility costs is that while consumers are seeing increasingly higher bills, the cost of some natural resources has actually decreased.

Electricity costs on the rise despite falling natural gas prices

The price of natural gas, for instance, which is the primary fuel used to generate electricity in New York, has dropped 39 percent during the same ten-year period. According to the Wall Street Journal, fuel accounts for at least 25 percent of the typical electrical bill, yet consumers aren’t seeing the benefits of substantially lower natural gas costs.
Since 2004, the cost of residential electricity has risen 39 percent, with the average price of a kilowatt-hour of electricity rising 3.1 percent last year alone, to 12.5 cents a kilowatt-hour. The 3.1 percent increase represents a rate far above the rate of inflation, meaning electricity costs are rising above what even cost-of-living pay rate increases can conceivably cover. In other words, consumers are feeling the pinch of rising electricity costs in their wallets.
The reason, WSJ says, is because of the trend in the utility industry toward heavy capital spending.

Capital spending by utility companies at its 30-year peak

In New York, power companies spent $17 billion in capital expenditures in the past decade alone. Of course, this spending is anything but frivolous. For the most part, it’s going toward new equipment – often direly needed – such as power plants and pollution control devices.
Also in the period since 2004, annual capital expenditures by utility companies (of the investor-owned variety) more than doubled, from $41 billion in 2004 to $103 billion. This stat comes from the Edison Electric Institute, which also estimates that the total capital spending between 2003 and 2016 is expected to top $1 trillion. Overall, this massive spending splurge is the largest the industry has experienced in three decades.
Bob Burns, an independent consultant and former energy researcher at Ohio State University, tells the WSJ that the high rate increases consumers are seeing on their electric bills can be directly attributed to this massive increase in capital spending.

Investments in infrastructure and other assets are not always frivolous

“Experts say there are several reasons for soaring spending, including environmental mandates, and the need to harden the grid to protect it from storms, physical attacks and cyber hacking,” according to the WSJ piece. “But utilities have another incentive for heavy spending: It actually boosts their bottom lines—the result of a regulatory system that turns corporate accounting on its head.”
The article goes on to say that the odd regulations impacting the industry mean that companies are allowed a percentage of profits – often approximately 10 percent of the shareholders’ equity that’s tied up in assets like power plants, transmission lines, and other assets. Under this model, higher capital expenditures means the ability to make more profit, which can lead to investments in infrastructure and other assets that aren’t necessary. Other experts disagree, expressing doubt that utility companies are realistically spending millions of dollars on unnecessary assets just to boost profits.
In fact, in most cases, the investments being made by utility companies today stand to benefit consumers, if perhaps not for many years. Over time, these capital investments are intended to pay off in the form of better, more reliable service delivery, less outages, and less damage to the environment. Sometimes, infrastructure investments can actually result in lower costs for consumers, but those benefits won’t be realized for many years, too many for today’s consumers to see in their lifetime.

What to expect in 2016

The battle over regulatory issues and efforts to right a system that some perceive as flawed is one that will be settled between state legislatures and utility companies, and it’s likely that this debate will be a topic of discussion throughout 2016. In the meantime, utility companies are facing increased pressure both from regulators and consumers to minimize cost increases that are pinching consumers’ pocketbooks. With many infrastructure and other capital investments not a luxury but an absolute necessity, capital expenses aren’t likely to dwindle anytime soon.
That’s why utility companies are increasingly looking to solutions like asset tracking and management systems, which provide a more comprehensive overview of the company’s entire asset infrastructure and facilitate processes that allow companies to get more value from their investments over time, such as regular maintenance and repairs that can extend the useable life of pricey assets. As new regulations are likely looming on the horizon, an effective asset management system will provide a seamless process for compliance and reporting requirements, as well.
In 2016, we expect to see continued discussions about utility rates, and whether or not a resolution is reached during the coming year, our bets are on utility companies embracing the power of asset tracking to further their investments, improve compliance, and increase value.