Gap In Electrical Infrastructure Investment

The author, Leonard S. Hyman, a Senior Associate at Rudden, is predicting future deterioration in electric system reliability if appropriate regulatory incentives are not provided and inadequate spending on infrastructure continues. Mr. Hyman attributes the sector's lack of activity in capital system improvements to a number of causes and describes the gap as "too large to ignore."

Citing past industry standards, Mr. Hyman states that electric utilities and transmission owners should spend about $63 billion for distribution improvements, and about $25 billion for transmission improvements, in the 2001-2005 period. However, in 2001, utilities spent only $8.5 billion on distribution and $3.7 billion on transmission, leaving balances of $54.5 billion and $21.3 billion, respectively, for 2002-2005. That averages out to $13.6 billion per year for distribution and $5.3 billion per year for transmission. Leonard asks, "Has the industry become astoundingly more efficient in managing its capital expenditures or should we expect the spending plans to rise dramatically?"

The report postulates that deregulated activities diverted money away from investing money on system improvement and replacement, in favor of steering funds toward deregulated activities with the potential promise of a higher return than regulated assets could earn. Regulators, inadvertently, encouraged the same pattern when they implemented price caps as part of bargains that liberated generating assets from regulation. Now the bill is coming due.

Financially, the utility and energy sectors are under tremendous pressure to pay off debt. Mr. Hyman predicts that filings for rate increases will be necessary to cover the costs of new capital needed for the higher level of spending required to maintain reliability.