Legislation requiring heavy investment in clean technologies should actually boost utilities' profits, AEP CEO Mike Morris says.
Common sense might lead one to believe that climate change legislation will be bad news for one group of big polluters: power utilities, which generate half of the country's electricity with coal. The carbon cap-and-trade scheme that California Democrat Henry Waxman will likely succeed in shepherding through the House of Representatives this month would force big utilities to invest millions of dollars in often unproven emissions-reduction technologies and replace some dirty, coal-fired power plants with clean, expensive wind and solar power.
But common sense can mislead, especially when attempting to decipher the finances of government-regulated electric utilities. The huge, mandatory investments in clean energy technologies could create new opportunities to boost earnings for utilities like American Electric Power ( AEP) of Columbus, Ohio.
Utilities make narrow margins on the sale of electricity to ratepayers and grow earnings by investing in capital projects. AEP, like other big utilities, earns modest, single-digit returns on projects like a new coal-fired generator. But regulators granted AEP a 14% return to build a 290-mile-long high-voltage power line in West Virginia and Maryland, where existing lines have become dangerously overloaded. Ratepayers pick up the cost of the project via "rate relief," or government-approved utility bill increases, with added margins benefiting utility investors.
The federal government will likely prod utilities to prioritize clean energy projects with guarantees of similarly rich returns, according to AEP Chief Executive Mike Morris. Morris met with Forbes to discuss the impact of green legislation on utilities. AEP, which earned $1.4 billion on $14 billion of revenue in 2008, provides electricity in 11 Midwestern states, while its transmission business is building networks of high-voltage transmission lines with partners including Berkshire Hathaway ( BRK ), subsidiary MidAmerican Energy and Allegheny Energy ( AYE). Its high-voltage transmission projects are the first pieces in what could become a nationwide backbone grid to carry renewable energy from western wind farms cross-country to population centers along the eastern seaboard....MORE, including interview.