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  • The importance of being prudent

    Long-term power supply and price stability requires sensible planning

    The word “prudent” sounds a bit old fashioned and stodgy. It’s defined as being wise in the handling of practical matters, or as exercising good judgment or common sense.

    The phrase “prudent utility ­practice” is a term of art in our industry. It generally refers to the actions a ­utility is expected to make, as a matter of course, to ensure the supply and ­delivery system works as it should, and the utility’s customers routinely and reliably receive the benefits of the service they pay for.

    Not that long ago, the exercise of prudent utility practice extended to both the supply and delivery sides of the electric utility equation. Then, a wave of restructuring washed across the nation’s electric systems. This was primarily a 1990s phenomenon and was an extension of the deregulation of banks and airlines and telephone service. The theory, which works sometimes and sometimes doesn’t, is that markets almost always know best.

    And so Illinois, along with 22 other states, took much of the regulation of the states’ investor-owned electric utilities out of the hands of their public service commissions. While the wires services (that is, the actual delivery of electricity to customers) remained under commission oversight, the power supply piece of the equation was converted into a market where, theoretically, individuals could shop for their electric supply much as they shop for any other commodity.

    For the first decade of this new structure not much happened that affected the vast majority of ­residential and small commercial customers. Except, of course, for the huge cost spike customers saw when decade-long caps the legislature placed on their costs came off. Those higher costs were the result of the prevailing market price, which had risen sig­nificantly in the years since the ­imposition of the cost caps. This resulted in the creation of the Illinois Power Agency, which negotiates the fall-back rates customers pay when they do not choose an alternative supplier.

    And now, after more than decade, a combination of reduced demand and greater supply (a result of the worst recession since the Great Depression) and new quantities of domestic ­natural gas have pushed market prices down. They are at a point where residen­tial and small commercial customers are seeing some savings compared to the bundled prices offered by the investor-owned utilities.

    At least for now.

    Meanwhile, those of us on the not-for-profit (cooperative and municipal) side of the electric utility industry have continued to exercise a level of planning and control over both the delivery services and supply side of the equation. Most of the municipal systems in Illinois, and many of the distribution cooperatives (through their generation and transmission cooperative suppliers), have made significant investments in new state-of-the-art generation facilities that will serve our customers well for years to come.

    Investments of that kind are not cheap. As my friends at the American Public Power Association like to say, no one builds a power plant on spec.

    This has created a temporary period where alternative suppliers may have some cost advantage. But temporary is the key word. Even now we are ­seeing aggregated prices for alter­native suppliers moving up. Those customers, the cities and townships and ­counties that entered into short-term contracts a few months back, will be forced to return to the market in which they may well find significantly higher costs. That today’s deals are predominantly short in term reflects the uncertainty of the markets. That uncertainty is justified, given that new environmental regulations will close existing power plants in this and adjoining states and as the price of natural gas inevitably moves up from what are historic lows.

    Kevin Gaden is the President and CEO of the Illinois Municipal Association and oversees the operations of the Illinois Public Energy Agency (IPEA) and the Illinois Municipal Utilities Association (IMUA).

    Kevin Gaden is the President and CEO of the Illinois Municipal Association and oversees the operations of the Illinois Public Energy Agency (IPEA) and the Illinois Municipal Utilities Association (IMUA).

    I don’t know the date when the tables will turn. I cannot tell you that we will be proven correct tomorrow, or six months from tomorrow. But I can tell you with a certainty that is born of my long experience in the industry, we will be proven right.

    At some point those of us who have done the prudent thing and acquired a part of our members’ resources at known costs for the long term will reap benefits for ourselves and our customers. And at that time, when our customers are insulated from the ­volatility and harsh potentials of the markets, you will have the satisfaction of knowing the customer-owned electric cooperatives and municipal utilities did the right thing.

    Not the easy thing, but the right and prudent thing.

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