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As utilities cut outlays, some electricity users may gain

By Business correspondent of The Christian Science Monitor / November 17, 1982



Boston

Consumers have seen their electricity bills rise rapidly in recent years. But at least in the ''snow belt,'' they may not increase so fast this decade.

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That is the result of a slowdown in spending on new power generating facilities by electrical utilities.

Since the first Arab oil embargo in 1973, the electric utility industry has had to generate a lot more than electricity. With its capital spending meter spinning crazily, it has had to get money to build this new plant and equipment.

This year, analysts and industry officials say, capital spending by electric utilities will peak at about $35.4 billion. Until 1990 at least, outlays will slowly wind down, and utilities will get a higher return on their investment. So they may not need to ask regulators for as large increases in electricity rates.

Several things caused the surge in capital spending, says Carl Seligson, managing director of Merrill Lynch White Weld Capital Markets Group, an industry underwriter. In a broad explanation, Mr. Seligson said that most of the spending boom started with the oil embargo. It drove some electric utilities to shift their fuel base from vulnerable oil to a diverse fuel mix, including nuclear power.

''Nuclear was a disaster'' in terms of cost, Seligson said. So the industry began to step up construction of coal-powered plants.

To top it off, he explained, this spending explosion came at a time of high interest rates, high inflation, and an economy heading down the recession path. Return on equity for the utilities went down, and rates to consumers went up.

''Back in the '60s, the utilities were financing over half of their construction costs internally,'' he said. The financing pinch has been so tight since then that last year the industry could only support 32 percent of its construction costs from internal earnings.

But the pressure to spend megadollars on construction is beginning to let up. Interest rates and inflation are lower now, and ''most of the construction projects are being completed as nuclear and coal units start coming on line,'' says Fulton Holmes, an industry analyst with Morgan Stanley, an investment banking firm.

One of the big spending areas, nuclear power, ''will be coming down over the next few years at a rapid clip,'' says Kirk Willison, spokesman for the Edison Electric Institute, the industry's Washington-based trade association. The institute projects that nuclear spending will drop from $13.7 billion this year to $5.5 billion in 1986. ''No new plants are being ordered,'' Mr. Willison added.

In many areas, demand has dropped and is not expected to pick up again rapidly. ''Demand for electricity just has not been there,'' because of conservation of electricity, says David Blitzer, chief economist at Standard & Poor's.

''Demand today is lower than what we have experienced in the past,'' agrees Stanley Skinner, chief financial officer for Pacific Gas & Electric. ''Other things being equal, that alone should drive down future construction expenditures.''

Because of these reasons, ''rate increases in the future will be much more moderate,'' Mr. Holmes contends. But he cautions that ''capital spending and rates must be looked at on a regional basis.''

Holmes explains that ''there has been a huge demographic shift toward the South, and many utilities there are still trying to diversify their fuel mix. They are heavily weighted to oil and gas. While trying to get out of that, they still must meet rising kilowatt demand.''

At Houston Lighting & Power Company, an arm of Houston Industries Inc., ''our expenditures will be quite large,'' says spokesman Stephen Gonzalez. HL&P has two nuclear and four coal units under construction. It just cancelled one other nuclear project ''as a result of economics.''

The company says it will finance its construction costs ''by selling substantial amounts of common stock and bonds.'' But the company will still ''require substantial rate relief,'' Mr. Gonzalez commented, with average rates over the next 10 years increasing about 20 percent annually, ''if not more.'' Regulators, however, will ultimately be the ones to decide on rate increases.

But ''in the snow-belt area,'' Morgan Stanley's Holmes says, ''much of the trend toward rising rates will be over with.'' He cites less demand from industry because of plant shutdowns and the completion of most new plant projects. ''Regulators see that most utilities won't be doing material construction until the early to mid 1990s, and at this point, it would be hard to grant general rate increases.''

Edward Burke, outgoing president of the National Association of Regulatory Utility Commissioners, is optimistic. ''Hopefully,'' he says, ''the reduction in new capital expenses will result in a stabilization of rate increases.''

While most utilities are consistently unable to get the return on equity allowed by their regulators, Mr. Holmes thinks this situation will change in the next few years. ''From here on in, there will be a restoration of the equity ratio back to better levels,'' he said.

And, the analysts say, utilities will have an easier time financing the capital expeditures they do have to make. With interest rates coming down and the stock and bond markets rallying, long-term bonds and securities appear as a fairly attractive way to raise capital.

But Edison Electric's Mr. Willison hasn't stopped worrying about the future yet. ''There's less pressure on capital spending and rates,'' he says, ''but so many factors that could come up - interest rates, inflation, fuel prices. It's difficult to look ahead.''