Electric industry hard put to forecast US demand
Boston — A major slowdown in the growth of electricity consumption has upset the plans of the nation's electric utilities. The articles on this page and the next look at some of the problems they face and ways they are trying to work out of them. Later this week, another article will look at their financing problems.
Earlier this year, after investing $199.6 million in the Cherokee I nuclear power station, the Duke Power Company of Charlotte, N.C., canceled construction. It was the sixth nuclear plant Duke had canceled in a year, though some were only on paper.
A major reason for the cancellation, Duke chairman William S. Lee told the North Carolina Utility Commission, was that the plant would not be needed until at least the mid-1990s, instead of the early part of that decade, as previously thought. With so many uncertainties about possible changes in electricity use, finances, and regulation, Duke Power simply could not plan that far ahead.
Planning. Of all the resources needed to run an electric utility in the United States today, the most important may not be nuclear fuel, coal, oil, or even money. The most important - and the one most lacking in recent years - may be the ability to make reasonably accurate long-term plans.
Once, 10 or 12 years ago, it didn't take so much expertise or planning to manage and regulate an electric utility.
It was an era of cheap energy, seemingly inexhaustible fuel, and the promise of hundreds of nuclear plants that would make electricity ''too cheap to meter.''
With electricity sales and revenues growing faster than the economy itself, planning usually meant that a utility simply planned on building more big power plants. Because new plants were more efficient and closer to the customers, each one actually reduced the cost of electricity, and regulators often got to approve reductions in rates.
But the Arab oil embargo in 1973-74 and another oil shock in '79 changed all that. So did rapid inflation. So did new concerns about nuclear power safety and waste management. And so did a newly aware public that forced utility regulators to be much tougher on proposed rate increases. Further, individuals and corporations learned to aggressively conserve energy.
Today, utility executives are caught in the conflict demands of uncertain inflation and changing fuel prices, a regulatory mandate that requires them to always provide reliable ''least cost'' electricity at whatever levels customers want, and a responsibility to stockholders and bondholders who want a fair return on their investments without too much risk.
Worst of all, if a utility wants to build a new power plant, its decision must be based on projections of what the economy will be like more than a decade away. Estimates of the cost to simply keep the nation's lights on and the economy growing at a reasonable pace range from $300 billion to $475 billion for new and upgraded power plants over the next 10 years. And those are in 1983 dollars.
''The utilities have long, long lead periods in their construction programs, '' says Peter Schmidt, an analyst at Prescott, Ball & Turben, a Cleveland brokerage. ''These lead times are subject to the vicissitudes of commodity prices, inflation, and politics through that whole period.''
As a result, utilities are asking themselves questions that will face their business, their customers, and the nation for at least the rest of the century.
* How many more times will already announced or partially built power plants be canceled?
* Will the slow rate of growth in electricity demand, which has averaged 2 to 3 percent in recent years, continue?
* Will the fact that no utility is willing today to start a new nuclear-plant project leave the US too dependent on other fuels like coal and oil while it tries to increase its use of renewable and alternate energy sources?
* Are utility customers and taxpayers willing to pay the higher costs of building or adapting coal-fired plants that will not add to such pollution problems as acid rain?
* Will a possible hiatus in construction of large new power plants, expected to begin around 1988 or 1990, when plants now in the planning or construction pipeline are completed, leave the US short of power at the turn of the century?
* Will the deteriorating financial condition of the utility industry continue to impair its ability to make investments needed to maintain and update its operating plants to make them more economical in the long run?
The answers to some of these questions can only come with time; the other questions are the subject of strenuous inquiry by experts both in and out of the utility industry. But again, finding these answers requires making some projections about the future, while trying to adjust past forecasts that have resulted in construction or planned construction of plants not actually needed at present.
''If you look at the forecasts that are impacting the utility industry today, '' says Joseph Crespo, a partner and utility expert at Coopers & Lybrand, the accounting firm, ''you'll see they were made five to 10 years ago.''
Since then, Mr. Crespo says, ''we've gone through a whole restructuring of the US economy.''
A major part of the restructuring has been done by US industry, says Judith Warrick, first vice-president and utility analyst at Dean Witter Reynolds Inc., the brokerage unit of Sears, Roebuck & Co. ''A lot of industrial America has put a lot of energy-conservation measures into effect'' since the second big rise in oil prices in 1979, she notes. ''As a result, you can read stories in annual reports of companies cutting their energy use per unit of output by 20, 30, or 50 percent. We're going to see a lot more of that sort of thing. We're already at very minimal growth levels.''
Sometimes this can cause more problems for a utility than it solves. Earlier this month, for example, the Dow Chemical Company terminated its contract to buy steam from one of two nuclear power plants being built by Consumers Power Company in Midland, Mich. Even though the utility intends to complete both plants, Consumers Power is left with the question of who will pay the construction costs of the plant that was supposed to be used by Dow.
When construction of the two Midland plants began in 1968, they were supposed to be done in seven years at a cost of $349 million. Now, because of cost overruns and delays caused in part by changes forced by environmentalists and regulators, mistakes in construction, and threatened cutoffs of funds, completion is not expected until 1985 - 10 years late. The final cost is currently pegged at $4.43 billion, nearly 13 times the 1968 estimate.
Meanwhile, the rating firm of Standard & Poor's, which had already set the Consumers Power credit rating at below investment grade, put the utility on its Credit Watch list when Dow pulled out, making it even more costly to raise financing. (The average utility bond today is rated at about A; three years ago, the average was almost AAA.)
In another now-famous case, much of the trouble over nuclear plant construction faced by the Washington Public Power Supply System (WPPSS) has come from the fact that projections for energy demand in the Northwest were simply overstated, particularly in light of the economic damage done to the region's economy by the recent recession. So far, construction on four of the five planned nuclear plants has been postponed or canceled. This week, Chemical Bank is expected to serve WPPSS with a notice of default, which could lead to the largest municipal default in the US.
Episodes like these, Ms. Warrick says, mean no new nuclear plants are likely to be started after those currently under construction are completed. At about $ 2 billion apiece, there's just too much risk.
For now, one answer to the planning problem seems to be a strategy that Peter Navarro, a researcher at Harvard University's Energy and Environmental Policy Center, calls ''capital minimization.'' It is not a strategy he likes. But with utility executives having to weigh the expense of an ambitious investment program against the risks of reducing or eliminating dividends to shareholders or even bankrupting the company, he says, many have chosen to spend only the money needed to maintain or slightly upgrade service - based on short-term forecasts for economic growth.
But trying to forecast economic growth is one of the hardest tasks facing the utility industry. Present construction plans are based on an annual growth rate in the nation's gross national product of 2.9 or 3 percent, says Eugene Oatman, manager of energy research programs at the Electric Power Research Institute, a Palo Alto, Calif., research organization funded by the electric utility industry.
To service this growth, Mr. Oatman says, the industry should be adding about 175 to 200 gigawatts of power between now and 1991, at a cost of some $350 billion. A gigawatt equals 1,000 megawatts, or about the amount of power generated by one nuclear power plant. A large coal-fired plant generates some 400 to 800 megawatts. Present construction plans call for the addition of just about 175 gigawatts, and no more. But if the economy expands any faster, say at the 4 to 4.4 percent rate projected by the Reagan administration, the nation will need 312 gigawatts, equal to an additional 100 power plants.
If the projections, present construction plans, and actual economic growth don't match, Mr. Oatman says, the lack of adequate electric capacity could itself slow the economy.
''We want to make sure we get these things together,'' he says. ''That's the key to the whole thing.''