The scope, complexity and frequency of major new financial schemes promise to make energy state regulators increasingly scratch their heads and yell for help, a panel of three regulators from the diverse states of California, Missouri and Ohio concluded at the Standard & Poor's Ratings Services (S&P) annual utilities conference May 31 in New York City. The three regulators said they and their colleagues around the nation are going to have to "raise their game to grapple with a set of issues that are qualitatively different than what they were only a few years ago."

California Public Utilities Commission member John Bohn, a telecom multi-millionaire who once headed Moody's Investors Service, was very impressed by the overflow crowds that turned out for the S&P sessions, which confirmed for him that there is "a whole bunch of money out there looking for a home."

In hosting the annual meeting, S&P analysts emphasized the fact that the U.S. electric power industry is "undergoing a surge in expansion seeing the emergence of private equity money in utility ownership, and dealing with complex issues of reregulation and deregulation, all amid growing environmental pressures."

For Bohn and his fellow panelists -- Alan Schriber, head of the Public Utilities Commission of Ohio (PUCO), and Jeff Davis, chairman of the Missouri Public Service Commission (PSC) -- future regulators and regulatory commissions are going to need a lot of new tools and ways of thinking outside the box, armed with much more sophisticated financial and modeling capabilities. Bohn told the S&P financial audience that in California the CPUC is getting its first look "at private equity involvement in regulated utilities, and we're concerned about the financial, management and structural changes."

In reporting on the panel to his own commission last Thursday, Bohn said his colleague from Ohio was openly soliciting new energy investment in his state before a crowd that Bohn said had the usual utility analysts "very much in the minority." Instead, PUCO's Schriber was appealing to capital market players, investment funds and investment banks that comprised the majority of the audience.

S&P panel moderator Richard Cortright Jr., a managing director at the rating agency, said state regulators are increasingly "wrestling with the emergence of private equity funding into the industry. Previously, mergers and acquisitions mainly consisted of one utility buying another. The parameters for approving such deals were reasonably well known. That's not so with private equity investors."

After the panel discussion, Bohn is convinced that California is "almost expected" to take the lead in a lot of areas, but there are also large differences in the energy make up in each state. Bohn cited Missouri, with its 85% dependence on coal for its power supplies.

"What you have are some enormous variations in the issues the different commissioners are dealing with," Bohn said. "Needless to say, their [Missouri's] position on coal is different than our [California's] position."

All of the states and regulators are facing the steeply rising costs for building energy industry infrastructure (S&P conducted a separate panel on this subject, and it stressed the impact rising costs could have in the future.) And while utilities have faced cyclical construction cost spikes historically, S&P's Aneesh Prabhu thinks this cost run-up is different this time because of the supply-side resource challenges faced by the industry.

At the S&P sessions, Bohn saw a lot of foreign private and public pension funds looking for good investments. The funds are competing with each other and the returns they are asking for in some instances are lower than private equity funds are looking for, Bohn said. "You're seeing a lot of money looking for a home in consolidation, but you're also looking at a lot of money looking for new horizons."

S&P people talked in some detail about the complex new approaches to major multi-hundreds-of-millions-of-dollars projects, calling them "hybrid financial instruments" that in some ways are traditional equity and in other ways are debt. S&P analysts said they have to break down these financing instruments into their corresponding debt and equity parts in able to rate them accurately and successfully.

"The clear message from S&P was these instruments are becoming very complex, and they will look at them from all perspectives and not be fooled (my words, not their's) by things that are painted to look like a duck, but are really a turkey," Bohn said. "It is something that all of us as regulators need to think about."

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