Big (or bigger, at least) and mostly regulated is one utility strategy, a fairly popular one that has been embraced by a number of players, including WPS Resources Corp.
Last month Green Bay, WI-based WPS said it would acquire Chicago-based Peoples Energy Corp. to form a diversified company with regulated assets in four midwestern states and nonregulated businesses serving customers in the Northeast and Canada (see NGI, July 17). Last week, WPS CEO Larry Weyers, who will be CEO of the combined company, talked with NGI about the merger and trends he sees in the utility industry at large.
The pairing of WPS and Peoples will bring together 1.6 million gas customers and 477,000 electric customers, but the deal was not struck for gas-power convergence reasons, Weyers told NGI. In fact, that gas-power convergence ship sailed some time back, to the peril of some its passengers.
“I don’t necessarily think you’re going to see a whole lot of what we used to refer to as ‘convergence mergers’ of gas and electricity,” Weyers said. “I’m not sure the reasons people were doing that before panned out or are still the same. Mostly, you’re seeing consolidation in the industry, whether they be gas or electric utilities, simply because size does matter in this game and I think people need to be getting bigger.”
At the time of its announcement, size was touted as one reason for the WPS-Peoples deal. “Better positioned to compete in a consolidating industry in which size and scale matter,” is how it was described at the time. Add to that the theme of specialization and you have a more complete picture of Weyers’ view on the utility industry.
WPS is by no means small, but it’s not a titan like, say, Southern Company. When one is not the biggest kid on the block it’s even wiser to choose one’s battles carefully. A number of companies are picking up generating assets and styling themselves as predominantly generation players. Then they specialize further by focusing on coal-fired plants, or nuclear, etc.
“And I think you see other companies who are staying away from the generation game because it’s really getting to be a very expensive game to play in an environment where there’s a great degree of uncertainty,” Weyers said. One area of uncertainty is the country’s lack of a national energy policy that spells out if/when/how carbon emissions will be dealt with and what technologies for doing so will be the most favored.
“The generation game requires deep pockets and still has a lot of risk associated with it because of the uncertain environment.”
Although WPS in about 18 months will finish work on a new coal-fired baseload plant, that facility will be in rate base, noted Weyers, which mitigates a good deal of the risk.
“I think we see ourselves as not necessarily shunning generation but realizing that we’re a pretty small company to be making billion-dollar investments in baseload generation plants with the uncertain environment that exists.
“I think we see ourselves as basically being a distribution company, and having expertise in that area can provide a certain amount of value to customers.” Weyers mentions recent service awards from the likes of J.D. Power on the utility side and Mastio & Company on the nonutility side as evidence of success in this area.
While not in the hunt for generating assets, Weyers concedes that WPS wouldn’t shy away from “the right kind of play in generation.” In that regard, open and mature markets are attractive, such as PJM now and MISO (Midwest Independent Transmission System Operator) in the next few years. “We like to see an area where it’s open competition but in a manner that’s pretty well prescribed so you know what the rules are going to be.” In a place like that, baseload generation with a decent environmental footprint becomes attractive.
But in WPS’s case it likely won’t be nuclear. “For a company our size it’s a little hard for us to move in that direction,” Weyers said. “I think coal makes a lot of sense, but once again the environment there is still undetermined. The technology that’s going to be used in the future, whether it’s going to be IGCC [integrated gasification combined cycle] plants or its going to be pulverized coal plants with a lot of cleanup on the back end is sort of undetermined. The amount of carbon taxes people are going to have to pay is undetermined.”
Unlike some in the industry who see carbon taxes as inevitable, Weyers isn’t so sure. “I think the jury is still out on that. Basically, I’ve seen the studies that show if you have a carbon tax on types of generation it will change the generation mix over time, but in the meantime the predominant effect is it just results in higher costs to consumers. Nevertheless, I think if the greenhouse effect is being caused by carbon emissions from generating plants, in part, that it will be addressed one way or another.”
In a carbon constrained environment, natural gas is particularly attractive, at least were it not for the high volatility seen in gas markets over the last two years or so.
“I guess I’m more of an optimist than perhaps I should be,” said Weyers, “but I do think we’re going to see gas prices stabilize a bit more than we’ve seen in the past 12 to 24 months. And I think a big part of that is going to be the fact that we’re going to see some LNG coming into North America. I think we’re going to see the political winds that are going to support more drilling for natural gas and oil in the United States. I think there’s going to be more of an infrastructure build-out for energy delivery in the United States, so I would hope that all of that has some tempering impact on the volatility of gas prices.”
Weyers admits to high hopes for plenty of LNG supply hitting U.S. shores, but he’s not interested in having a hand in turning it back into gas.
“We’ve actually looked at that question and decided that we’re going to be on the output side of the gasifier.” While some local distribution companies and LNG developers have called for utilities to put some skin in the LNG game, others, including Weyers, don’t see the sense in that and think the LNG-gas grid interface should be left to marketing companies, with the major oils playing on the global stage. “Once you step across into the gasification unit as an investment, now you really have to understand the rest of the value chain to make sure you have LNG coming into that gasification facility.”
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