Investing in America's Electric Future

By Susan H. Burnell

The shareholder-owned electric industry is a source of economic strength. Last year, the industry spent $80 billion on infrastructure, including transmission systems, clean energy and smart-grid technology. In spite of the recession, the industry has remained a mainstay of continuing investment in America’s electric future.

Investment in all areas of the electric industry can result in new jobs, a cleaner environment, more-efficient energy usage and highly reliable power sources for future growth. The future success of the industry is contingent upon strong leadership, ongoing investment in infrastructure and sensible legislation.

Transformative Technology to Reenergize the Nation’s Economy

Keeping these issues front and center is the role of the Edison Electric Institute (EEI), the association of U.S. shareholder-owned electric companies. EEI members serve 95% of the customers in the shareholder-owned segment of the industry and represent approximately 70% of the U.S. electric power industry.

“Our industry is at the forefront of deploying technologies that will make utilities and their customers much more efficient users of electricity,” says Richard F. McMahon Jr., executive director of energy supply in EEI’s Business Operations Group.

Much of this technology is transformative, says McMahon. “The infrastructure that will support plug-in hybrid electric vehicles, for example, will make the nation more energy independent. Smart-grid technology promises to change fundamentally the ways utilities provide and customers use electricity. Utilities are, and will continue to be, primary investors in new technology.”

Shareholder-owned electric utilities and stand-alone transmission companies invested an unprecedented $9.1 billion in our nation’s transmission infrastructure in 2008. The industry now invests close to $10 billion annually for new and upgraded transmission lines—the larger, longer-distance lines that transmit power from the source to the load.

New transmission technologies can improve the system and lower costs for customers. These upgrades also are necessary to maintain system reliability. Just as important, transmission helps make many other technologies, such as renewable generation, practical. EEI member companies plan to spend nearly $56 billion on transmission-system investments through 2020. The electric industry is investing heavily in the development and deployment of cutting-edge environmental technologies to meet increasingly stringent EPA regulations.

Utilities Drive Fuel
Diversity Efforts

As demand for electricity grows, new power plants that rely on a diversity of fuels are needed to ensure adequate electricity supplies in the future. According to the U.S. Energy Information Administration’s (EIA) Annual Energy Outlook 2010, overall electricity consumption will be about 5 million gigawatt hours (GWh) by 2035, which will require the addition of 250 gigawatts (GW) of new generation capacity between 2009 and 2035.

Of this new capacity, 44% will be coal based. The next-largest category will be combustion turbines, primarily fueled by natural gas. To comply with existing state-level renewable-energy requirements, the nation will add
38 GW of renewable generation capacity. Natural gas-based, combined-cycle plants and nuclear generation will make up the remaining capacity additions, the EIA estimates.

A myth persists that renewable-energy projects are primarily the domain of small developers and entrepreneurs, says McMahon. Yet utilities are really the leaders and drivers for getting renewables—including wind, solar, geothermal and biomass—deployed.

One example is Nevada Solar One, the largest solar plant built within the last 16 years. The 64-megawatt solar thermal power plant near Boulder City, NV, is part of NV Energy’s commitment to spend approximately $2 billion to purchase and invest in new renewable energy by 2015.

“Shareholder-owned electric utilities are making direct investment in renewables,” McMahon says. “We have the long-term power agreements that enable renewable projects to get financing, and it ties back to our balance sheets.”

Funding the Future: About to Become More Costly?

Grid modernization is a national goal, supported by the administration and the Federal Energy Regulatory Commission. Yet investors need to have the right return to make it happen.

A crucial congressional vote on the horizon could affect the way investors view utilities, which many rely upon because of the dividend income they generate. At issue is the extension of the lower tax rate on dividends. Now capped at 15% for most investors, the rate could jump as high as 39.6% by year’s end.

“The extension of the lower rate on dividend taxes is very important,” says McMahon.

“Investor interest in electric utilities is based on dividend yields. So, if rates are allowed to go up to where they were in 2003, that impacts our investors and increases our cost of capital. That is the capital we need going forward to expand clean-energy projects, develop and deploy smart grids, and upgrade transmission systems. Given the state of the economy, we would like to see the current rates extended for at least two more years.”

As an integral part of the nation’s security, stability and economic strength, the electric industry continues to lead, innovate and advocate. Investing in an energy future that is greener, more reliable, more efficient and a generator of high-quality jobs is the essential role and vision of the nation’s shareholder owned electric utilities.

American Electric Power
www.AEP.com

Edison Electric Institute
www.eei.org

Reliability and Low Costs Drive AEP's Mission

American Electric Power (AEP) believes that reliable, safe and reasonably priced energy is key to supporting the recovery of the U.S. economy. AEP is committed to supplying that energy to its more than 5.2 million customers. And the company is proud to be at the forefront of industry efforts to transform how electricity is generated and delivered for the benefit of its customers, shareholders, other stakeholders and the environment.

AEP operates in an 11-state region, from Texas to Michigan and east to Virginia. The company, based in Columbus, OH, ranks among the nation’s largest generators of electricity and owns the largest electricity transmission system in the U.S.

AEP recently marked a milestone of 400 consecutive quarters of dividend payments to shareholders, symbolizing the value the company places on its investors. The dividend was increased nearly 2.5% in April. AEP offers a dividend yield in the range of 4.5% to 5% and a targeted payout ratio of 50% to 60%.

The company forecasts annual ongoing earnings growth of 2% to 4% based on continued capital investment in its utility business, with greater growth prospects if opportunities in its transmission business are realized.

AEP is exploring new transmission projects within the company’s footprint and is involved in joint ventures to build high-voltage transmission lines outside of its service territory. These joint projects offer the potential for earning higher-than-typical rates of return.

The company is diversified geographically and in terms of fuel source, although coal—traditionally its primary fuel—continues to account for about two-thirds of its generating capacity. Use of this low-cost, abundant domestic resource has helped keep electricity affordable for AEP’s customers, whose rates are among the lowest of electricity providers in the regions it serves.

New environmental compliance requirements could greatly increase the cost of generating electricity from coal. AEP strives to manage the economic impact of stricter regulations on its customers while investing in emission-reduction technologies. The company has invested more than $5 billion since 2004 to reduce emissions from its coal-fired power plants. AEP’s sulfur-dioxide emissions fell 55% and its nitrogen oxide emissions fell 73% from 2000 to 2009.

Carbon emissions legislation or regulation is also on the horizon. AEP is leading the industry in developing technology to address greenhouse gas emissions from electricity generation. The company is operating the world’s first integrated carbon-capture-and- storage technology validation at a power plant in West Virginia with plans to ramp up to commercial-scale operation in 2015.

AEP’s strategy to lower its carbon emissions also includes investing in carbon offsets, making greater use of renewable energy and natural-gas generation, potentially increasing the output of its nuclear units, and implementing programs to promote energy efficiency. The company’s gridSMART^SM initiative features customer programs and advanced technologies designed to improve service reliability and enable energy efficiencies for consumers served by AEP’s electricity distribution system.

www.AEP.com