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The Capex Cycle
Remember when people said that electricity generated by nuclear power would be too cheap to meter? When announcements of new nuclear plants were commonplace, followed by cancellations of most of those plants? When electric utilities were in a seemingly unending rate relief cycle and man faced acute financial distress? Well, many folks still do recall the bad old days of the late 1970s and 1980s. And they fear that Mark Twain was right when he said, "History doesn't repeat itself, but it does rhyme."
It was not so apparent at the time, but in retrospect, the events and circumstances that brought the electric utility industry to the brink of financial disaster are fairly clear. As we ramp up to another cycle of major capital expenditure, we find that the traumatic past yields many lessons that can help prevent its recurrence—and several beneficial circumstances and policies currently in place will help the current capex cycle avoid the pitfalls of the last. Key among the lessons of the 1970s and 1980s is the need for supportive regulation. Violation of the fundamental regulatory compact—which provides a reasonable return on the investment required for the reliable provision of electricity—increases the cost of capital and serves to harm every stakeholder. The necessity of a diverse generation portfolio is another lesson, as is the necessity to be acutely aware of the costs (for nuclear, coal, natural gas, renewables, and energy efficiency) to build it. Finally, utilities and regulators must meet investor needs for returns commensurate with the risks in a major construction cycle.
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