CenterPoint Energy has a hedge fund problem – and its solution could cost consumers
CenterPoint Energy, the Houston-based regulated utility that supplies electricity to the Houston area, has been facing a crisis of late.
Electricity customers have repeatedly criticized the company for recurring reliability problems. Its share price has fallen 20 percent during the past year while the broader S&P 500 index increased 14 percent. The company is operating under its third CEO in less than a year.
CenterPoint executives acknowledge that investors are disappointed, and they promised last year to launch a board level business review committee. The solution? CenterPoint, which expanded into oil and gas pipelines and bought a Midwestern utility with coal plants in recent years, is going back to the basics by focusing on reliability, replacing aging power poles and lines, and clearing trees from overhead lines.
CenterPoint is following the lead of other U.S. utilities and returning to its roots as a regulated transmission and distribution power company. It hopes to capitalize on the growing demand for electricity as electric vehicles grow in popularity, electric heat continues to replace oil and gas furnaces and take advantage of a regulatory system that allows spending on reliability and other improvements to be added to consumer rates.
CenterPoint officials hope to recover most of the $16 billion that it’s investing in the improvements over the next five years by getting the costs included into the pool of regulator-approved assets known as the customer rate base. CenterPoint can then earn a 9.4 percent return on equity — essentially profit — on assets approved by regulators, a move that could drive up the cost of electricity for consumers and businesses.
The investments create a steady — and growing — source of revenue, the kind attractive to hedge fund investors drawn to utilities and other mature industries that produce strong cash flow with little risk. The bigger the rate base, the more utilities earn, according to one industry expert.
“That’s the profit model going forward,” said Tyson Slocum, energy program director for Washington-based consumer advocacy group Public Citizen.
Hedge fund investors like Elliott Management of New York are demanding that CenterPoint and other utilities in which they’ve bought a stake put as much of their new cash into the rate base as possible, Slocum said. Elliott Management, which has about $40 billion in total assets, was among a group of investors that in May bought a $1.4 billion stake in CenterPoint.
But because the new model shifts risk to rate payers and away from investors, the rate payers may end up paying for investments they didn’t need nor want, such as new transmission lines for anticipated population growth that never materializes, Slocum said.
There is the risk consumer electricity rates will go up, he said. It’s called gold plating, referring to the business practice of overbuilding for maximum returns for shareholders while forcing ratepayers to overpay for those investments.
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Consumers pay for electricity transmission and distribution in their monthly electricity bills, a charge that is often higher than the cost of generation. Houstonians in the CenterPoint service area pay 4.2 cents a kilowatt hour and $4.39 a month for transmission and distribution, or more than two-thirds of a 6.7 cent per kilowatt hour six-month fixed price electricity plan on the state managed website Power to Choose.
But to make the plan work, utilities have to get regulators on board because regulators have to approve the additional expenditures before they can be added to customer rates.
CenterPoint has been already been making inroads with regulators in Texas to improve relationships, CenterPoint officials told investors recently. CenterPoint clashed with regulators last year after reliably complaints were brought by the San Antonio-based grocery chain H-E-B. CenterPoint eventually agreed to accept a $13 million rate hike instead of the $161 million it was seeking and a lower return on equity.
“While we encourage regulated entities to maintain open communication with the commission, rate decisions are based on the facts, applicable rules and statutes, economic needs supported by substantive evidence, and appropriate litigation,” Public Utilities Commission spokesman Andrew Barlow said in a written statement.
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CenterPoint has made mistakes, including overpaying for the Indiana utility Vectren and devoting too many resources to its non-utility businesses, CEO Lesar told investors in December. But he promised investors the company will do a better job by focusing on its core regulated utility and vowed that CenterPoint would increase its rate base by 10 percent a year through 2025.
“I have a very long track record of execution as a CEO,” he said, “and I’m not about to mess that up now.”
Nation plugs in
Utilities are at a turning point as the nation increases dependence on electricity. Electric vehicles are expected to account for more than 20 percent of annual vehicle sales by 2030, according to Edison Electric Institute, a Washington-based trade group for investor-owned utilities. That’s about 18.7 million electric vehicles by 2030, up from 1 million in 2018.
And to power all those vehicles, the trade group predicts that 9.6 million electricity charging ports need to be installed during the next decade.
The share of all-electric homes also has increased nationwide over the past decade, according to the Department of Energy. About 25 percent of homes rely only on electricity and 35 percent of homes built in the past 40 years depend solely on electricity.
On HoustonChronicle.com: Complaint: Houston’s CenterPoint Energy failed to disclose New York hedge fund’s $1.3B investment
Meanwhile, utilities are facing new competition as tech companies develop ways for consumers to remotely manage their electricity use, transportation companies try to supply their own power and large financial institutions look to sell electricity on their banking platforms, said one electricity expert. A bank, for example, might provide electricity to a company’s offices, warehouse and electric vehicle fleet for a flat monthly fee.
“They’re trying to get into their space,” said Siddhartha Sachdeva, CEO of Innowatts, a Houston-based company that collects data from millions of electric meters to determine consumer habits.
Whoever can really capitalize on the opportunities will come out the winner, he said. But utilities don’t have a lot of time to take back control.
CenterPoint launched a capital improvement plan in Houston, which has grown by about 2 percent a year for more than a decade, and faces regular threats from hurricanes.
Projects include building 29 new substations by the end of 2025, investing $1.4 billion to improve reliability and resiliency of the power grid, and replacing 10,500 miles of aging underground cable, 1.1 million wood poles and, 4,400 substation breakers and transformers, according to CenterPoint’s investor presentation. And by the end of 2021, CenterPoint expects to complete a $483 million project to construct 55 miles of high-voltage transmission lines.
CenterPoint predicts its rate base for electricity and gas service will grow by 10 percent annually to $25 billion by 2025 from about $16 billion in 2020, CFO Jason Wells told investors.
“Our strategy will be accomplished by investing in and empowering our greatest assets — our employees,” according to a written statement from CenterPoint spokeswoman Natalie Hedde. CenterPoint will accomplish its strategy by focusing on core regulated utility businesses, capitalizing on growth opportunities and focusing on its values, she said.
On HoustonChronicle.com: How H-E-B went head-to-head with CenterPoint to lower Houston electricity bills
Evergy, the utility with 1.6 million customers in Kansas and Missouri, predicts that its recent commitment to $8.9 million in capital spending will increase its rate base by as much as 6 percent a year through 2024.
The company, which launched a board-level strategic review at the behest of investor Elliott Management, announced in August it would spend $4.8 billion on transmission and distribution upgrades and $500 million on automation and technology.
Evergy declined to comment.
DTE, which has 2.2 million electric utility customers in Michigan, also said it plans to boost capital spending by $2 billion to $17 billion over the next five years. DTE has regularly increased its capital spending over the years and the recent increase is unrelated to the spin off of its midstream business, according to a written statement from the company.
Job No. 1
Utilities will likely be successful getting new capital investments through regulators, especially ones geared to improving reliability, grid resiliency and reducing costs.
One former regulator said he liked to see companies improve reliability and the consumer experience in a cost-effective way. Because when the lights and air conditioning go out, consumers and political leaders call to complain.
“You take notice,” said Richard Mroz, a regulatory consultant for the law firm Pillsbury and former president of the New Jersey Board of Public Utilities. “It was always on my mind and I know it’s on the minds of other regulators.”
Keeping the lights on is job No. 1, he said. But it’s a balancing act. It costs three to five times more to install underground power lines than overhead poles and wires. For neighborhoods that like their large trees it might be worth it; others might not want to spend the money.
CenterPoint trucks are out in force in Houston neighborhoods with reliability problems. For several weeks, workers have been erecting new power poles, stringing new wires and trimming tree limbs in the Brighton Place neighborhood in Spring Valley.
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Homeowner Peter Lovie said the upgrades, which came after a Chronicle story about persistent power outages, have seemingly improved reliability. The frequent outages were so troubling that Lovie bought a 22-kiowatt natural gas-fueled standby generator for $10,500 last year for his home that kicks in every time the power goes off.
Lovie said it had been a dozen years since trees were trimmed around power lines. Now the branches no longer intermingle with the power lines, a new wire is running down the back of his house and a nearby leaning power pole has been replaced with an upright version. So far, the power went off in the neighborhood for just a few minutes during a recent heavy rain.
Lovie said he hopes that’s a good sign the problems have been fixed.
This story has been updated to clarify DTE’s capital spending plans.