Changing Course: Latest RKS Survey of State Utility Regulators Documents Retreat from Deregulation.

Fifth National Study Finds Major Shifts in Opinion & Priorities; Energy Efficiency, Nuclear Gain Support While Coal-Fired Generation Proves Divisive 

NEW YORK -- A new nationwide survey confirms a dramatic reversal of support among state utility regulators for deregulated energy markets. In fact, one third of regulators in currently competitive states say they are now seriously considering re-regulating utilities in their jurisdictions, according to this survey.

When asked to identify the states operating the most successful deregulated energy markets, a majority of commissioners reply, "None." Further analysis of the survey data finds no measurable support among state regulators for fostering or supporting any form of retail energy competition for the foreseeable future.

The survey also contains sobering news for independent power producers. For example, one third of regulators say they oppose opening their wholesale supply markets to non-utility generators. And a third of regulators representing deregulated states support the idea of utilities owning and operating their own generating plants.

These results are part of the 2007 Survey of State Utility Regulators, conducted in conjunction with Standard & Poor's by RKS Research & Consulting. This marks the fifth time since 1995 that RKS has surveyed sitting state commissioners and staff. The last such survey took place in 2005. For this latest study, RKS completed telephone interviews with 96 active regulators in 51 separate jurisdictions.

In contrast to the steep decline in regulatory support for deregulation, the RKS 2007 survey finds increased support for energy conservation and efficiency. Citing growing action at the state level to curb emissions and establish renewable portfolio standards, more regulators seem willing to provide incentives for utilities conducting efficiency programs.

For instance, one quarter of the regulators surveyed now support the concept of "decoupling" utility revenues from returns in order to incent utility efficiency efforts. Another 50 percent of the commissioners in the survey believe performance-based ratemaking can be extended to reward utility efficiency initiatives.

"These results represent a sea change in regulators' awareness of environmental issues and their relationship to successful efficiency programs," said David J. Reichman, RKS chairman and chief executive officer. "It is clear that state commissioners recognize the need for incentives that motivate action on the part of their utilities, together with well-considered cost recovery mechanisms, in order to achieve tangible progress on energy efficiency."

This latest nationwide survey also spotlights significant shifts in regulatory opinions about utility generation options. For example, two-thirds of the commissioners interviewed say their attitude toward nuclear power is changing. While 28 percent encourage coal-fired generation in their jurisdictions, another 22 percent now oppose this option because of environmental concerns. Reflecting recent price volatility, regulator support for new natural gas plants falls to the 10 percent level, according to the survey.

Utility financial strength remains a high priority among state commissioners, the survey confirms. Nine in 10 give utility financial condition the highest priority, and a nearly identical 82 percent say they seek confirmation in the form of bond ratings from independent national credit agencies. But a significant majority of regulators continue to express concern about the credit quality of unregulated utility affiliates. In all, 71 percent of regulators say they need increased access to utility parent company financial statements.

"Utilities will be dedicating substantial capital to new and enhanced infrastructure for many years, so the characteristics of rate recovery structures that state regulators implement will be a particularly vital element in Standard & Poor's assessment of utility credit quality," said Richard Cortright, managing director of Standard & Poor's corporate and government ratings practice.

"It is, therefore, very noteworthy that in their responses to the RKS survey commissioners place such a high priority on utilities' financial health," Cortright concluded.

While regulators expect continued merger activity among utilities, this latest survey confirms that they will also demand firm financial returns in the form of cost savings, operational efficiencies, or economies of scale before they approve such transactions. While four in 10 express confidence in the ability of foreign utility holding companies to own and manage regulated utility assets, private equity investors draw only a 32 percent show of support. Indeed, nearly three-quarters of the commissioners interviewed say they would likely "ring fence" or shield regulated utility assets from prospective private equity acquirers.

The complete 2007 Survey of State Utility Regulators includes aggregated interview results, data analysis and charts divided into nine separate sections, including Generation, Transmission, Utility Finances, Environmental Issues, Ratemaking Mechanisms, and Customer Satisfaction. Ordering information may be obtained from RKS at [phone] or at [e-mail].

Founded in 1974, RKS is a national marketing research and public opinion polling firm with a major presence in the energy industry. RKS designs and delivers both syndicated and proprietary research analytical products and services for electric, gas and water utilities, plus their major associations. Headquartered in Danbury, CT, RKS also serves clients from field offices in Florida, New Jersey and California. Further information about RKS is at: www.rksresearch.com.