ThePanelist.com - Financing a Power Plant Without Bond Issues

Financing a Power Plant Without Bond Issues

Written by Jeanne Roberts

Tuesday, 01 July 2008

Financing a Power Plant Without Bond Issues

Photo: davipt, Creative Commons, Flickr
A recent article from Reuters states that environmental activists are opening a new frontier in their fight against coal-fired power plants by questioning the use of tax-exempt bonds to help fund such projects.

Photo: Mollivan_Jon, Creative Commons, Flickr

These groups, apparently led by The Sierra Club, cite the Prairie State coal-fired plant Peabody Energy Corp is building in southern Illinois. AMP-Ohio, a project partner, recently sold $761 million of tax-exempt bonds through J.P. Morgan to raise its share of costs - bonds which had to be re-priced, indicating the reluctance of buyers to purchase them at the offered rate.

This frontier is not new. As early as 1984, Christopher Lamb, writing to the New York Times in response to an editorial, observed that if the public has to assume the burden of investment to build power plants, the public also has a right to control their use and to profit from their operation.

Lamb further pointed out that the utility companies, inveterate capitalists, want to have their cake and eat it, too, through public investment and public risk combined with private profit.

Lamb describes this as a growing and disturbing trend in American capitalism, in which businesses expect generous tax write-offs, subsidies and bailouts to defer inherent risks, even though risk is the historic justification for unearned income. This applies to all power plants, and their operators, not just coal-fired units.

“Socialization of investment and risks should entail socialization of control and profits.” Lamb argues, and quite correctly.

Let’s take a brief look at utility company profits during the past year. PPL Corp. (PPL - $55.73) announced a record annual profit on Feb. 1, 2008, earning $1.3 billion, or $3.40 per share, in 2007, compared to $865 million, or $2.24 per share, in 2006.

MDU Resources Group Inc., (MDU - $34.72) based in Bismarck, North Dakota, is also reporting record profits - 37-percent higher than in 2006. FirstEnergy Corp., (FE - $82.38), parent of Toledo Edison, said 2007 profits exceeded the previous year’s by $1.31 billion. In spite of that, FirstEnergy filed with the PUCO to collect another $340 million from customers beginning in 2009.

In 2007, utilities like Xcel Energy Inc. (XEL - $20.19) recorded increased earnings of 37 percent, Constellation Energy Group (CEG - $82.26) also announced a 37-percent profit over 2006, and Atlanta-based Southern Co. (SO - $35.01) noted record 2007 earnings of $1.73 billion, or 10.2 percent higher than 2006.

There is no reason utility companies can’t finance their own power plants. Laying the risk off on bond buyers (i.e., consumers) - who will ultimately be taxed double through lowered interest on bonds during economic downturns and higher utility bills - is an unfair advantage taken by an industry whose stock has traditionally been considered a staid but reliable investment for retirees and others who want safety and consistent performance. Shareholders who expect large profits generally choose riskier investments, and – again – risk is proportionate to profit.

If the utility industry as a whole is getting the kinds of government perks (through approved rate increases, government subsidies of plants, and tax havens for nuclear generation and spent fuel storage) that lead to vastly higher profits, it ought to be able to shoulder the burden of needed generation as a cost of doing business.

Utilities argue that diminishing shareholder profits would lead to less and less investment. And it might, unless shareholders were given the tax incentives now provided to the utility industry.

For example, if I hold 100 shares of Xcel (which I don’t), and my return is diminished by $200 for construction of a new and badly needed generating unit in my state, that loss should be deductible from any income tax or Social Security tax liability I might have.

Creating this kind of tax liability relief among consumers is likely to do more for the economy than giving it to utility companies, who pass as much profit as possible to upper level management and shelter the rest through infrastructure upgrades through subcontractors, where costs are poorly tracked and invite questionable dealings on both sides.

I’m no financial wizard, but the advantages of a system like this should be obvious to all except the players who have made out like bandits during the last eight years of Republican economic strategies. Players who have, as a result of their greed, swamped the American economy to such a degree that even bailouts no longer guarantee the boat won’t sink.

Disclosure: I don't own utility company stock.

Site Disclaimer

Tags

Finance

Culture

Financial Bloggers

RSS Feed Manager

Members