Energy Insider Interview Series: Insights from Terry Fitzpatrick – President & CEO of the Energy Association of Pennsylvania
The following interview was conducted by John Povilaitis - Shareholder, Buchanan's Energy Practice.
1. Over the course of this series, we've talked to a number of different players in the energy space—from businesses, to trade organizations to lawmakers—all of which have had different things to say on the status of the U.S. energy industry. How do you feel 2017 was for EAP members?
Overall, I think it was a good year. You run into variations, of course, from the individual members, but I think as a group with both electric and natural gas utilities there are a lot of good things going for them. The fact that energy prices themselves are low on the whole is a benefit, too, and I think that has allowed our members to put a lot of money into infrastructure investments in terms of replacing pipes, wires and whatnot. These are things we've done all along, but we've been able to step that up with the lower energy prices. Now, low prices also cause pain to certain parts of the industry, and a lot of that has led to discussions at the federal level with respect to nuclear and coal plants looking for support in order to keep operating.
2. Recently, you also testified in front of the Pennsylvania House Consumer Affairs Committee about the benefits of alternative ratemaking for energy companies across the state. Can you talk a bit about how Pennsylvania's current methods of ratemaking are outdated and why alternative methods like decoupling mechanisms, performance-based rates and others would be more beneficial for distributors and their customers?
I think the name of the game is stability and sustainability, really. Historically, there was a connection between economic growth and the sales of electric and gas utilities. For a number of reasons, from public policy, to technology development, to environmental ethos on the part of customers, you no longer see demands for energy growing along with economic growth. And what that has meant for companies is that they have to resort to more frequent rate case filings in order to keep up and not lose money. That has contributed to a desire on the part of the companies for new types of ratemaking because the majority of the cost of the distribution systems in both electric and gas are still recovered through usage-based or volumetric-based rates. So, there's an overreliance on those types of rates, given where public policy has gone, to encourage more energy efficiency and more conservation. I think it's really a transition from the view of an electric or gas utility as being primarily an entity that sells energy, to being one that sells energy services.
I think Pennsylvania has done some really good things in terms of encouraging infrastructure growth with Act 11 back in 2012 that allows us to establish distribution system improvement charges so we can recover costs of those infrastructure investments between rate cases. But when it comes to alternative ratemaking and decoupling being the major form of that, we're really behind other states.
We think we've gotten a pretty good reception to the legislation so far. It'll provide more revenue stability for us, and we also think in the long run it's going to be more beneficial for customers as well because we're really just talking about sustainable funding for the electric grid for the gas distribution system that everybody relies on.
3. Pipeline approval and construction has been a topic of conversation not only in Pennsylvania but across the country and certainly something that greatly affects distributers. What needs to be done by our government and pipeline developers to enhance Pennsylvania's status as a true exporter of natural gas that it deserves to be?
I think overall from the Pennsylvania perspective the process is working pretty well. It's not an easy process, but building infrastructure is not easy. I do have some concern with what's going on with other states. New York being one, not the only one but maybe the chief one, that I think there really is a question whether they're going to approve any pipeline to go into New York or through New York carrying gas. That's something that's going to have to be sorted out. It's essentially an outgrowth of the keep-it-in-the-ground movement, which I think is linked to climate change concerns among other things.
Sitting where I do, I see how important natural gas is as a home-heating fuel and increasingly as a fuel used to generate electricity. It certainly seems wildly unrealistic to me to think that we're not going to be very reliant on that fuel for decades to come. So, the thought that we can just stop building infrastructure as a realistic way to combat climate change is something that I don't think is viable at all. And yet a lot of people seem to be saying that. So, it's going to be interesting over the next year or two. But I do think that if states are going to try and block those things, I would expect you're going to see some movement at the federal level to try to come up with policies that prevent that from happening. We seem to go back and forth on climate change and what the policy is going to be at the federal level, too, so it'll be interesting to see how that all shakes out.
4. With the changes that have happened in the past year with this presidential administration and reverting some regulations, how do you and your members deal with the uncertainty that in three more years things may change again? Are there systems in place to deal with whatever is thrown your way from a regulatory standpoint?
I think electric and gas distribution companies, and probably the industries more generally, are very capital intensive. They make long-term investments, and that causes us to have long-term perspectives. Some people say that at times that makes the companies look stodgy, but I don't really see it that way. When President Trump was elected, I don't think you had any dramatic change in the planning focuses of the electric and gas industries, because over time we see that these things need to get cleaner and there's going to be ups and downs over the shorter term. The planning process always goes beyond three years. Does it adjust as public policy shifts? Yes, it does. But I don't think we're chasing the latest public opinion poll. The process goes well beyond that.
5. While it was not enacted, tax legislation introduced by the Pennsylvania Senate last year to balance the state's budget included a sizeable increase on the tax of public utilities. What was the EAP's stance on this increase, and how would it have impacted businesses and utilities customers in the state?
We were quite engaged in opposing that. We thought that was an unfair way to fund state government on the backs of energy users. It would've had the reintroduction of the gross receipts tax on natural gas, which would've punished a lot of heavy users, including both industrial users as well as school districts, for example. Not to mention a lot of customers of modest means who sometimes happen to be located in cities where you have natural gas as the primary heating source. We thought that was a poor way to go, particularly in Pennsylvania where the chief asset is energy. We really are an energy powerhouse, and to put additional taxes on that, we thought was not the best way to fund state government. So, we opposed that, and we're happy that that's not a part of the package. The state still does have some money issues, however, so we'll be watching for that in 2018. If it comes up again, we'll make our perspectives known on behalf of our companies and really on behalf of our customers.
6. In the same vein, what challenges or opportunities are you and EAP members looking at for 2018? What excites you and what will you be focusing on in the year ahead?
Well, it excites me that we're doing so much with infrastructure. That's been true for a number of years now, because you keep hearing about how serious of a problem infrastructure is in our country. We've been putting money into these systems, not letting them run into the ground, and that improves the quality of service that the companies provide. It also provides a lot of jobs, too, so that's an ongoing item we're happy about and proud of.
Additionally, some of the rate changes we've been able to get into effect – with the distribution system improvement charges and the alternative ratemaking bill we talked about – are exciting aspects of the year ahead. I think we have an opportunity to get that passed, so we're certainly excited about that.
7. We know safety in the energy space is a huge point of emphasis for EAP and its members. How has this focus improved job safety for workers and reduced the number of incidents across Pennsylvania?
I'm glad you raised that because that's a matter we gave more attention to in our board meetings last year. The board asked me to report to them in June and give them a survey of everything we're doing along with a few new ideas on safety. We were very involved in the discussions on the renewal of the One Call law last year, which is one of the major safety measures that affects utilities. Enforcement of that is now shifting to the Pennsylvania Public Utility Commission, and we'll be working with the PUC to implement that new law.
One of our missions here at EAP is to help our members actually operate better by facilitating the sharing of best practices. And we do that in a few different ways. Whenever a company has questions about what another company is doing or what the industry is doing, we share information on industry trends. We're a little unusual for a state-level energy or utility association in that we actually have operations committees, and we have conferences that we host for both the electric and gas industries. There, employees of the different electric and gas utilities get together to talk about what they're doing in terms of operations, and a very big component of that is safety. So, I'm always proud to emphasize that we're not just a mouthpiece for the industry. That's important, too, but we also have a big role in actually helping them operate better because of our educational and sharing opportunities.
8. Are there any other topics your members are especially focused on in 2018?
I think with all the investments that we're doing in infrastructure, and all the work that we're doing, the hard reality is that we're digging up a lot of streets. One of the growing issues for us is all the requirements that municipalities put upon utilities with regard to repaving, restoration and the fees we pay for that. With the difficulty of government finding revenues and the reluctance to raise taxes, we feel like we're being viewed as the cash cow more and more. So, one of the things that we're working with our members on is this whole idea of coming up with reasonable municipal requirements.
You know, I used to be a local official myself. I was the member of a borough council. I understand what it's like when residents get upset because the streets are dug up and the inconvenience of having to wait in traffic. But on the other hand, something that we really need to do is keep that infrastructure in good shape. So, we're going to be working on trying to develop some guidelines for what's reasonable and work with the municipalities and some others to see if we can make some headway on that. It is an area of increased focus.