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WIKI ANALYSIS
Ameren (AEE) is an electric and natural gas utility in Illinois and Missouri. Like most utilities, Ameren is heavily regulated and may only raise its rates for certain groups of customers with the permission of state regulatory agencies. Although Ameren ultimately benefits by supplying energy to both regulated and unregulated customers, its ability and incentives to adapt rapidly to the regulated market are often restricted within that market.[1] Although AEE is permitted adjust prices according to the price of fuel, raising prices often encourages customers to contact their regulating agency to have them reduced. Ameren's experience with rate regulation has more often than not been negative. Following the deregulation of the Illinois electricity market, regulators responding to public outcry over the prospect of sharply higher rates imposed a decade long rate freeze from 1997-2007. Following the expiration of the rate freeze, consumers in Illinois pushed for a 3 year extension. Although the extension was not passed, Ameren was required to reduce its new rates by $150MM. [2]
The company's dependence on coal power makes complying with continually evolving environmental standards - the most significant of which are mercury and greenhouse gas emissions standards - very costly. AEE estimates in its annual report that these costs will range between $4B and $5B by 2017.[3] Although AEE generates power using a combination of nuclear, coal, oil, natural gas, and hydroelectric power generation systems, coal represents the largest source of power by percentage of total energy generated at 84%.[4]
In 2007, Ameren eliminated Ameren energy Inc., a marketing agent for UE, a subsidiary which now operates its own marketing and risk management department.[5]
Business Financials
As a holding company, Ameren's financial performance largely depends on the individual performances of its subsidiaries, namely UE, CIPS, Genco, CILCORP, and IP. Revenue comes from the sale of electrical power and natural gas to customers. Many of Ameren's customers fall under state rate regulation laws which dictate both the amount and price at which Ameren is required to supply electric power. Under Illinois rate regulation laws, Ameren subsidiaries (CIPS, CILCO, and IP) supply power according to requirements of customers and at prices determined at a low cost auction among suppliers held in 2006. Under a new Illinois law, as of 2009, price will be determined through a request-for-proposal-process to be reviewed by the Illinois Commerce Commission. All contracts already in place will hold until they expire.[8] In the event that an AEE subsidiary cannot produce the volume of power demanded, or if cheaper electricity is available on the market, AEE will purchase it from a third party supplier.
Fuel Types
Coal is typically purchased in five year contracts, with one fifth of the total coal supply contracts expiring each year. Approximately 94% of Ameren's coal is purchased from the Powder River Basin located in Wyoming, and 6% is purchased from the Illinois Basin. Ameren consumed approximately 40.6 million tons of coal in 2007.[9]
Natural Gas is purchased from a wider range of vendors which include the Panhandle Eastern Pipeline Company, the Trunkline Gas Company, and the Natural Gas Pipeline Company of America. Due to greater variability in natural gas prices over time, Ameren is permitted by law to pass prudently incurred natural gas expenses on to rate regulated customers, subject to ICC review.[11]
The UE Callaway nuclear plant is refueled at eighteen month intervals, the last of which occurred in May of 2007. During a refueling, power must be purchased from a third party or generated by another power facility. UE is price-hedging 87% of the plant's 2010 and 2011 fuel.[13]
Trends and Forces
Political Resistance to Higher Rates Affects Earnings as Fuel Prices Rise
Due to rate regulation laws and government price controls, Ameren is less able to adapt to changing markets or fuel prices than it would be otherwise. Although it is likely that competitive pricing will be approved after an increase in fuel pricing, it is not likely to be approved as quickly as in a case where Ameren alone controlled prices.[14] For example, in November of 2007, AEE applied to the ICC in November of 2007 to increase rates for regulated natural gas sales. The ICC is not required to reach a decision until September of 2008, and that decision could actually mean a reduction in rates.[15]
Developing Environmental Regulations Increase Output Costs
As environmental regulations and concerns develop or become more stringent, Ameren is required to adapt by altering generation processes, incurring additional costs. According to the AEE annual report, some of the most prominent include the introduction of new air quality regulations, mercury regulations, and potential greenhouse gas emissions standards.[16] Starting in 2009, AEE will be required to invest what it describes as "significant capital expenditures" to comply with laws calling for "significant additional reductions in emissions." Although only 61% of Ameren's capacity to produce electricity is fueled by coal, because coal is an inexpensive fuel source, it accounts for 84% of annual production. If the changes are of large enough scope, AEE will shut down one or more coal fired plants. Implementation costs are estimated to be between $4B and $5B by 2017.[17]
Construction Related Regulations Increase Eventual Costs Paid by Customers
Due to the Missouri “Construction in Progress” laws, power companies are not permitted to finance the construction of new nuclear facilities with increases in pricing while the facilities are under construction. For Ameren to construct another Callaway plant at $7 billion, Ameren is required to borrow a larger portion of the construction costs than it would without the price controls. Customers would still finance the cost of building a new nuclear facility, but would incur additional interest costs in addition to the actual costs of construction. Ameren is campaigning to change the law.[18]
Competition
Kansas City, MO. Supplies both electricity and natural gas.
Chicago Illinois. Supplies both electricity and natural gas to approximately 5.4 million customers in Illinois and Pennsylvania.
Kansas City MO. Supplies approximately 500,000 customers in Eastern Kansas and Western Missouri with electricity.[19]
References
- ↑ "AEE 2008 10K, pg. 14,15"
- ↑ Morning Star Analyst Report, Ameren Corportation, Jason Stevens, 7-24-2007
- ↑ "AEE 2008 10K, pg. 15,16"
- ↑ "AEE 2008 10K, pg. 8"
- ↑ "AEE 2008 10K, pg. 8"
- ↑ "AEE 2008 10K, pg. 27"
- ↑ "AEE 2008 10K, pg. 27"
- ↑ "AEE 2008 10K, pg. 7"
- ↑ "AEE 2008 10K, pg. 9"
- ↑ "AEE 2008 10K, pg. 12"
- ↑ "AEE 2008 10K, pg. 10"
- ↑ "AEE 2008 10K, pg. 9"
- ↑ "AEE 2008 10K, pg. 9"
- ↑ "AEE 2008 10K, pg. 10"
- ↑ "AEE 2008 10K, pg. 14"
- ↑ "AEE 2008 10K, pg. 10"
- ↑ "AEE 2008 10K, pg. 10"
- ↑ http://www.komu.com/satellite/SatelliteRender/KOMU.com/ba8a4513-c0a8-2f11-0063-9bd94c70b769/dc7c2744-80ce-0971-000b-bd2904945d45
- ↑ http://www.hoovers.com/ameren/--ID__11542--/free-co-competitors.xhtml
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