Nrg Energy, Inc. · NYSE:NRG
Nrg Energy — Investor Presentation (December 2024)
16 slides from Nrg Energy's investor presentation, Dec 20, 2024
Slide 1: Performance-Based Ratemaking
Performance-Based Ratemaking Virginia Dept of Energy Stakeholder Working Group Travis Kavulla, Vice President, Regulatory Affairs, NRG Dec. 20, 2024 © 2024 NRG Energy, Inc. All rights reserved. 1
Slide 2: Who am I?
Who am I? • Executive in charge of regulatory affairs for NRG Energy: Fortune 200 company, provider of energy services to 8M customers throughout North America • NRG’s Direct Energy is a Competitive Service Provider in Virginia. For their customers (generally, >5 MWs) CSPs are responsible for procur
Slide 3: Roadmap for Today's Presentation
Roadmap for Today’s Presentation Incentives in Competitive vs. Cost-of-Service Pricing Utilities: Spend More, Make More? What is Performance-Based Regulation? Examples of Performance-Based Regulation Conclusion © 2024 NRG Energy, Inc. All rights reserved. 3
Slide 4: Competitive vs. Monopoly Enterprises
Competitive vs. Monopoly Enterprises • How do competitive firms make money? • Lower the cost of goods sold (efficiency of processes, input costs) • Increase the value of one’s product (e.g., customer service, guarantees, etc.), allowing increased pricing vs. competitors • Gain market share (increasi
Slide 5: What's the Math?
What’s the Math? • Utilities’ rates are based on a “revenue requirement”, where: Revenue Requirement = O + T + D + r(RB) • O= Operating Expenses • T = Taxes • D = Depreciation (return of capital investment to utility) • r= fair rate of return (weighted cost of capital) • RB= Rate Base • value of uti
Slide 6: Vanishing Incentives in Utility Regulation
Vanishing Incentives in Utility Regulation • Historically, utilities also had profit opportunities by becoming more efficient. Once their rates were set, if their operating expenses decreased, they could pocket difference between revenue collected and actual costs • The introduction of adjustment cl
Slide 7: Virginia is the GOAT in Adjustment Clauses
Virginia is the GOAT in Adjustment Clauses • Virginia has effectively removed most ‘skin in the game’ for regulated utilities, with a record 22 adjustment clauses & factors for Dominion alone • Most rate increases Virginia customers see don’t go through traditional rate-review process, but instead c
Slide 8: Let's Hear What's Being Said To/By Utility Investors
Let’s Hear What’s Being Said To/By Utility Investors 1. Investors are hyping Dominion as a “rate base” story that is “derisked” because of … 2. Riders/Adjustment clauses that allow Dominion to charge customers for costs without traditional regulatory review © 2024 NRG Energy, Inc. All rights reserve
Slide 9: Less Risk… More Reward?
Less Risk… More Reward? • Regulator-authorized profits (Return on Equity) reached an all time high in 2020, net of the “risk- free” rate (as measured by 30-Y Treas bonds) • Recent increases in 30- year Treasuries have eroded the most extraordinary profits • Nevertheless, investors in utilities can m
Slide 10: So what?
So what? • Utilities’ profits depend on growth in utility spending – and not other variables that would be influential in a competitive environment • A few take-aways: • Utilities are good at spending money – but not in operationalizing it (e.g., spend money to deploy the smart meters but not use th
Slide 11: Performance-Based Regulation
Performance-Based Regulation • “PBR” means different things to different people • Core idea behind PBR is a recognition that existing incentives for utilities are not well aligned to the public interest • Two integral concepts of PBR are • Creating incentives that simulate the incentives of a compet
Slide 12: PBR Component #1: Multi-Year Rate Plan
PBR Component #1: Multi-Year Rate Plan • Put utilities on a budget. Terminate nearly all adjustment clauses, and fold these costs back into base rates that are re-set only 3-5 years (or a long enough period for utilities to be positioned to profit from managerial decisions) • If annual rate changes
Slide 13: PBR Component #2: Shared Savings
PBR Component #2: Shared Savings • Fuel & Purchased Power Costs are big & volatile. A ‘tracker’ or ‘factor’ may seem inevitable • “Sharing” profits/losses still possible • Utilities today typically recoup 100% costs from customers through a ‘tracker’. If current rates do not recover a utility’s spen
Slide 14: PBR Component #3: Pay for Performance
PBR Component #3: Pay for Performance • PBR also includes “performance incentive mechanisms” (PIMs) that ride atop a Multi-Year Rate Plan. • Adequate performance around a PIM should make up a significant enough part of a utility’s authorized return as to meaningfully incentivize performance, with bo
Slide 15: PIMs alone are not PBR
PIMs alone are not PBR • Some stakeholders appear to believe “performance-based regulation” is all about specific, targeted incentives (i.e., PIMs) • That is not the first or most important part of PBR (and it’s not alone what HJ30 says to study) • Individually incentivizing 14+ difference ‘performa
Slide 16: Travis Kavulla
Travis Kavulla Vice President, Regulatory Affairs (406) 788-3419 travis.kavulla@nrg.com © 2024 NRG Energy, Inc. All rights reserved. 16