Consolidated Edison (NYSE:ED) has a problem. It wants customers to use less electricity in the city that never sleeps. You'd think spending less on the electric bill would be a no-brainer, but Consolidated Edison is willing to pay up to $150 million to get customers on board. Such conservation programs aren't new in the utility space, but expect to see more of them in the future.
This utility is all wet
Consolidated Edison is trying to do something that California Water Service (NYSE:CWT) has being dealing with for years: Get customers to use less of the very product it sells. As the name implies, California Water Service is a water utility serving nearly 500,000 customers in more than 80 California communities.
Even more so than electricity, water is a necessity of life. In fact, California Water Service has increased its sales every year for a decade. And while earnings go up and down, the water utility's dividend has headed steadily higher, though not on an annual basis. That sounds roughly similar to electric companies like Consolidated Edison.
The big difference is that California Water Service can't make water, it has to deal with the vagaries of nature. That's why it's spent over $30 million in recent years to get customers to use less of the very product it makes money selling. But its efforts are working. According to California Water, "water use has declined an average of 15% throughout the company's service territories since 2007."
That's big news
This is an important thing to keep in mind as utilities like Consolidated Edison look to achieve similar results in the electric market. The big push is the newly proposed Environmental Protection Agency (EPA) rules regarding carbon emissions from existing and future power plants. Instead of relying only on the production side (electric utilities), the EPA is looking for the demand side (electric users) to pitch in, too.
That's one of the reasons why Consolidated Edison is asking regulators to approve up to $150 million in spending on programs meant to reduce electricity consumption. But reducing CO2 emissions isn't the only benefit. Consolidated Edison is hoping that the $150 million of conservation spending will help it delay $1.1 billion worth of spending on infrastructure to support a growing population.
New York City, which accounts for around 90% of Consolidated Edison's business, is a vital and growing city. That's good on one level, but bad when it comes to conservation. For example, New York City ranks number two for jobs recovered since the 2007 to 2009 recession. Building permits are heading higher again. And, to add insult to electric consumption injury, the Big Apple is attracting record numbers of tourists (admit it, you blast the AC in your hotel room just like I do).
In other words, demand is a big issue for Consolidated Edison. And it wants to get a head start on the process of keeping not only its infrastructure costs down, but on dealing with the new rules coming out of the EPA that increasingly highlight the role of conservation.
An industrywide change
The thing is, Consolidated Edison isn't alone. For example, Xcel Energy (NASDAQ:XEL) has been working hard to green up by dramatically increasing its use of wind power. That source of electricity will increase from just 3% of its generation in 2005 to 22% by 2020. This effort should allow Xcel Energy to meet the EPA's 30% carbon dioxide reduction goal.
However, in 2020 coal will still make up over 40% of Xcel Energy's power supply. If the utility can follow along in Consolidated Edison's footsteps and get customers to use less power, meeting future CO2 mandates won't require the ugly choice of closing perfectly good coal plants while at the same time having to spend to build base-load plants that run on natural gas or uranium—the other two notable contributors to Xcel Energy's power pie.
Watch Consolidated Edison's conservation spending request; it's likely to be approved. And keep an eye on the trend in the broader industry as electric conservation becomes more important.