Shock: UBS Sees New England, New York Susceptible to "Re-regulation" of Generation

New England and New York could follow California in essentially re-regulating new build power generation through the use of regulator-directed procurements, Julien Dumoulin-Smith said in a note to UBS Investment Research clients.

Dumoulin-Smith is executive director for UBS' US Electric Utilities & IPPs Group.

"We believe the notion of competition for IPPs is fundamentally shifting," Dumoulin-Smith said in the research note titled "Evaluating the Competitive Landscape," which cites the potential for New England states and New York to follow California into a long-term procurement process for utility capacity and generation needs.

With respect to retail, the note also cites a trend toward re-regulation versus deregulation (see related story today)

"With all of the discussion in recent years around how to effectively incentivize new capacity in merchant markets -- and with nearly every market now contemplating a capacity-like mechanism -- we see a fundamental re-evaluation as to the merits and approach around 'restructuring' of power generation. We believe regions that are truly 'committed' to deregulation warrant premium cash flow multiples; while Texas (ERCOT) stands out at the top of our list, PJM remains near the top as well. Meanwhile, we see cash flows produced by IPPs in states such as California, New York, and New England as more risky given uncertainty around new supply—and possessing less upside, as 'new entrant' economics appear unlikely given states efforts to contract for capacity needs well in advance of price signals," Dumoulin-Smith said.

"We believe states like New York could eventually pursue more formulaic approaches to the procurement of new capacity through efforts akin to traditional 'Integrated Resource Plans' filed by utilities in regulated states, rather than the ad-hoc methodology pursued currently," UBS' research note says.

"What's next in the 're-regulation' of Generation? Formally acknowledging such by regulators -- as has already been understood in California, where the CPUC solicits for generation using a long term procurement plan (LTPP). We believe New England and New York could follow suit eventually," Dumoulin-Smith wrote.