Surging energy demand, federal headwinds, and the $140B public power buildout

Transcript:

Mike Scarchilli (00:04):

Hi everyone, and welcome to the Bond Buyer podcast, your trusted source for insights on all things public finance. I’m Mike Scarchilli, editor-in-chief of the Bond Buyer, and in this episode, the Bomb Buyer’s Northeast Reporter Christina Baker, is joined by Tom Falcone, president of the Large Public Power Council for a deep dive into the urgent energy and infrastructure demands facing public power utilities. Fresh off the PPCs Annual Financial Conference, Tom breaks down what’s driving the unprecedented surge in electricity load growth, especially in regions seeing rapid expansion from AI data centers and advanced manufacturing, and how utilities are grappling with the long timelines and steep costs required to meet that demand. He also explores the affordability challenges for rate payers, the mixed signals coming from federal policy and the shifting regulatory landscape. Utilities must navigate as they build for both the present and the future. Let’s get into it.

Christina Baker (01:06):

Hi, welcome to the Bond Buyer Podcast. I’m Northeast Reporter Christina Baker, and with me today is Tom Falcon, president of the Large Public Power Council. Tom, thank you for joining us.

Tom Falcone (01:16):

Thank you, Christina, for having me.

Christina Baker (01:18):

And for listeners who might be unaware, the LPPC just held its annual conference. What were your takeaways from the conference, Tom?

Tom Falcone (01:27):

Well, it was a financial conference, so it was really targeted to the bond buyers audience, the financial community, investors, bankers, attorneys, all those types of folks. I think the big elephant in the room, not just for public power, but also for the electric industry, is load growth. I mean, after 25 or so years of flat to declining load, which minimized the amount we needed to invest in our grid today, we have significant growth and it’s not evenly spread across the country, but in about half of our LPPC members, we have 30 large utilities. About half of those we see very, very rapid growth. And that’s from AI and data centers and manufacturing. And it’s in places like Texas and Oklahoma, Arizona, Nebraska, South Carolina, Georgia, upstate New York. So it’s in pockets where you can build quick, where there’s capacity to serve, where there’s the right workforce.

(02:28):

I think that’s probably the number one thing. And probably the number two thing that we talked a lot about in our panels with our many CEOs was that this time that load growth is very different than what we’ve seen The last time we saw a lot of load growth, which is in the fifties and sixties and then slowing down, but still some in the seventies and eighties, the last time somebody moved to town and they needed five megawatts or 10 megawatts or something like that. Now they moved to town and they need 500 megawatts or a thousand megawatts, and you may not know what a megawatt is, but that’s a full power plant. Or two a thousand megawatts is enough to serve 650,000 residential customers. And they also want it quick. It takes us 6, 7, 8 years to build infrastructure, but they’re looking to get connected to the grid very rapidly, certainly a lot less than that.

(03:22):

So we spent a lot of time talking about that, and I hope what the conference attendees walked away with is that each of those utilities have a good handle on that risk. A number of our CEOs mentioned their strategies. Some like Javier Fernandez of OPPD said, Hey, bring your own generation. If you’ve got contracts, renewable, dispatchable, whatever, you assign ’em to us, we can serve you faster. LCRA spoke about rapid transmission build out. They’ve got about a $5 billion, five year investment in Texas transmission, including a Texas’s first 765 KV line, which is a very, very high voltage. Others are looking for long-term contracts. So in total, we went from an era of flat growth to something that your listeners would be interested in. We’re going to be spending at least $140 billion over the next decade, building about 60 gigawatts of generation in transmission.

Christina Baker (04:22):

And all of the surging demand is coinciding with a lot of concern, especially from the states in the northeast that I cover about the affordability of everything really, but specifically people’s utility bills. Can you talk about what’s fueling the utility, the affordability challenges, and how your members are trying to balance the need for affordability with the rapid expansion that you need to carry out?

Tom Falcone (04:56):

Sure. Well, let me first talk about what’s going on in the northeast and then about the problem more broadly. There’s been a lot in the news that is very specific to the PJM electricity market that stands for Pennsylvania, New Jersey, Maryland, which were the key states that founded that market, but it’s across 13 states, includes places like Virginia, Ohio, Illinois, North Carolina. So it’s not just limited to those three, but what’s been in the news is a number of governors have been asking for reforms in PJM. They’ve been looking for board seats, and their basic issue is that capacity prices and electric prices in those markets is up quite a bit. And the reason it’s up is because demand’s up quite a bit. And so I think it’s probably important as background for folks who are less focused on electricity markets, understand that they function at two levels, they do two different things.

(05:51):

So the first thing is they optimize what’s there, do I run this plant or do I run that plant? And the issue is that you may have different plants owned by different people, but it’s more economic to run one plant at full capacity than two plants at half capacity. So there’s kind of gains from trade like a power pool. And so that functions pretty well in optimizing what’s there. The problem is the second one, which is attracting new generation and planning and building transmission. And that second level really hasn’t been tested in these markets since they were established in the late 1990s. We’ve had flat or declining load. We haven’t really needed a lot of new entry. We haven’t needed a lot of transmission build, but one man’s opinion. But I think what we’re seeing here is that these constructs, they were designed by economists in theory, and now we’re seeing how well they work in practice for the first time.

(06:56):

And for many, the answer is they don’t work that well. But I think it’s also important to know that a lot of the reasons they’re not working are just policy choices, their policy choices within those states, their policy choices at FERC. And within those markets, and I’ll just give you one example, even within those states, some of them like Virginia, allow investor-owned utilities to own generation and others like Pennsylvania do not. And what that means is that in a state like Virginia, customers since the utility owns generation, are hedged for rising capacity prices because they have the higher cost in the market, but they also own the asset. In other places like Pennsylvania, they’re not hedged and they’re entirely reliant on the market. And one of the things that happens that having been a former utility, CEOI can tell you, being entirely unhedged against rapidly rising prices is not generally something that’s going to be a customer pleaser.

(08:02):

Most of our utilities are public power utilities are vertically integrated, and I think a lot of states are now looking at that and revisiting it. There’s bills introduced. I don’t know whether those bills will pass. And like I said, our members, even when they participate in these markets, are generally at least partially hedged. And so the other part of that is whether these markets are really even attracting the new entry that they hope for. We have a really high price. And the point is so that now it sends a price signal to attract new generation. And it’s important to note that these markets are kind of in name only. They’re really administrative rules. They’re not truly markets. They’re kind of a form of regulation that’s very complex and formula driven. And the answer is they don’t really attract new entry that well either. So we have high prices without attracting the new entry.

(08:53):

We have retirements even though we have shortfalls in the out years, and it just leads to an environment where people start to question, is this working well? So that is very unique to PJM. That is not the electric industry overall. Some states don’t even have markets. A lot of our members are vertically integrated. Now to your second part of your question, which is, okay, let’s get out of the northeast and talk about or really PJM and talk about affordability. And that is a topic we spend a lot of time about in the conference. And generally speaking, if we’re in a big build cycle, new costs more than old, the marginal cost of new stuff is more than the average cost of the old stuff. So if we’re in a major build cycle that has a tendency to raise cost. And I think the unique thing here is we’re building a lot, but it’s for a handful of industries which are very, very important industries, ai, advanced manufacturing.

(09:50):

If you want to win the AI race, if you want to reshore critical manufacturing chips, things like that, then you have to have the electricity that supplies it. But it’s also important to make sure that, and this is something that’s routinely done in the electric business, that you charge the right people, the right price. So if what’s raising the price is data centers and building for data centers, for example, you don’t want to charge your residential customer more when their cost to serve hasn’t gone up. And so that’s a rate design issue and there’s lots of novel things, novel issues for us to deal with in there, but these are not insurmountable problems. These are things that are routine. We’re just dealing with them in this new instance.

Christina Baker (10:37):

And while you’re in this built cycle, I know many states also have emissions goals and prior to the influx of data centers were trying to transition or at least create more renewable energy. How are those priorities faring in the face of this drastic demand?

Tom Falcone (11:04):

Many of our states and our localities and our public power utilities have renewable goals. Generally speaking, we’re in build everything mode, especially when you have rapid growth, you’re building whatever you’ve got plans for. You’ve generally been trying to, it takes a long time to permit things and buy land and right of ways and order equipment. So if you’ve got something in the pipeline, you’re going to build it. And utilities are building everything. Our members are building wind and solar, but they’re building pump storage. They’re building batteries, they’re building hydrogen carbon capture. They’re looking at nuclear in various ways. They’re looking at gas plants, they’re looking at extending the life of their existing assets. Even things they were planning to retire. They may slow the retirement because there’s more energy demand than we can immediately meet. So I think it’s kind of important to recognize though that there was a change in federal policy in the one big beautiful bill, the tax bill that was passed earlier this year.

(12:05):

But if you have been working on and are pretty far along on a wind and solar project, you should be able to secure the tax credits. It should not affect your project. There’s some rules in there and things you have to do, but I think the second thing to note that’s also important, one wag said that the one big beautiful bill was the second largest clean energy bill in the nation’s history, which is interesting and also true. The first was the original bill passed in the Biden administration, but this was the second biggest because it preserved a lot of incentives. It did make some changes on wind and solar, but the incentives for storage for hydrogen, carbon capture, nuclear, those still exist. And not only do they exist, they could well extend if you begin a project and begin construction into the 2040s. So tax policy has changed, federal grants have changed a little bit, but if you got a project far enough along that’s wind and solar, you should be able to continue with it.

(13:09):

And if you’re looking at these new, more emerging technologies, those tax credits continue. The second part of that, you have state and local policy, and that’s very important and people are proceeding a pace. But I think it’s also really important to know that in the electric business, you’re also driven by the resource that’s available to you, and the resources are not evenly spread across the country. Some places just have a better hydro resource like the Pacific Northwest or Northern New York, tremendous hydro resource. You’re going to use that. Or one of our members, GRDA, there’s CEO, Dan Sullivan likes to note they’re from Oklahoma. So he likes to note that Oklahoma is where the wind comes sweeping down the plane. There’s a lot of wind there. So it’s a big natural gas state, but it’s a big wind state, so you’re going to have a lot of wind and natural gas in Oklahoma regardless of federal policy. So I think that kind of summarizes where people are, projects that are in the pipeline are moving ahead a lot still to do on emerging technologies and people are going to look at their local resources and local requirements.

Christina Baker (14:15):

Yeah. And let’s talk more about the federal landscape. I know recently the president has been going after specific grants to certain renewable energy projects like Revolution Wind in Connecticut, which is I guess still in court. Can you talk about how the administration’s attitude towards natural gas and I guess sometimes specific projects and specific states is going over with your members and how they’re feeling about taking on major projects like this with the threat that they might have their approval rescinded or receive a stop work order?

Tom Falcone (15:04):

Sure. So there’s two things there. One of them has to deal with federal permits that have been issued on projects. Another one is grants. I think it’s important to note that every administration resets policy in their own direction. This administration may be a little more aggressive than most, but every administration resets policy in their own direction. We have some members that have lost grants. They’re generally in the 30 to $50 million category. We prefer not to see that. At the same time, I do think it’s kind of interesting that if you go back to the one big beautiful bill and I mentioned it was the second largest clean energy bill in the nation’s history. So the bill was originally passed under the Biden administration and it was passed on a party line vote, and now those subsidies have gone through the meat grinder on a party line vote by the other party in the reconciliation bill, and it turns out that there’s a lot of consensus on a lot more stuff than you might have assumed.

(16:07):

So things that are still being incentivized by both parties for the long term storage, hydrogen carbon capture, nuclear. So there’s a lot to do there that there really is some bipartisan consensus even in an era when Washington dc it’s hard to get 60 votes on anything. But the process we’ve come by seems to indicate that there is a consensus on certain of these technologies that this is where federal policy should incent. To your question about particular projects, obviously if you are going to be in the business of financing particular projects, particularly for the developers take offshore wind, I think it would probably give an offshore wind developer, which is not generally a utility. Most of our utilities are building transmission infrastructure. They’re not going building offshore wind, but they may sign a contract for it. But for the developer, look, they’re going to think twice before they commit the funds unless they think that they can get that project done within a timeframe, the administration has a particular view on that technology.

Christina Baker (17:19):

And in the next big energy bill or the next regulatory change, what policies would you and your members like to see from Washington?

Tom Falcone (17:29):

Well, it’s hard to get a big energy bill. We haven’t had one since about 2005 increasingly because you can’t get 60 votes in the Senate for bipartisan bills. You see changes that are on a party line vote on something like budget reconciliation, so tax budget type policy, and you see a lot of administration administrative actions, whether through executive orders or a regulatory environment. So that tends to be where the action is. Right now, the Congress is working on a couple of bills. One is permitting reform. We’re pro permitting reform. There’s two ways that projects can get slowed down, and it may be federal and it may be state, but it’s an important thing. We’re in this major build cycle and for example, we’ve got a member that’s been seeking federal permits on a non-controversial transmission line for about 12 years. If it takes you 12 years to permit something that’s needed, you’re just not going to meet the moment.

(18:32):

So federal permitting is important. A lot of times state permitting is important. Most of the projects do not go through federal permitting. Most go through state permitting, but some things are federal, and so permitting reforms important. Whether we’ll get to 60 votes for something that would be meaningfully helpful, hard to say. Those things are hard to do. There’s a reforms at FEMA that are being contemplated. There’s a bipartisan bill in the house on FEMA reforms that was introduced in the House Transportation Infrastructure Committee. It’s a good bill. It’s a bipartisan bill. It was moved through committee by the chair and the ranking member, the Republican and the Democrat, and it would significantly speed reimbursements and projects. When you have a big disaster, it’s really important that you want to get these communities back on their feet and also investing in resiliency and infrastructure quickly. So that Bill is a very good bill.

(19:34):

We very hopeful Bill like that could pass whether it can or not. The Senate has not taken it up yet, but the fact that it moved through the house in a bipartisan fashion, that’s really good. But a lot of the action is that EPA and FERC and NERC and permitting reforms that are executive taken through executive action rather than federal bills. And many of those are helpful. I do think the administration’s extremely focused on the fact that we have this electricity energy need and that we’re going to have to move things along faster if we want to meet the moment.

Christina Baker (20:13):

And the other federal policy that I guess is sometimes an elephant in the room, which I know was discussed at the conference, was tariffs and their impact on the building new infrastructure and on the US economy in general. Can you talk about how tariffs are going to affect your member utilities?

Tom Falcone (20:36):

Yeah, I think it’s too soon to tell. We just had a meeting of our supply chain working group. It was the leaders of supply chain among our 30 utilities, and we’re monitoring, there’s some things that would make a big difference, and there may be cost pressure coming down the pike. Do we strike deals with Canada and Mexico? We have a lot of equipment that comes from those two countries or steel tariffs. What we’re seeing mostly at this point is that suppliers are passing along the risk. So when they negotiate contracts that are longer term, not for delivery of a piece of equipment on a purchase order in a few weeks or a month, but things that have long lead time, the suppliers are passing along the risk. They’re asking for in the contract this to be a plus or minus type item because nobody really knows where it’s going. So we’ll see what deals the country strikes and where those issues come out. Administration has been willing to listen on specific issues, so I think that that’s good, but I think it’s really too soon to tell what tariffs mean. It depends on where the story ends and the story. The president just had a meeting with the Prime Minister of Canada yesterday. They didn’t reach an agreement, but I think it’s just too soon to tell.

Christina Baker (21:58):

Yeah, and we’re coming up on our time. Is there anything else, any other subjects that were covered at the conference that you want listeners to know about?

Tom Falcone (22:08):

I think we covered all the highlights. I think the big picture is we’re building, we’re thinking about building, we’re thinking about how we manage the risk, and certainly LPPC is very focused on helping our utilities compare notes and best practices, but also advocate for things in Washington DC that are going to be helpful to them.

Christina Baker (22:28):

Thank you again for joining us, Tom.

Tom Falcone (22:31):

Well, I really appreciate it. I started my career as an investment banker and a loyal bond buyer reader for many years before I moved into the CEO role at one of our utilities and now into policy in dc So a long time bond buyer reader.

Christina Baker (22:47):

We love to hear it. Thanks again.

Tom Falcone (22:49):

Thank you.

Mike Scarchilli (22:50):

That’s a wrap for this episode of the Bond Buyer podcast. A big thank you to Tom Falcone for his insights, and to Christina Baker for leading the conversation. Here are three key takeaways from today’s episode. One electric load is surging after decades of stagnation, driven by massive demand from AI data centers and manufacturing with utilities across regions like Texas, Arizona, and the Northeast. Planning more than 140 billion in infrastructure investment over the next decade. Two, affordability remains a critical concern, especially in markets like PJM Pennsylvania and New Jersey, Maryland, where capacity prices are spiking public power. Utilities are working to ensure the right customers bear the cost of growth while shielding residential rate payers from unnecessary increases. And three, federal policy is creating opportunity and uncertainty with continued incentives for emerging clean energy technologies like hydrogen and carbon capture, but also growing regulatory friction around permitting, grant rescission, and offshore wind development. Thanks again for listening to the Bomb Buyer Podcast. This episode was produced by the bomb buyer. If you liked what you heard, please subscribe on your favorite podcast platform. Leave us a review and visit us@www.bombbuyer.com for more of our award-winning coverage. Until next time, I’m Mike Scarchilli signing off.