Economy and Environment and Utilities

Law could generate earnings for Cummins: States face deadline in completing standards for connecting generators to grid

August 22, 2005

Cummins Inc. and other makers of electric generators stand to gain under a provision an Indiana lawmaker plugged into the federal energy bill signed this month.

The amendment by 4th District Republican congressman Steve Buyer forces state utility commissions to adopt standards within two years that will pave the way for businesses that generate their own electricity to sell excess power to the electric grid.

That's good news for firms that generate their own power and for Cummins, which makes and sells generators.

Businesses in Indiana and most other states already can connect their generators to the utility grid and sell excess electricity they generate back to utility companies. The problem has been a mishmash of rules among the states that can delay and discourage interconnection. The electrical industry has already come up with technical standards for interconnection.

"We say, 'Look, it's time to get on with it. The technical standards are done,'" said Cathy Van Way, director of legislative affairs for Cummins.

Indiana is one of those states developing interconnection standards. The Indiana Utility Regulatory Commission plans to adopt a final rule next summer.

The Buyer amendment designed to streamline interconnection also could benefit firms such as Anderson-based iPower Technologies, which makes generation devices for industries that run on automotive engines that burn natural gas.

Power generation is the second-largest division of Columbus-based Cummins, with sales last year of $1.9 billion, up 41 percent over 2003. Cummins is more known for its heavy truck diesel engine business, which had sales of $5.5 billion last year.

But generator sales have big potential for Cummins, particularly in countries such as China. Its fast-growing economy has been plagued by power shortages. In other countries and in parts of India, the electrical grid can be so unreliable that businesses rely substantially on generators, said Thomas Linebarger, president of Cummins Power Generation.

In the United States, a growing market is for so-called "distributed generation," in which customers generate power at their own sites on a more sustained basis. Some electric users such as universities also operate co-generation plants, in which they not only generate electricity but use the heat produced by the generators to help heat and cool their buildings. Some of Cummins' units generate upwards of 10 megawatts. Many of the larger units burn natural gas, rather than diesel, for environmental reasons.

Distributed generation also is being encouraged by regulators as a way to reduce demand on electric utilities facing the need to build expensive new plants.

"It often defers big capital investments for a period of time," Linebarger said.

The Cummins executive expects the Buyer amendment to have a measurable impact on sales after next year.

Linebarger said Buyer's interest in streamlining interconnection standards accelerated after the Northeast power blackout a few years ago, as a way to improve reliability.

For Cummins, the generation unit and a handful of other businesses are intended to improve earnings reliability. Historically, those earnings have swung wildly because of the highly cyclical nature of the truck engine business.

The diversification strategy appears to be working: Cummins lost 47 cents a share during 2001's downturn vs. a $4.69-a-share loss in the 1990 truck slump, said Mark Foster, a partner of Columbus investment firm Kirr Marbach & Co. "They made it through the last go-around much better than they had in the past."


Cummins' power-generation division, which sells generators like this one, saw sales increase 41 percent last year. Firms producing excess power can feed it to the electric grid.
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