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Industry Outlook -- Services: UTILITIES

UTILITIES

Power companies are producing lots of cash, and regulators are treating them gently. But the public may cry foul

For all the talk of turmoil caused by deregulation, the $210 billion U.S. electric-utility industry should generate healthy profits again in 1997. With competition still mainly theoretical, many power companies will continue charging more for electricity than a free market would bear. Most can pass along higher fuel costs to customers. And utilities have declared a near moratorium on new generating plants and transmission lines. That means they have plenty of free cash flow to repurchase debt and equity or snap up other electric and gas companies at home and abroad.

All told, it's hardly an industry in severe pain. The average return on equity of U.S. utilities should reach 11.8% this year, continuing a steady rise from 9.6% in 1993, says Bear, Stearns & Co. analyst Dan Scotto. Take FPL Group Inc., parent of Florida Power & Light Co. With a healthy local economy and supportive regulators, FPL should post earnings-per-share growth of 6% this year, says analyst Ronald S. Tanner of Baltimore-based Legg Mason Inc.

PICK UP THE TAB. Happily for utilities, competition is coming as a tepid bath, not the cold shower many had feared. California set the tone in 1996 with passage of a law protecting the state's utilities and their shareholders from footing the bill for generating plants that are "stranded"--rendered obsolete--by cheaper power sources. Customers must keep paying for obsolete plants even if they start buying their electricity from someone else. The theory is that utilities built the plants in good faith, thinking they needed to supply juice to all the customers in their territory.

State regulators can still force utilities to pick up the tab for investments that are judged obviously unwise. Still, utility lobbyists like what's happening in California and other states in the vanguard--Massachusetts, New Hampshire, Pennsylvania, and Rhode Island.

Fresh from reforming telecom in 1996, Congress will turn to electricity this year. Representative Dan Schaefer (R-Colo.) is pushing a bill that would give states a deadline of Dec. 15, 2000, to begin letting customers choose between electricity suppliers. Another bill, to repeal the Public Utility Holding Company Act of 1935, would accelerate industry consolidation by making utility mergers easier to pull off.

Residential consumers won't benefit as much as industry from utility deregulation. Last fall, the Washington International Energy Group Ltd. consultancy asked utility executives whether competition would significantly reduce the average family's electric bill. Fully 82% said no.

If the general public starts demanding better treatment, lawmakers' and regulators' benevolence toward utilities may fade. So utilities may move quickly in 1997 to lock in deals with their states. "There's a first-mover advantage," says Howard P. Kagan, a partner in the investment-banking boutique of McManus & Miles Inc. in New York. "The later utilities are not going to do as well." Expect lots of politicking this year.By Peter Coy in New YorkReturn to top

TABLE

Prognosis 1997

POSITIVES

-- Mergers between electric utilities will bring down costs

-- State regulators are socking customers, not shareholders, with the bill for utility assets that are rendered uncompetitive by deregulation

NEGATIVES

-- Utilities with high-priced electricity face long-term problems

-- Uncertainty about deregulation will leave many utilities paralyzed

-- Residential customers may rebel if restructuring isn't benefiting themReturn to top


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