[BETA] Fortnightly

The other day I read in the New York Times that evolution is dead. For humans, at least. It seems we don't have enough sabre-toothed tigers around anymore to cull the weak from the strong.

Now that doesn't mean Darwin was wrong. Few dispute his "survival of the fittest." But without the normal complement of predators, we're each as "fit" as the other. The Times article ("Evolution of Humans May at Last Be Faltering," William K. Stevens, March 14, 1995, p. C1) predicts that even mutations may cease as the human race enters a long evolutionary pause. Darwin's law of natural selection still applies, but "selection" has stopped; we've run out of "natural."

The electric utility industry, however, has not yet broken free of Darwin's theory. The predators still prowl. All utilities are not equally fit. Will restructuring continue in gentle evolution, or will the future bring revolution or mutation? Will the landing be "hard" or soft?"

Electric Evolution

These days my in-box is jammed with reports, "white papers," and outlook pieces attempting to shed light on the evolution of the electric industry in the age of restructuring. Three, in particular, have caught my eye. Each offers some words on electric utility evolution.

The first is The 1995 Electric Industry Outlook, published by the Washington International Energy Group (Tel. 202-331-9820), headed by president Roger W. Gale, who last appeared in Public Utilities Fortnightly in the May 15, 1992, issue. In this latest survey, Gale's group contacted CEOs and decisionmakers at some 3,000 American and Canadian electric utility companies, probing opinions on competition, operations, restructuring, and regulation. The second report comes from Dan Scotto, now senior managing director at Bear, Stearns & Co. in New York (Tel. 212-272-8061), and a frequent Fortnightly contributor. His work, Electric Utilities Outlook: 1995 and Beyond, looks at electric utility credit ratings, balance sheets, capital structure, debt coverage, cash flow, income statements, return on equity, and most importantly, price competition. Fitch Investors Service (Tel. 212-908-0500) supplies the third paper, Fitch Competitive Indicator: Global Power Electric (em Special Report. The Fitch report sorts investor-owned and public electric utilities by competitive strength and bond rating, and predicts an electric industry "time line" through 2000 and after.

Let's consider the Bear Stearns outlook. With care and precision, Scotto runs down some of the ominous signs that imply revolution or even mutation, such as 1) stagnant or falling returns on equity, 2) a shrinking gap between utility dividends and U.S. Treasury yields on the long bond, and 3) a marked inability by utilities to boost the common equity ratio in capital structure. And all this persists despite downsizing: "[T]he workforce reductions we read about . . . are generally failing. . . . [P]rice cutting is occurring at a faster pace than expense cutting."

Scotto predicts a stream of asset or equity markdowns, until equity reaches a value low enough that market prices produce competitive equity returns. Moreover, he sees such markdowns extending to so-called "regulatory assets," produced by phase-in accounts that defer or accelerate certain expenses, revenues, or the recording of