Fortnightly’s 2013 ranking of shareholder value performance shows substantial changes, with gas prices weighing on some utilities and elevating others.
The Blackout of 2003: Why We Fell Into The Heart of darkness
The Dow Jones Electric Utilities Index reached a high of just over 170 in December 2001 and stands at 103 as of this writing.
This and the broader Dow Jones Utilities Index declined after the end of the tech-stock bubble in March 2000, and the terrorist attacks on 9/11. In fact, electricity stocks were thought to be a safe financial haven. Diversification failures changed this assumption. Not only has the electric industry walked away from delivering economic and reliable electric service as its mission, but much of the industry no longer has the financial capacity to make investments directed at this mission.
The silver lining is that the segment of the electric power sector that escaped financial collapse are utilities that focused on producing electric power for the grid and managing the grid to ensure reliable delivery. Southern Co., Entergy, and Exelon appear to be the prime examples. Each of these companies has outperformed both the Dow Jones Electric Utility and the S&P 500 indexes by wide margins, seeing significant price gains.
Truth and Consequences
As investments in the electricity infrastructure declined, so did its reliability. Up until the recent recession, generating capacity reserve margins declined to dangerously low levels of 15 percent and less.
It has since recovered to just over 20 percent, but only through the addition of natural gas-fired power plants that are now uneconomic and operated by organizations that are bankrupt or struggling for financial survival. How reliable can this capacity be? Pepco and Northeast Utilities are among utilities dependent on near-bankrupt organizations for significant portions of electric supply, and are at risk of seeing these supplies cutoff.
As of now there are few new plants under construction, and those planned are being pulled off the books; thus, capacity margins may soon begin to trend down again. The only capacity that will almost assuredly be added are the up-ratings planned for many nuclear power plants. Nuclear is the most economic source of electrical energy available to the grid, thus the strong likelihood of the up-rates.
The dearth of new transmission capacity is well documented. Electricity consumption increased by 35 percent in the 1990s alone (and is twice the level of the early 1970s), with transmission carrying capacity increasing by only 10 percent. Bulk power sales are also on the upswing as load grows and capacity margins tighten.
Examples of the consequences of an aging generation and transmission system with little investment for modernization are of course obvious. They include the August 14th blackout; the New York City blackout of 1977; the West Coast power interruption of 1996; voltage reduction and loss of load in the Midwest, Northeast, and Mid-Atlantic states in 1999; and the California energy crisis of 2000-2001.
As technology advances and increasingly sophisticated equipment is developed, the need for a stable electricity grid will increase. Voltage and frequency fluctuation will be less tolerable without damaging equipment. Increasingly sophisticated manufacturing will also be less tolerant of even minor fluctuations in the electrical grid.
Warnings from North American Electric Reliability Council (NERC), the present administration, and even this