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Business & Money

Can economies of scale make the industry more stable?
Fortnightly Magazine - March 2004

merchant plays) and would be severely scrutinized in today's marketplace.

Comprehensive regulatory policies supportive of consolidation in the utility industry would benefit all constituencies. Regulators would be able to achieve significant reliability investment while avoiding, or at least significantly mitigating, the politically unpalatable proposition of increasing rates. The utility industry (and its shareholders) would materially benefit by eliminating currently embedded cost inefficiencies, realizing economies of scale and generally becoming financially stronger. And ratepayers would avoid shouldering the entire burden of infrastructure investment in addition to other rate pressures described above.

Currently, however, and notwithstanding the compelling economic proposition outlined above, it is uncertain whether the overall regulatory will exists to properly align the industry's economic policies with the need for significant industry investment. While there are features of the proposed federal energy legislation that would ease the administrative burdens of seeking consolidation approvals, much more still must be done on the regulatory front. What is certain is that, in the absence of the necessary economic incentives, utilities will continue to find new investment in transmission and other system infrastructure challenging, thereby impoverishing the U.S. power system and ultimately degrading reliability over time. While the causes of the Northeast Blackout will be considered for some time, the debate about the causes of the blackout reminds us that the price for the continued neglect of the U.S.'s electricity infrastructure needs is very steep and very real.

Investment in infrastructure, however, requires that a fair return be available that someone-i.e., ratepayers-must fund. In an economic and general rate environment with many pressures that will otherwise require rate increases, additional rate increases to fund investment may be politically challenging albeit necessary. Having access to the embedded economies of scale from industry consolidation could ease these burdens and create benefits through further system reliability and investment.

Business Bytes

Progress Energy Earns $3.30 Per Share for 2003

Progress Energy reported full-year consolidated net income of $782 million, or $3.30 per share, compared with earnings of $528 million, or $2.43 per share, for 2002. For the fourth quarter 2003, net income was $102 million, or 42 cents per share, compared with $123 million, or 55 cents per share, for the fourth quarter of 2002. The Thomson First Call mean estimates for the fourth quarter and full year 2003 were 76 cents and $3.53, respectively. The company's management uses ongoing earnings per share to evaluate operations; the company reported ongoing earnings for the full year 2003 of $844 million, or $3.56 per share, compared with full-year 2002 ongoing earnings of $827 million, or $3.81 per share. Fourth-quarter ongoing earnings for 2003 were 82 cents per share.

Progress provided 2004 earnings guidance of $845 million to $880 million, or $3.50 to $3.65 per share. "Our success in selling non-core assets has positioned us to be able to pay down $500 million of holding company debt in March. Compared to 2002, we reduced our capital expenditures, and our leverage is below 59 percent, down over 200 basis points. Importantly, we raised our dividend for the 16th consecutive year," said Chairman and CEO