What's a Utility?
Never before have investors known less about what their company is up to.
How many different types of "utility" companies can you name? Which ones would you trust the most to double or triple your investment nest egg? Which ones make you nervous?
In their latest memo to clients and "friends of the firm," lawyers Dan Fessler, Doug Hawes, and the rest of the crew at LeBoeuf, Lamb, Greene & MacRae identify no less than a half a dozen. They see the industry trying out such strategies as:
- Distribution as a pure play (with GPU as a leading exponent),
- Merchant energy (Enron),
- Independent power generation (Calpine),
- A regional focus, serving all energy markets at all levels (Dominion Resources),
- A national focus in generation, combined with regional transmission and distribution (American Electric Power, Duke Energy, Southern Co., Unicom/ PECO), and
- Technology or e-commerce (Montana Power, Avista).
And you can slice and dice some of these six categories. The letter from LeBoeuf, Lamb explains that AES looks like a generation company, like Calpine, and enjoys a high price-earnings ratio (also like Calpine), but also claims some 14 million distribution customers overseas. According to the firm, "the p/e magic must be related to something other than pure play."
At the other end of the spectrum, as LeBoeuf sees it, are the pure distribution companies like GPU and Consolidated Edison of New York, but the firm thinks these companies may have trouble linking up anytime soon with synergistic partners, since the equity markets have turned sour on utility mergers.
"We do not expect pure utility M&A to pick up in the second half of the year to anywhere near a level that would equal last year's record activity," says the firm.
Meanwhile, the LeBoeuf lawyers now see some profit in straying from the knitting. "The almost uniform result of utility investment in some form of telecommunications has been a windfall," they say. "Montana Power is the extreme example of that phenomenonits success in telecom having prompted its current effort to dispose of its utility and related business."
So how many other utilities have now disposed of their utility business? Do their investors know?
FOR MY MONEY, THE ISO WILL BECOME THE TRUE "UTILITY." Or, if not the independent system operator, then it will be the transco, the RTO (regional transmission organization), the ISA (independent system operator) or whichever model wins the day.
After all, what is a utility? As I see it, the utility is the firm that faces the big questions: How to engineer the power grid and keep it running; how to balance construction programs with environmental concerns; how to evaluate resources and meet needs in the most efficient and cost-effective way; how to balance the conflicting interests of power producers, marketers, and consumersall of whom depend on the transmission network.
Utilities have always done this. The job hasn't disappeared. But now someone else will be doing it. That someone will be the ISO/ISA/RTO/transco. In my book, that someone will be the new "utility."
For evidence, consider the talk that Midwest ISO CEO Matt Cordaro gave in Washington, D.C. at the end of May at the Edison Electric Institute's "Reliability Summit." He documented many of the problems (price spikes, distorted markets, constrained interfaces, system emergencies, etc.) that have become legion this summer. He ran down a litany of things he's got to keep his eye on, such as whether a drought in the Midwest might lower reservoir levels and leave power plants short of cooling water, forcing them to trim output:
"Although we cannot control temperature [or] ensure adequate rainfalland even an act of Congress will not alter the laws of physicswe will ... provide the infrastructure to maintain reliability and support a robust market in electricity."
Isn't that what a utility does? So if I want to be a "utility investor," how do I convert my erstwhile utility stock to new shares in the Midwest ISO?
AND THE PUCS OUGHT TO JUST FOLD UP THE TENT. Every night on your local television newscast, you can probably find a five-minute segment by a consumer reporter, telling you what to do when you get ripped off by a car body shop or a home remodeling contractor. These cases are simple. Third-year law students often volunteer at phone banks and county fairs to help consumers with these types of problems. There's not much expertise involved. And that's exactly the type of case that will eventually prevail as the norm at the state public utility commissions, after the utilities get through with selling off their power plants and delegating control over transmission assets to the system operator.
If restructuring stays true to form, then state choice laws will leave the local distribution company without customer contact (the unregulated supplier takes its place as retailer). The PUCs will lose all reason for being.
They will become consumer hand-holding agencies_charged with arbitrating disputes between consumers and energy retailers, which involves as much specialized knowledge as my examples of car repair and home fix-it scams. And though the supplier retailer may become captive to the local disco, that supplier will likely be one of only three or four nationwide energy retailers. These retailers will have lawyers. They will know how to go to court. I don't see why we would need state PUCs as an extra layer to review complaints involving the operation of the distribution grid.
BUT THAT ASSUMES THAT CONSUMERS WANT "CHOICE." And the jury is still out. Some say that electric customers are getting more than they want. Others say none at all.
Back in May in Montreal, I sat on a conference panel on the future of retail choice in energy. Also on the panel was Sharon Darcy, representing the Consumers Association, the British equivalent of our Consumers Union, publisher of Consumer Reports. Darcy suggested that electric customers in Great Britain are fed up with choice. They have too much of it. Or at least they lack the kind of choice in energy markets that would prove meaningful to their lives.
NiSource CEO Gary Neale sat on our panel as well. He also serves as chairman of the American Gas Association and (surprise!) chairman of the board of trustees of the North American Electric Reliability Council. Lately he has been crisscrossing the country, giving a stump speech about how real customer choice in energy will arrive only when fuel cells come on the market. That will give customers the ultimate utility choice: the choice not to buy.
That recalls a story I heard from Dan Fessler, one of the authors of the LeBoeuf, Lamb client letter.
Fessler says that when he served on the California PUC, he rented an apartment carved out of an old mansion off of Van Ness Avenue in San Francisco. Down in the basement, alongside the old coal furnace, was a panel in the wall with a series of switches installed at or before the turn of the century. Each switch at one time was connected to a separate electric distribution company. The homeowner could quite literally choose his electric supplier, flitting from one supplier to another at the flick of a switch.
He said that during the negotiations at the PUC over electric restructuring, he used to invite the consultants, lawyers, and utility executives down into the basement, show them the switches on the wall and ask, "Is this what you mean by customer choice?"
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