[BETA] Fortnightly

For The 21st Century

Interviews by

So it begins again. After several financially tumultuous years, executives at many of the nation's top utilities can once again look to the horizon and ask the growth question worthy of a Caesar: "What worlds to conquer?"

Utility executives are emboldened by bulging free cash flows, improved credit quality, lower operations and maintenance costs, favorable regulatory treatment, growing service territories, and increasing demand for power.

Much the same way that bankers used to worry about a "run on the bank," where there is an overwhelming demand for liquidity that causes a solvent bank to fail, so should energy companies be worried that their use of material adverse change (MAC) clauses might trigger an overwhelming demand for liquidity that causes a once solvent energy company to fail. Of course, the banks now have the Fed to protect the financial system from a liquidity crisis. No such luck for the energy industry.

Each assumes a vertical breakup, but watch out for securitization.

It can prove difficult to detect any overt difference of opinion among financial credit rating agencies. That appears to be the case in today's electric utility industry, where Moody's, Duff & Phelps, and Standard & Poor's each predicts that a breakup of the vertically integrated utility is now virtually inevitable. The result, they say, will leave us with an industry made up of disaggregated high-risk power generators, and lower-risk companies engaged in transmission, distribution, and other related services.

Which matters most: Cost? Price? Sales? Regulation?

Many investors no longer think of electric utility stocks primarily as dividend-rich, income-oriented investments. Instead, they have begun to consider new criteria in evaluating utility stocks (em criteria that might help explain some of the variations in equity price performance now seen among various utility companies.

Investors are taking stock

of utility exposure to price competition.The utility trade press and even the general financial press have featured the views of regulators, utility executives, legislators, and various consumer advocates on the stranded-cost question. Stranded costs easily represent the most contentious issue facing the electric industry as it moves to an era of competition.

Standard & Poor's (S&P) plans to maintain negative outlooks on the three largest California electric utilities (em Southern California Edison (SCE), San Diego Gas & Electric (SDG&E), and Pacific Gas & Electric (PG&E). Although it considers the California Public Utilities Commission's (CPUC's) December 20 electric restructuring order "reasonably favorable," S&P will not reexamine the ratings until it is sure the plan will be finalized as proposed. S&P's concern is that some members of the California State Senate believe small customer interests would not be adequately protected.